Sonar Real Estate diversifies beyond offices in shifting market

German real estate investor and asset manager Sonar Real Estate is adapting to a slow market by diversifying asset classes, not leaving their core sector office but shifting focus also to more popular sectors like residential and logistics.

Christoph Wittkop, CEO Sonar Real Estate

It is targeting office opportunities, investing in refurbishment and repositioning in prime locations but also converting offices into residential or hotel properties, especially in secondary locations, and exploring distressed assets.

Sonar Real Estate sees good demand in logistics and industrial, residential is a key growth area due to high capital demand, and it is once again eyeing the retail sector regarding food anchored assets as well as opportunistic other assets, CEO Christoph Wittkop told CRE Media Europe.

Managing over €3 bn in assets, Sonar Real Estate works with three main investor groups: opportunistic Anglo-Saxon and non-German investors, German institutional investors, and family offices. A significant part of the business involves value-added activities like leasing, refurbishment, development, as well as managing capex / TI projects.

 “While distress in prime office locations is limited due to patient banks and institutional owners, secondary locations offer more potential for discounted deals. However, investors are currently very cautious about investing in anything but the best office locations. At some point we will see deals in established secondary locations again”, Wittkop pointed out.

Looking ahead, Sonar Real Estate is also exploring residential sub-sectors like co-living, student housing, and other operating residential concepts. They continue to optimize their existing portfolio and expect future growth of transaction activities. Especially foreign investors are eager to deploy capital into the right real estate opportunities. However there is often a gap between return requirements and what the market offers

“I see increasing potential in prime office locations. However, we're also open to acquiring the right assets in established secondary locations where we see significant discounts. We believe these assets will remain viable because not all tenants can or will pay the higher rents in central business districts. Identifying the right buildings in these secondary areas is challenging but certainly achievable”, Wittkop explained.

He agrees that the current market is more active and optimistic than a year or two ago, when activity was minimal. “There's more clarity regarding asset valuations and the interest rate environment, which, while not as low as before, is certainly better than in the recent past.” However, he does not foresee significant interest rate drops soon, so the market must adapt to current conditions.

Wittkop notes a positive shift in the German office sector, moving away from overly dramatic predictions that offices would become obsolete. While not a complete return to "normal," people are returning to offices, and the market is settling into a more realistic understanding of office space needs. However, the pre-pandemic "best times" for offices are likely over, as companies adapt to hybrid work models and demographic shifts.

Retail is also showing signs of recovery, with rents and yields seemingly bottoming out, providing a more stable base for future activity. Liquidity is gradually returning to the retail sector at certain price points.

However, developing new projects across all asset classes, especially offices remains challenging due to high construction costs, challenging financing and low exit prices. He suggests that either lower construction costs or changes to planning regulations are needed to make development more viable, noting that residential development in Germany is significantly more expensive than in comparable European countries.

Regarding market pricing, for core offices and certain residential assets there is renewed competition among investors, in some cases leading to bidding competition again and sales prices are exceeding initial guidance.  But for secondary/lower-quality assets, there's still little to no interest, or only "ridiculous" offers are received. The gap between core and non core office locations become even wider.