KGAL to expand residential, mixed-use portfolio, cautious on office

KGAL sees the residential market as highly bullish, mixed-use is an expansion target, the office market is neutral to cautious, while social core offers a stable cash flow.

Florian Martin

Florian Martin, co-CEO of KGAL, told CRE Media Europe at Expo Real that he is optimistic about residential because it is not directly linked to GDP growth, there is continued urbanization, households are shrinking, and there is a structural supply shortage, especially in Germany. Rising interest rates and costs make homeownership less accessible, further driving demand for rentals. He believes the recent price correction presents a good investment opportunity, offering decent spreads to German government bonds.
KGAL aims to expand in the mixed-use sector, which combines various elements like office, retail, residential, schools, and kindergartens to create walkable communities.
Regarding the office market, Martin believes trophy buildings that are green, modern, and ESG-compliant will thrive. However, older or less desirable properties, especially those on the outskirts of major cities, will face significant pressure due to work-from-home trends, slow GDP growth, declining traditional industries (like automotive), and the looming impact of AI.
If seeking cash flow, he suggests investing in "social core" assets like universities, schools, kindergartens, medical centers, and government buildings. These properties often have long leases, are linked to CPI for inflation protection, and provide a stable cash stream. Government tenants also tend to be less flexible in terms of relocation.
He expressed caution regarding data centres, not because of the technology itself, but because many small and medium-sized developers underestimate the complexity and requirements of these facilities.
Martin shares the sentiment at Expo Real that there is more optimism compared to previous years. Factors contributing to this include the new German government, infrastructure and military spending, initiatives to simplify property types, and efforts to accelerate construction. However, he acknowledges that traditional institutional investors are still facing a capital crunch due to previous over-investment and a lack of current cash flow.
Looking ahead, KGAL plans to continue with its core five residential Europe Article 9 fund, having already acquired five properties at attractive prices after the recent market downturn. They are also considering a social core fund focused on schools with long-term leases and government connections. Additionally, KGAL is exploring the possibility of establishing a residential development platform.

Branislav Pekić