Two markets, one great potential.

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13.12.2023

Two markets, one great potential.

PREA, through its transformation, ensures sustainable value enhancement in the real estate and energy sectors. In an exclusive interview for the Handelsblatt special edition on ‚Renewable Energy,‘ our CEO Gabriel Khodzitski provides insights into the upcoming significant changes and potentials in the year 2024. Discover more about his insights regarding promising opportunities in the energy market.

Investors, financial institutions, project developers, property owners, or municipalities – all of them can benefit from technological innovations in the real estate market to create sustainable value for various types of use. Through data analysis systems, it is possible to measure, evaluate, and predict accurately throughout the entire real estate cycle in every micro-location in Germany, enabling the right investment decisions. These data analyses also make it possible to identify potential values in the energy sector. This includes assessing suitable areas for solar and wind parks and developing innovative projects such as urban district heating and cooling systems through the targeted utilization of waste heat from data centers. A current example of this is the Bluestar project, where up to 244,000 kWh of waste heat energy is being utilized from the largest urban data center in Berlin.

Developed and implemented by PREA, we, as a highly specialized consultancy service, use our proprietary software solution to create sustainable value enhancements for investors, owners, and users across the entire real estate, infrastructure, and energy sectors. In a conversation with PREA CEO and founder Gabriel Khodzitski.

Mr. Khodzitski, with Bluestar, PREA is reaching a milestone.

This project underscores our commitment to sustainable energy generation and the integration of technology into energy infrastructure. It serves as an exemplary concept aimed at transforming the development of data centers towards a more energy-efficient and sustainable utilization. However, we are a data-driven company and see our role as much broader. We are constantly searching for innovative ways to shape the real estate and energy markets and to think beyond boundaries through artificial intelligence.

With a capacity of 100 MW and a power intake of 69.5 MW, Bluestar will be the largest rentable data center in Berlin.

What does this look like in concrete terms?

We have the capability to digitally map the entire Germany. We have a database containing socio-demographic data, economic aspects, and essential data needed to evaluate specific property uses. And these data, powered by our own AI named ”mercury” can also be applied to forecasts and scoring in infrastructure and energy.

We have the capability to digitally map the entire Germany and possess all the relevant data to evaluate specific types of property usage.

Gabriel Khodzitski

CEO PREA Group

So, is it a kind of combination of the energy and real estate markets as a lifeline in ongoing times of crisis?

One could certainly see it that way. We combine our extensive M&A experience and access to institutional investors with digital expertise. This innovative technology and research approach has been and continues to be unique in the industry, leading to inquiries beyond our original focus areas – in the fields of energy and infrastructure. In addition to our own solar and infrastructure projects, we offer data-driven planning and construction services through our architecture firm to third parties. So, we cover the entire value chain and plan to offer our software as a SaaS model in the future.

The concept behind Bluestar creates a circular economy of sustainable energy supply, from the utilization of sustainable energy sources to efficient waste heat utilization. Source: PREA.

Since when has PREA been in the market?

We began developing the software solution in 2018 with the clear mission of establishing PREA as a real estate service provider that brings new technologies and research approaches to the industry in the real estate sector. Even during times of stable growth, we conducted research into risks and early on warned of increasing inflation, sales problems, and skyrocketing rents. We now see how the market is approaching these perspectives and increasingly aligning with our forecasts. So, we recognized the signs of change early on – and also the corresponding opportunities in the crisis. Specifically, we have organized our projects within a corporate structure in various segments. Since 2023, we have transferred more than 2 GW of renewable energy parks to various capital market investors as M&A advisors in the solar and wind sectors, including many existing real estate sector customers. This has helped some of our clients emerge stronger from the crisis.

What goals are you continuing to pursue?

Our goals are clearly defined. We aim to become a leading consultant, project developer, and investment manager for sustainable and forward-looking investments in the real estate and energy sectors. We intend to expand our database to encompass over 150 trillion data points and enable global transparent market access. All while adhering to the principle of commitment to the energy transition.

Insights for the Energy Market

Two growth markets in focus: Renewable Energy and Data Centers

The real estate investment market has been significantly influenced in the past two years by increased inflation expectations and the resulting growing interest rate dynamics. This led to a rapid increase in long- and short-term bond yields, while returns on real estate investments only reacted with a delay. This delay occurred partly because sellers had not fully accepted the new price level, and partly because the valuations of real estate funds had not yet been adjusted to the new price level. Selling at market prices would only be possible with significant depreciations.

Opportunities in times of rising inflation and interest rates

On the buyer side, the rise in bond yields has increased the opportunity costs for real estate investments. Currently, ten-year German government bonds offer a yield of 2.7%. While returns on real estate investments are slightly higher, they do not fully reflect the higher risk. Especially for multi-asset investors, they are not an option at the current price level. These investors were among the largest buyer groups before the war in Ukraine, especially because the European Central Bank, through its zero-interest-rate policy, nearly dried up the private bond market. This has changed with the interest rate turnaround. Bonds are yielding positive returns again and are increasingly sought after by institutional investors. However, they have withdrawn from the real estate market and are now in a wait-and-see position.

s1-graph-1 — Fig. 1a: Historical and Future Development of Construction Costs; Source: mercury.

s1-graph-2 — Fig. 1b: Historical and Future Development of Yield on Ten-Year German Government Bonds; Source: mercury.

Investment activity remains low despite increased supply

A significant increase in investment activity in the real estate market is expected only when property prices have adjusted to the current market level. Whether this will happen in the coming year remains to be seen. It is anticipated that the supply will increase next year as the portfolios of many portfolio holders are likely to be devalued in year-end evaluations, while the value of their loans will remain the same. This could force them to reduce their holdings. However, it remains uncertain whether the increased supply will also lead to a resurgence in demand. It is evident that the current environment for real estate investors and portfolio holders has become more challenging. In traditional real estate market segments such as residential, office, or retail, properties with attractive yield levels are currently offered only sporadically. Compounding the difficulty is the ongoing increase in construction costs. Currently, this is affecting developers and project developers particularly strongly. Due to the time lag between construction and marketing, they had calculated with higher exit prices, which cannot be achieved now due to the increased yields. Consequently, several prominent project developers have already succumbed to market consolidation this year, including Gerchgroup, Development Partner, the Project Group, Euroboden, and most recently, Signa.

Nevertheless, even in the current challenging market environment, there are segments where significant value appreciation can be achieved: the market for renewable energy and data centers. Below, we explain why both market segments have tremendous growth potential.

Renewable Energy: growth market for the coming decade

The war in Ukraine and the discontinuation of Russia as an energy supplier for Germany have led to a sudden increase in energy prices. This has heightened the political pressure to make the energy supply less dependent on non-EU countries, in line with climate protection goals, through an expansion of renewable energy. The share of gross electricity consumption is expected to increase to at least 80% by 2030.

s2-graph-1 — Fig. 2a: Share of Residential Real Estate Inventory by Energy Efficiency Classes; Notes: The analysis considered only multi-family houses with three or more residential units, assuming an average apartment size of 100 m²; Source: mercury.

s2-graph-2 — Fig. 2b: Share of Residential Real Estate Inventory by Energy Efficiency Classes; Notes: The analysis considered only multi-family houses with three or more residential units, assuming an average apartment size of 100 m²; Source: mercury.

s2-graph-3 — Fig. 2c: Share of Residential Real Estate Inventory by Energy Efficiency Classes; Notes: The analysis considered only multi-family houses with three or more residential units, assuming an average apartment size of 100 m²; Source: mercury.

For real estate investors, this provides the opportunity to invest in renewable energy and supply tenants with green energy through direct contracts. Tenants benefit from a lower electricity price compared to a traditional provider, while landlords benefit from a higher off-take price than if they were to feed the electricity into the grid. For comparison, electricity from the grid currently costs about 40 cents. The generation of one kilowatt-hour of solar power costs about 10 cents. The potential contribution margin per generated kilowatt-hour is thus 30 cents. In contrast, only 8.2 cents can be achieved for the feed-in of solar power. This is not even profitable enough to cover the production costs.

Green Energy in the building stock: more sustainable and fairer than renovation

In addition, supplying the building stock with green energy can be seen as more socially acceptable than increasing building energy efficiency. In Germany, the share of residential real estate with an energy efficiency class below B ranges from 88% to 99% (see Fig. 2a/b/c). The percentage is lower in regions where the population has grown significantly in recent years, as new construction activity has been higher in these areas. New construction projects have been more economically viable here. In contrast, the building stock outside growth regions tends to have lower energy efficiency. If all these buildings were to be upgraded to a higher energy standard, rents would also have to increase. This is because the investments in the building structure would need to be refinanced. We have analyzed this for the top 7, top 15, and top 100 cities. In the average of the top 100 cities, net cold rents would increase by about 4.50 EUR/sqm and thus reach levels for new constructions. In the top 7 cities, the increase appears to be lower. However, this is likely because, in the past year, due to higher refinancing costs caused by the rise in interest rates, existing rents already showed strong growth. The higher refinancing costs to increase energy efficiency are thus underestimated here. In addition, with the rising construction costs, the costs of renovation measures also continue to increase, which would have an even more pronounced impact on rising rents.

s3-graph-1 — Fig. 3a: Rental Prices in Euro / m² and Gap between New Construction and Existing Rental Prices; Notes: All construction years from 2015 were considered for calculating new construction rents, and construction years between 1980 and 2000 were considered for calculating existing rents; Source: mercury.

s3-graph-2 — Fig. 3b: Rental Prices in Euro / m² and Gap between New Construction and Existing Rental Prices; Notes: All construction years from 2015 were considered for calculating new construction rents, and construction years between 1980 and 2000 were considered for calculating existing rents; Source: mercury.

s3-graph-3 — Fig. 3c: Rental Prices in Euro / m² and Gap between New Construction and Existing Rental Prices; Notes: All construction years from 2015 were considered for calculating new construction rents, and construction years between 1980 and 2000 were considered for calculating existing rents; Source: mercury.

A more socially acceptable alternative to meet the energy needs of the building sector is to supply tenant households directly with green energy through a direct contract. This would prevent a significant increase in rents, and tenants could even benefit from lower electricity prices compared to traditional electricity providers. This would also positively impact ESG scoring, both in terms of Environmental (E) and Social (S) aspects. The E, because the energy comes from renewable sources, and the S, because rents could continue to be socially acceptable.

The energy output is growing, but so is the demand

When considering the progress of renewable energy expansion, it is evident that since 2000, the energy capacity of both wind and solar power has been steadily growing. Currently, the installed capacity of wind energy is 125.3 TWh, and solar energy is 60.8 TWh. This means that approximately 60% (annual average) of Germany’s annual electricity demand comes from renewable energy sources. The share is lower in the winter months at about 50% and higher in spring and summer at around 70%. However, it is expected that electricity demand will rapidly increase in the coming years.

s4-graph-1 — Fig. 4: Net Electricity Production from Solar Energy and Onshore/Offshore Wind Turbines in Terawatt-hours (TWh); Source: energy charts, Fraunhofer ISE.

s4-graph-2 — Fig. 4: Net Electricity Production from Solar Energy and Onshore/Offshore Wind Turbines in Terawatt-hours (TWh); Source: energy charts, Fraunhofer ISE

Nevertheless, it is anticipated that electricity demand will significantly rise in the coming years. Germany’s goal is to become independent of fossil fuels by 2045, with 80% of its energy needs to be met by renewable energy by 2030. Currently, Germany still covers a quarter of its energy demand with natural gas, primarily used in industry and heating. Solutions are needed in these areas, such as increased use of heat pumps and the deployment of green hydrogen as a substitute for coal and oil in industry. Additionally, the electrification of the transportation sector is crucial, where there is still significant room for improvement. Currently, the share of battery electric vehicles is only 2.1%.

The north is on track, the south lags behind in the expansion

The expansion of renewable energy varies among the German states. For instance, Schleswig-Holstein has exceeded its 2030 expansion target for installed wind energy capacity by 13%. Brandenburg is at 82% of its expansion target, while the states of Saxony-Anhalt, Saarland, and Lower Saxony are at 74%. The states furthest from their 2030 expansion targets are Saxony, Baden-Württemberg, and Bavaria, having achieved only 23%, 17%, and 13% of their respective goals. The production of solar energy also shows regional disparities, with more energy being generated in the northern and eastern parts compared to the southern and western regions.

s5-graph-1 — Fig. 5a: Solar Energy Production in Gigawatt-hours (GWh); Notes: It was assumed that each square meter of solar panels produces approximately 150 kWh of energy; Source: Mercury.

s5-graph-2 — Fig. 5b: Wind Energy Production in Gigawatt-hours (GWh); Notes: It was assumed that each square meter of wind turbines produces approximately 4.2 GWh of energy; Source: Mercury.

However, the southern and western states are catching up, especially in the field of solar energy. These regions were leading in the expansion of solar capacity last year. However, this is still largely attributed to private initiatives. Despite being lucrative, the expansion of solar energy in the southern regions is primarily due to their abundant sunlight and a high energy demand driven by their significant industrial presence.

Fig. 6: Newly Installed Modules Since the Beginning of the Year in kW/km²; Source: Federal Network Agency; Energiemonitor.

Fig. 7: Wind Turbines that Received Construction Approval in Germany Since January 2023; Source: Bundesnetzagentur

On the other hand, the expansion pace for wind energy in the southern states continues to be slow. Despite the significant progress in the northern states, a large portion of new installations still occurs there. In total, 678 wind turbines were connected to the grid in 2023, and 1,222 received construction approval. However, the majority of these approvals were in states that are already close to achieving their expansion targets. For instance, in Bavaria, only 14 wind turbines were completed, 16 in Baden-Württemberg, and 8 in Saxony. Furthermore, these states are likely to miss their expansion targets next year as well, given that only 56 wind turbines were approved in Baden-Württemberg, 33 in Saxony, and 14 in Bavaria last year.

s8-graph-1 — Fig. 8a: Annual Expansion of Photovoltaic and Onshore Wind Energy, as well as Expansion Targets in the Renewable Energy Sources Act; Source: Federal Ministry for Economic Affairs and Climate Action, Bundesnetzagentur.

s8-graph-2 — Fig. 8b: Annual Expansion of Photovoltaic and Onshore Wind Energy, as well as Expansion Targets in the Renewable Energy Sources Act; Source: Federal Ministry for Economic Affairs and Climate Action, Bundesnetzagentur.

Never before has so much Solar Energy been installed

Due to the substantial growth of solar energy in the southern and western regions, the expansion of solar energy is currently advancing at an unprecedented pace. Never before has so much solar energy been installed as in the year 2023. This year, 51% more solar energy was connected to the grid than the annual target projected.

The situation is different for the installed capacity of new wind turbines. Currently, Germany is 24% below its plan. Moreover, the pace of expansion has rapidly declined since 2017. Back then, a different subsidy model was in place. Since then, wind turbines must be tendered nationwide, leading to a slowdown in expansion. However, the federal government is optimistic that with the new Wind-on-Land Act and changes to the Federal Nature Conservation Act, the expansion will proceed much faster in the future.

Fig. 9: District Heating and Electricity Prices per Megawatt-hour (MWh); Notes: The district heating price calculation assumes a heat demand of 160 kW. The electricity price is the 30-day moving average of auction prices from the EPEX power exchange; Source: mercury.

Another turning point: Data Centers are also on the rise

Not only is the market for renewable energies a growth market with strong anticipated growth rates, but so is the market for data centers. In an increasingly digitized world, data centers will play an ever-growing role. They are already a crucial component of modern information and communication technology and are expected to further solidify their position in supporting business processes, securing data, and providing cloud services.

Some areas that are currently experiencing significant growth include:Increasing Data Traffic: The continuous rise in data traffic, especially due to technology trends like the Internet of Things (IoT), artificial intelligence (AI), and Big Data, is driving the need for storage and computing capacity.
Cloud Computing: Companies are increasingly relying on cloud computing services to optimize and make their IT infrastructure more flexible. This results in a growing demand for data centers that support these cloud services.
Digitalization of Businesses: As part of digital transformation, businesses are investing heavily in IT infrastructure to remain competitive. This includes expanding data centers to meet the growing demands for data processing and storage.
Edge Computing: The widespread adoption of edge computing, where data is processed closer to the source to reduce latency, requires a decentralized infrastructure. This leads to a demand for smaller, distributed data centers to meet the requirements of edge computing.
5G Technology: The expansion of 5G networks opens up new possibilities for real-time data transmission. This results in an increased need for data centers to process the growing amount of data generated by 5G-enabled devices.
Cybersecurity: With the increasing threat of cyberattacks, companies are investing heavily in security infrastructure, including highly secure data centers, to protect their data.

Currently, we are only witnessing the beginning of growth through digitization. For this reason, the widespread and especially inner-city supply of data centers will play an even more important role in the future. This includes the growth market of Green Computing, where environmentally friendly IT solutions are offered with data centers powered by sustainable energy sources. The advantage is that these solutions align with the German government’s strategy to become independent of fossil fuels. The data center market not only offers attractive opportunities due to increasing digitization but also provides additional returns by selling the waste heat to households supplied with district heating. This is particularly lucrative as district heating prices have recently increased significantly, while electricity prices have declined since their peak in September 2022.

A weak office market provides opportunities for the expansion of data centers

Furthermore, the low demand for office space due to the growing prevalence of remote working presents opportunities to meet the increasing need for data centers. Typical back-office locations currently do not command rents that would justify the development of office properties. Additionally, office employees prefer inner-city office spaces. It is worth considering whether the infrastructure allows for the development of data centers in these locations. Acquiring spaces that were formerly designated for office use is currently cost-effective. Replanning a data center on these sites is permissible without the need for a new zoning procedure, and with the appropriate sustainability concept, it can be realized in a relatively short time. In locations with adjacent residential areas, the waste heat can also be utilized.

Conclusion

The real estate market is currently facing challenges due to increased inflation and high interest rates, leading to a decline in activity in the real estate investment market over the past two years. Improvement is not currently in sight, and if the supply-demand dynamics do not adjust in the coming year, a standstill is likely to continue.

However, in this challenging environment, two market segments stand out – renewable energies and data centers – both promising growth areas in the coming years.

Renewable Energies

The rising energy prices, following the cessation of Russian deliveries due to the war in Ukraine, have increased the political pressure to accelerate the expansion of renewable energies.

This market offers excellent growth opportunities, especially for property owners. They have the opportunity to supply their tenants with green energy through direct contracts. Tenants benefit from a lower electricity price compared to traditional providers, and landlords benefit from a higher purchase price compared to the feed-in price. This not only makes landlords environmentally friendly but also socially responsible, positively impacting their ESG scoring in both the environmental (E) and social (S) aspects.

Data Centers

In an increasingly digitized world, data centers play a key role in supporting business processes and providing cloud services. Growth areas that are already evident today include increasing data traffic, cloud computing, digital transformation of businesses, edge computing, 5G technology, and cybersecurity. All of these require an expansion of digital infrastructure, with data centers playing a key role.

The market for data centers complements the strategy of the German government to become independent of fossil fuels. Data centers are essential in a more digitized world, and their waste heat can be used to supply households with district heating. When operated with green energy, data centers are also environmentally friendly.

Author

Gabriel Khodzitski

Gründer und CEO der PREA Group. Er war an Transaktionen und Entwicklungen im Wert von über 3,5 Mrd. € beteiligt, inklusive Immobilien-Portfolios, Data Centern mit über 100 MW und Solarflächen mit insgesamt 2 GWp.

Bei PREA steuert er ein Team aus Architekten, Beratern, Entwicklern und Data Scientists, das Kunden mit datenbasierten Insights zu besseren Investments verhilft.

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About PREA Research

Today’s technology and the availability of data enable us to analyze the risks and returns of past real estate cycles. We have further leveraged this advantage by providing reliable predictions for future investments. PREA is guided by principles rooted in technology and data science, as well as financial and real estate services. Areas such as machine learning and distributed computing drive our team. The connectivity among people, data, and technology enhances our understanding in solving the most challenging problems in finance and real estate.

About PREA

We are a technology and real estate company that creates value for investors, owners, and users through our own ecosystem and artificial intelligence while incorporating social and sustainable values. In a team consisting of data scientists and engineers, analysts, mathematicians, consultants, architects, designers, and software engineers, we not only develop data analysis systems for sustainable property valuation but also infinitely scalable digital solutions for the complete digitization of the real estate and construction industry. Our range of services includes commercial transactions, leasing, research and strategic planning, financing, investments, architecture, and development for all types of properties.

Pressekontakte

Christoph Kückner

Marketing Director

presse@prea.eu

0049 30 473 729 996

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