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Hybrid real estate – a worthwhile investment?

The fact that German investors shy away from building hybrid properties denies them millions of euros in income. Because: According to a master’s thesis, properties in this asset class can be financially strong, especially in real estate markets with high prices.

Vanessa Piller from the International School of Management (ISM) examined the profitability of hybrid properties in her master’s thesis entitled “Possibility of project development for a“ hybrid property ”based on target costing in high-priced markets – using the example of Munich” – and she even won the Munich University Prize for her research results. Piller’s method of calculating profitability can also help investors and home builders make the most financially sound decisions.

Hybrid real estate: So far there is only the “light version” in Germany

In an interview with HAUFE magazine, Piller explains that hybrid properties are already much more widespread abroad (Asia and the USA) than in Germany: So far, there are only exceptions here, such as the Elbtower in Hamburg, only the “light version” houses with retail stores on the ground floor and apartments on the floors above.

However, such solutions are not sufficient: With the help of larger hybrid projects, both inner cities and suburbs can be used more lively and intensively, which would make everyday life more pleasant and also do the environment good.

In her thesis, the certified real estate manager shows that such projects can pay off not only in terms of urban development, but also financially for investors.

Profitability calculation with techniques of traditional real estate development and “target costing” approach

In the HAUFE interview, Piller explains the initial situation: “Hybrid properties, especially mixed-use high-rise buildings, are significantly more expensive to build than if they are based on one type of use […] focus.” There are many additional structural requirements, and the experts also lack the experience – which leads to higher costs and which is why people often shy away from building hybrid properties, according to Piller.

Piller’s model focuses on real estate in high-priced markets and calculates the profitability of hybrid real estate using, among other things, the “target costing” approach: the acceptable construction costs and the achievable rent are calculated taking into account the market and the target group. Then different scenarios for the use of the property can be modeled, in the same step the costs and income are calculated.

Piller specifies the exact work steps in her research work – anyone interested in building a hybrid property can use them.

Hybrid properties are profitable in the long term

It is clear that hybrid properties are not worthwhile in the short term due to the high construction costs, but that building owners have to dig deep into their pockets first. In return, Piller has found that hybrid high-rise buildings are even more profitable in the long term in high-priced markets.

She shows this with the example of the 14-story property “Schwabinger Tor” in Munich: Apartments, hotels, restaurants, offices and retail have been meeting here since 2019. Using her method, Piller calculated three scenarios for the building – the best, i.e. the most profitable and therefore most profitable version, according to her calculation, can generate around 2.3 million euros more than the most unprofitable version.

It is interesting that the most profitable version of the three scenarios also includes the largest planned mix of uses, the least profitable version the least mix. So it’s an enormous amount of money that hybrid properties can bring in. And: the more hybrid, the higher the yield.

Image sources: Deutsche Asset Management

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