Time to market: How timing has once again become a risk factor

In the 2010s, developers – and the investors who backed them – were not so bothered about how long it took to complete a property, or even if their projects went over budget and took a lot longer than planned. After all, interest rates were low and rising prices meant that their assets constantly gained value. As a result, whether renting or selling, the timing of any deal became almost irrelevant.

The risks associated with build times
Attitudes changed fundamentally once interest rates began to rise in 2022: Declining market values and rising borrowing costs have made lengthy build times, even those that remain on schedule, among the most critical risk factors for developers and investors. Of particular concern is the uncertainty surrounding interest rates for follow-up financing. An analysis conducted by Interhyp reveals that real interest rates for private construction loans have swung by 55 basis points in 2024 alone and, despite recent interest rate cuts, are currently showing a tendency to rise again. As you would probably expect, interest rate fluctuations typically follow a similar trajectory on the professional real estate market.

In the third quarter of 2024, Bulwiengesa’s BF.Quarterly Barometer reported an index value of minus 13.79, indicating a continued reluctance on the part of lenders. This is comparable to the value of minus 15.24 seen during the Corona crisis in the Q2 2020. Developers looking to refinance at the wrong time are therefore exposed to heightened risks. Furthermore, analysts at Lübke Kelber have observed a stabilisation in the institutional residential real estate market, with an average purchase price of EUR 3,541 per square metre. However, given current economic uncertainties and global crises, many investors cannot be sure what prices their developments might achieve in six, twelve, or let alone 24 months.

With a volume of EUR 4.5 billion, market liquidity has significantly decreased since the interest rate turnaround. What’s more, lengthy marketing times further complicate the situation.

In addition to liquidity concerns, regulatory risks are often overlooked. As rules and regulations change over time, the zoning or long-term financing of a project may be jeopardised even before its completion. This risk is particularly pronounced in projects with low sustainability ratings that are nearing completion or about to come to market. Unforeseen events, such as economic crises or external shocks, can also transform certain asset classes into non-sellers. These unpredictable factors can have devastating consequences for investors and developers.

Considering these factors, time to market – the period between a property’s development and its marketing – becomes a crucial lever for managing project development risks.

Modular and serial construction methods can save time
One effective way to significantly cut the time to market is to use modular building techniques. By incorporating a high level of prefabrication, up to 90 per cent of the time typically spent on traditional masonry construction can be saved. This not only accelerates the construction process but also leads to significant cost savings, including reductions in additional expenses such as HOAI fees. The efficiency of modular construction is particularly advantageous in a competitive housing market. Architects can develop a solution once and replicate it multiple times, streamlining the construction process and allowing for scalability. Modular buildings are also more efficient when it comes to building approval procedures.

While speed is important, it is not the only factor; modularity does not automatically guarantee quality. However, a well-planned and executed modular construction project not only looks sophisticated and modern, it also reduces construction defects and minimises human error on the building site. In order to create a desirable product, it is essential to combine design and quality of stay with high ESG standards and sustainable construction methods, such as wooden modular construction. Anyone who prioritises build time at the expense of quality may struggle to achieve their desired sales price at exit. Conversely, a high-quality product can yield market-standard returns for both the developer and the future property owner.

The neighbourhood as an investment factor
It is equally important to consider individual location factors alongside standardised processes when developing space concepts. By tailoring amenities to suit the specific needs of a community, developers can enhance the overall appeal and functionality of a property.

For instance, in areas lacking fitness or wellness facilities, adding a gym and swimming pool can greatly enhance the attractiveness of a development. Similarly, incorporating coworking spaces can provide a valuable alternative for residents in suburban areas, reducing the need for commuting to city centres. Simply put, properties that offer a high quality of stay and a sense of community perform measurably better than those that don’t. And for investors, this enables greater space efficiency. Shared areas create synergies, especially in combination with smaller private residential units, reducing the need for living space and leading to reduced construction costs and higher cash flow.

In addition, such concepts promote social mixing, which plays a crucial role in fostering social sustainability, the “S” in ESG. A recent study from the Zukunftsinstitut identified “connectivity” as a significant megatrend that will have a major influence on the market in the foreseeable future. Establishing a conducive environment for community building is now considered a necessity rather than a choice in the development of new construction projects.

Despite all the doom and gloom, these seemingly intangible factors can translate into tangible benefits, such as increased rental income, higher property purchase prices, and more affordable follow-up financing. The fact is, properties that offer superior quality of living tend to outperform others on almost all performance metrics.

Time to market becomes a catalyst
By the end of 2023, the market share of serial construction in Germany stood at approximately five per cent, as reported by the Federal Association of German Housing and Real Estate Companies (GdW) – although the analysts predict a potential market share of ten per cent. The current landscape of soaring construction costs, housing shortages, and financing uncertainties may drive the market share of serial construction even higher in the medium term. And the time-to-market factor could serve as a significant catalyst. As developers – and the investors who back them – increasingly prioritise shorter planning and construction timelines, the appeal of serial or modular construction methods is likely to grow. The efficiency gains associated with quicker project delivery remain one of the biggest levers for investors seeking to manage risks more effectively.