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Renters’ capital
76% of Berliners would like to own their own home, but only 15.6% have so far been able to turn this dream into a reality. This is the result of a survey carried out by the Forsa Institute on behalf of the IVD, about which the IMMOBILIEN ZEITUNG reported on 22.09.2016. Berlin has the lowest homeownership rate of Germany’s 16 federal states. In order to correct give homeownership a boost, the IVD has called for owner-occupiers to be exempted from property purchase taxes.
More construction permits, but no sign of relief
According to the Federal Office of Statistics, 213,600 construction permits were issued between January and July this year for the development of new apartments, a figure that is more than 26% higher than the same prior year period. The latest figures were reported by the FAZ on 20.09.2016. However, in a new study, the Landesbank Hessen-Thüringen reveals that this is unlikely to provide fundamental relief to Germany’s over-heated housing market. According to the study, between 350,000 and 400,000 new apartments need to be completed each year. In an article on 20.09.2016, the HANDELSBLATT reported that the price of development land in Germany’s biggest cities accounts for as much as 40% of a property’s total purchase price. Speculation involving development land in the best inner-city locations is blamed for pushing prices ever higher. These lots remain undeveloped, rather than being used for the construction of desperately needed housing. Property prices in some of Berlin’s districts have surged by 30%-50% in the space of a year. An end to such extreme price increases is now being forecast by a growing number of market experts, who point to the fact that the length of time needed to successfully market a property is getting longer and longer. One of the reasons for these developments is that insufficient building permits are being issued. Although the Federal Office Statistics reports 213,600 construction permits for H1 2016 (+26%), this is still far short of the number required to satisfy current housing demand.
Legislative initiative to reform property tax
On 21.09.2016, the FAZ, BÖRSEN ZEITUNG and DIE WELT, along with the SÜDDEUTSCHE ZEITUNG on 23.09.2016, all reported that the Finance Ministers of Hesse and Lower Saxony, Thomas Schäfer (CDU) and Peter-Jürgen Schneider (SPD), both submitted draft legislation on property tax reform to Germany’s upper parliamentary house. Any reforms will be revenue neutral. Property tax is currently based on property values from 1964 in western Germany and 1935 in eastern Germany. The new proposals would require the value of 35 million properties, along with land and forestry businesses, to be reappraised. In addition, property owners would need to submit tax declarations to tax authorities. This process should commence in 2022 and would take a number of years to complete. The new appraisals would also be based on current land values. In the case of developed land, theoretical construction costs would be assessed on the basis of construction plans and also incorporated into the appraisal calculations. The resulting values would then be multiplied by a property tax multiplier. This would allow individual municipalities to continue to set and apply their own rates of assessment.
Transaction market tops the €200 billion mark
As reported by the IMMOBILIEN ZEITUNG on 22.09.2016, the Gewos research institute in Hamburg has announced that Germany’s real estate transaction market has broken through the €200 billion threshold. For this year, Gewos believes that transaction volumes could well climb to €230 billion. They attribute the lion’s share of investment to the residential sector. According to the Gewos Real Estate Market Analysis (IMA) 2015, some €213.9 billion was invested in residential and commercial real estate in 2015, roughly 16% more than in 2014. For this year, it is likely that an additional 8% will be invested, taking the full-year total to €231 billion. For 2017, the institute forecasts a further 7% rise, and a transaction volume of around €247 billion. An overwhelming proportion of the 2015 transaction volume was generated by sales of residential real real estate and development land zoned for housing, which accounted for €150.9 billion. For 2016, Gewos expects this figure to rise to €164.9 billion. For detached and semi-detached houses, Gewos registered €58.8 billion of transactions (+7%), for multi-family houses €25.6 billion (+7%). Transactions involving development land for housing were up by 6%, accounting for €15.8 billion of the total. Gewos reports that the main drivers of increased transaction volumes are higher property and land prices.
More office buildings with sustainability certificates
As revealed by the IMMOBILIEN ZEITUNG on 22.09.2016, JLL has reported that from Q1 2016 to Q2 2016, the volume of certified office buildings in Germany’s Big 7 cities increased from 6.5% to 7% of the total office stock. Certified office space in Germany’s seven major property centres reached almost 6.3 million sqm. According to JLL’s Martin Hofmann, the majority of this increase is can be attributed to completions of new office developments. 62% of the newly built office space that entered the market in Q1 2016 was certified, compared to the whole of 2015, when the figure was 46%. Whereas around 2.15 million sqm of office space in Frankfurt is certified, equating to a well above-average 18.1% of total stock, other cities reported much lower proportions ranging from 3.6% in Stuttgart to 6.9% in Düsseldorf. Across all seven cities, 241,000 sqm of certified office space was leased, equivalent to 13.5% of total office space take-up, compared to 11% last year, and significantly higher than the share of certified office space across all of Germany (7%). This shows that certified office space is in proportionately higher demand, said Hofman. There is also a clear correlation between the quality of an office location and the number of green buildings. In prime locations, one in every five square metres is leased in a certified office building. JLL predicts that occupier and investor interest in sustainable office space will continue to grow in the future. Greater importance will also be attached to the certification of existing buildings.
Keep calm and carry on
Following an initial post-Brexit referendum slowdown, the British property market is once again recovering, reported the BÖRSEN ZEITUNG on 21.09.2016. According to data from the online property listings portal Rightmove, advertised house prices rose by 0.7% in September, following a fall of more than 2% in August. Prices even rose by as much as 1.9% in Greater London. A number of property investment funds, many of whom suspended withdrawals as the market was engulfed in turmoil following the Brexit decision, have now announced that they are planning share buy-backs. They have also stepped up their property acquisition activities, largely as a result of the drop in the value of the pound against other currencies. For international buyers, prices have fallen by as much as 10%. The Bank of England also cut interest rates again, which means that there is no shortage in the supply of cheap financing.
Asian investor’s could turn to the USA
On 22.09.2016, the IMMOBILIEN ZEITUNG reported that Fidelity International Real Estate Research expects Asian investors to steadily reduce their European investment activities over the next few years, and turn instead to the USA. This shift in focus is driven by the Brexit decision, ongoing political uncertainty and the continent’s currency fluctuations. At the same time, Fidelity revealed that European investors, in particular German investment funds, are taking advantage of declines in the value of the British pound to snap up property bargains. Fidelity predicts that the European real estate investors will also increase their share of investments in core eurozone countries, especially in Germany and France, both of which are viewed as investment safe havens.
Demand for company real estate increases
The latest market report from the Initiative for Company Real Estate (Initiative Unternehmensimmobilien) reports an increase in the transaction volume for company real estate, which amounted to €775 million in H1 2016. The report was the subject of an article in the FAZ on 23.09.2016. Transactions increased by 27% in comparison the corresponding prior year period. This relatively new asset class includes mixed-use commercial real estate typically leased by SMEs. A majority of transactions involved production facilities (€260 million), followed by transformation real estate, i.e. older real estate repurposed for commercial utilisation.
Growing investor interest in retail parks
The IMMOBILIEN ZEITUNG reported on 22.09.2016 that growing pressure on investors and a reduced supply of investment product has intensified competition in the retail real estate market. This is the conclusion drawn by the latest Hahn Retail Real Estate Report, published in conjunction with CBRE. Top of investors’ shopping lists at the moment are retail parks, which offer an attractive yield premium over shopping centres. At the mid-point of the year, the peak yield for retail parks stood at 5.25%, compared with 4.1% for shopping centres. Retail parks in medium-sized cities currently offer the greatest potential, although investors are advised to carry out comprehensive due diligence on any potential object due to strong regional variations. The most attractive investment opportunities re in what are described as “local champions”. “The term ‘retail park’ has long been a difficult concept for investors, but today it rolls off their tongues,” said CBRE’s Jan Dirk Poppinga. Demand for retail real estate has been given a further boos by positive growth in retail sales space. According to calculations published by GfK, the amount of retail space grew for the first time since 2011 (+0,4%), and growth is expected to accelerate again this year to 0.6%.
Car parks of the future provide investors with new opportunities
According to the FAZ on 23.09.2016, investors are increasingly attracted to the business of inner-city parking. Philippe Op de Beeck from Apcoa sn’t believe that new mobility concepts, such as car-sharing, will do anything to dampen this interest. The number of new car registrations in Germany continues to rise unabated. Electric vehicles and self-driving cars are set to change the market dramatically. Apcoa has already announced plans to equip one quarter of its multi-storey and underground car parks with at least two electric vehicle charging stations each by the end of this year, in order to provide a suitably modern infrastructure. The company is also optimising the lighting systems within its facilities, making it easier for self-driving cars to recognise their surroundings. Municipal authorities’ restrictions on the zoning of new parking spaces have also boosted the market for paid parking, as newly planned facilities rarely secure planning permission. “In five years, free parking will be a thing of the past,” predicted Op de Beeck.
SCPR crowns Germany’s best shopping centre
On 22.09.2016, the IMMOBILIEN ZEITUNG reported on the results of this year’s Shopping Centre Performance Reports (SCPR), which surveyed tenants in 400 shopping centres across Germany. According to the report, the Südring-Center in Paderborn has the most satisfied tenants. The Minto in Mönchengladbach was voted the most attractive shopping centre and Citti won in the best operator category.
Demand for German real estate running higher than ever before, even in niche categories and outside A-cities
On 30.09.2016, the HANDELSBLATT and the SÜDDEUTSCHE ZEITUNG both wrote about the uninterrupted high levels of demand on the German real estate market. The last time transaction volumes reached a similar level was in 2007. Roughly €55 billion was invested in commercial real estate in Germany in 2015. The preparations for the UK’s Brexit referendum were a major factor. “In the short and medium term, Germany’s real estate market will benefit from Brexit,” said Christian Schulz-Wulkow from EY Real Estate. A survey carried out by the Cologne-based Institute of Economic Research (IW) reveals that 90% of investors expect demand for real estate in Germany’s major cities to increase further. As the HANDELSBLATT reported, investors are increasingly interested in objects outside central districts. Investments in student apartments, car parks, and even co-location data centres, have been rising in popularity. According to the BÖRSEN ZEITUNG on 30.09.2016, the mood on Germany’s financing markets has begun to dampen in the face of reduced margins and increased regulation. At the same time, refinancing is cheaper than ever. Germany’s biggest banks have reported an increase in accounts receivable, despite a large proportion of mortgage loans being repaid early, reported the IMMOBILIEN ZEITUNG on 29.09.2016. As a recent Irebs’ study shows, this is largely due to the fact that banks have bcome increasingly willing to finance real estate outside Germany’s seven A-cities. Irebs surveyed 23 market participants who together reported a total credit volume of €183 billion. The strongest growth in lending, at 20%, was again reported by Germany’s commercial real estate financiers (2014: 9 %). New business in the commercial real estate sector grew by €26.3 billion compared with the year before, reaching €97.4, the highest total since the market report launched in 2013. In contrast, loan approvals in the residential sector declined by 8 % to around €39.8 billion. The study’s authors fully expect that the trends identified in H1 will continue in H2 2016 and that further double-digit growth is likely. New loan business outside Germany’s seven major real estate centres grew by 57% in 2015. This geographic shift has done little to dilute competition on the property market. In terms of overall transaction volumes (€137.3 billion) the gap between the rpovinces and central urban districts narrowed. For projects in smaller towns and cities, banks approved €60.6 billion of financing, compared with €76.7 billion in A-cities. The shift to less urban locations is due to the intensity of competition and shortage of attractive objects in major cities.
Construction industry raises forecasts
On 29.09.2016, the IMMOBILIEN ZEITUNG reported that unbroken demand is driving activity in all sectors of the construction industry. The Central Federation of the German Construction Industry has revised its growth forecast for this year upwards, from 3.5% to 5%. The largest growth in revenues is attributed to housing construction, with revenue expectations lifted from 6% to 8%. By the end of the year, the industry predicts around 270,000 apartment completions, 9% more than the 248,000 completed last year. The commercial construction sector is also enjoying similar growth. The federation predicted annual growth of 1% in its summer prognosis, a figure which has now been revised to 3%, revealed Peter Hübner from the Central Federation. The high-rise commercial sector has registered double-digit growth in orders. Office, light industrial and warehouses have taken the lead in construction permit approvals. The only sector with an unchanged forecast was the public sector, where municipalities’ empty coffers mean no increase in construction projects, and growth is predicted to total 4% for the year.
Office space is gradually running out
In Germany’s major office centres, Colliers International reports further declines in vacancy rates, although the extent of decline differs by location. This was the subject of an article in the SÜDDEUTSCHE ZEITUNG on 30.09.2016. There has long been a trend to repurpose office space for residential use, which has exacerbated the situation. According to office market experts, there is a serious risk that there will not be enough office space in the future. Vacancy rates have dropped well under the fluctuation reserve of 5% in Berlin, Stuttgart and Munich, a result of high demand, advance lettings and conversions. In Düsseldorf, just 8% of office space is unoccupied, in Frankfurt, where a number of large-scale developments have boosted supply, vacancies are unchanged at 11.8%. Still, the Main metropolis has lost roughly 1 million sqm over the last five years, 60% of which was converted into residential real estate. Berlin is going to need an additional 1.6 million sqm of office space over the next few years. Berlin’s booming economy, fuelled by a surge in the start-up scene, is already feeding through into the rental market, where peak rental prices have risen rapidly. The current €25.30/sqm per month is already 10 % higher than 2015. The peak rent in Frankfurt is €38.50/sqm and in Munich it is €33.60/sqm. Berlin’s average office rental price has also increased faster than elsewhere, adding 12.5% to reach €15.50/sqm. Only Frankfurt and Munich have higher average rents, at €19.00/sqm and €16.20/sqm, respectively. Letting volumes mirror these increases: Colliers International reports office leases for 347,000 sqm during the first two quarters of 2016, some 3 % higher than last year. In Munich, take-up rose by 27% to 387,000, and in Cologne lease volumes surged by 43 % to 192,000 sqm.
Munich to develop more commercial space
As reported by the SÜDDEUTSCHE ZEITUNG on 30.09.2016, Colliers International has revealed that 350,000 sqm of office space has been converted into housing in Munich over the last three years and the office vacancy rate has fallen to 3.4%. Short-term leases are widely unavailable, especially in central areas. Advanced lettings for 2017 are already running at 58%. City authorities’ economic committee has announced that it is examining which development land should be made available to commercial real estate developers. This was reported by the IMMOBILIEN ZEITUNG on 29.9. It is hoped that increasing the amount of land zoned for commercial real estate would prevent an exodus of businesses to the provinces. Classic business taxes on the city’s 22,000 small businesses swelled the city’s coffers by €2.4 billion in 2015 and represent roughly 40% of the city’s total tax revenues. Since 2001, the amount of land approved for commercial utilisation has decreased by 250 hectares. City authority’s have already received 300 applications from companies looking for new development land. Two-thirds of these companies are searching for spaces of up to 4,000 sqm, the remainder are hoping for much larger spaces. Such demand can in no way be met. Between now and 2030, it is estimated that 160 hectares will be needed for new businesses and company relocations or expansions. In response, roughly 35 hectares of commercial space is set to be developed over the next few years.
Investors step up interest in commercial real estate in eastern Germany
As reported by the SÜDDEUTSCHE ZEITUNG on 30.09.2016, investors are increasingly interested in commercial real estate in cities in eastern Germany, and not just in Berlin. According to a study published by TLG Immobilien and bulwiengesa, the number of office jobs in Dresden, Potsdam, Erfurt, Rostock and Leipzig has risen steadily over the last few years. At the same time, a large stock of vacant office buildings means that almost no new office space has been developed. Now vacancy rates have started to fall significantly in some locations, such as Leipzig, which has seen declines of 7% since 2011. Vacancy rates in 2015 were particularly low in Potsdam (4.3 %) and Rostock (7.2 %), followed by Dresden (8.6 %), Leipzig (12.6 %) and Erfurt (15.5 %). Rental prices for objects in good locations ranged between €8.00 and just under €12.00/sqm, and the peak rent has climbed to €14.00/sqm. The trend is towards stagnation or moderate increases. Yields are comparably high, at between 5.2 % (Leipzig) and 6.1 % (Erfurt). The picture in the retail real estate market is similar. Rental prices have risen sharply in some locations. Retail tenants in Leipzig now pay a top rent of €140/sqm per month, and in Dresden €110/sqm. The solid economic fundamentals have fed through to the transaction market: In some segments, transaction volumes have increased fourfold.
GERMAN REAL ESTATE NEWS
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Feri Real Estate Market Rating
The Feri Real Estate Market Rating provides a forward-looking assessment of potentials and risks for investment return on regional real estate markets. Ratings are based on detailed econometric forecasts of regional real estate markets including regional economic development. The rating currently includes more than 150 cities in Europe, in the United States and in Asia.
In this issue:
Real Estate Market Rating for Stockholm
Stockholm is Sweden’s biggest city, as well as one of the most dynamic growth regions in Northern Europe. As Sweden’s capital city, Stockholm also hosts a high concentration of administrative activities. The mainstays of regional growth are the IT, telecommunication, research and development sectors, as well as business-oriented services. Several of these sectors have been hit hard by the economic slump that arose as a result of the latest financial crisis, and this adverse development caused much damage to Stockholm’s economic growth in the years 2008 and 2009. The Stockholm area boasts a large array of universities and research institutes, with aggregate enrollment of more than 40,000 students. These institutions provide a very good research infrastructure and are a key factor in the high educational level of the local population.
Feri rates Stockholm as a business location “AA”, which is unchanged compared to the 2nd quarter 2015. It translates into “high potential, low risk”. With this rating result the city ranks 4th in the comparison of European Metropolises.
Office Real Estate
Regarding office real estate Feri rates Stockholm “C”, which is unchanged compared to the 2nd quarter 2015. The city ranks 18th among office locations of European Metropolises. Feri awards the office top locations “C” and the side locations “C”
Stockholm is the largest office market in Scandinavia with around 11 million square meters of office space. The preferred locations are in the central business district in the city center and in locations close to the city center. Business-related services, the financial sector, and the public sector determine demand for office space. Outside of the city center are the submarkets Solna (biotechnology) and Kista (IT sector) with a large inventory of modern office space. Stockholm is the most liquid and transparent of all markets in Northern Europe. The volatility of rents and yields was exceedingly high in the last decade – due in part to the new economy crisis.
Office rents in the prime locations in Stockholm declined by a good ten percent during the financial crisis, in the much more volatile central business district (CBD) by even 20 percent. Some projects were postponed then. In the coming years, the volume of new office space coming into the market will remain below the long-term average. Together with the current robust demand, will lead to a slightly decreasing vacancy rate during the next years. Additionally we expect the creation of new office jobs. We therefore anticipate an overall average increase in rent prices of about 3 percent per year.
At the height of the last investment cycle, the initial yields in the prime segment of the Stockholm office market had sunk to a level that was only slightly above that of no-risk government bonds. In the subsequent correction phase, rental yields rose by 100 basis points. Since then, transaction activity has benefited from Stockholm’s reputation as a “safe haven”. Meanwhile rental yields have sunk again below 5 percent. This development has been caused by investor challenge in the prime segment and better expectations in terms of rising rents. Due to repeating uncertainties that result from the Euro-Crisis rental yields will currently stabilize on this level.
The current situation in Stockholm’s office market corresponds approximately with the yield level at the end of 2005. Like then the market expectations in terms of rents are positive. The current price level has already fallen clearly below the “fair value” rental yield calculated by Feri. However, the “fair value” rental yield relates to scarce top locations primarily demanded by risk-averse investors with sufficient equity resources. But also in good and average locations the net initial rental yield has compressed beyond long-term average meanwhile. Nevertheless availability of quality product allow a market entry furthermore.
Retail Real Estate
In the comparison of European Metropolises regarding retail real estate Stockholm placed 10th with a rating result of “A”, which is unchanged compared to the 2nd quarter 2015. Feri awards the retail top locations “A” and the side locations “B+”.
The vacancy rate for retail space in Stockholm is very low. Especially in prime locations practically no shops are available. During past years Stockholm experienced more restrained expansion in its supply of retail space than was the case in most other major European cities. Thus, only a limited volume of new retail facilities came onto the market. At times of the economic downturn rents have decreased moderately. Although the European dept crisis has only little impact on the Swedish economy, rent performance was relatively weak in 2012.
In the years after the current economic slump – when the consumption climate improves – one can expect retail rents in Stockholm to rise again, for space in both top and secondary locations.
Residential Real Estate
When it comes to residential real estate, Stockholm placed 5th among European Metropolises with a rating result of “A”, unchanged compared to the 2nd quarter 2015.
A notable factor supporting Stockholm’s recent trend of strong demographic development is significant in-migration from other parts of Sweden. This influx has boosted demand for residential space, while the apartment supply is rather tight relative to the level of demand. New building activity has declined since the early 1990s. Consequently, both existing and new apartments have posted continuous rent increases. The rental market is a more important housing segment in Stockholm than elsewhere in Sweden, to some extent due to the city’s large share of young people and one-person households. Especially in the city center mostly rental property are found. Given ongoing in-migration and no anticipated jump in apartment construction, rents in Stockholm will continue to rise.
Amid net in-migration and low building activity, prices on Stockholm’s residential property purchase market have risen quite consistently as well. In city center, almost no houses have been available for purchase in recent years, and the suburban supply is short as well. Lower prices in nearby areas, and Stockholm’s short supply, induced home buyers, especially families, to move outside the city. Due to the conversion of rental apartments into condominiums in recent years, supply in this market segment is somewhat looser than it is for houses. The individual renting the unit however has the right to buy it. In the immediate future lower affordability will induce only moderate increases for both houses and condominiums.
Contact:
Franz Wolfgang Kubatzki, wolfgang.kubatzki@feri.de, phone +49 (0) 6172 916-38 11
Feri Real Estate Market Rating
The “Feri Real Estate Market Ratings” issued by Feri appraise the value potential of regional real estate markets, taking into account the attendant risks. The methodological approach underlying Feri Real Estate Market Ratings is rooted in the empirical observation that the performance of a given real estate market depends essentially on the economic power of the respective city. Before this background, Feri develops a separate prognostic model for each city, mapping the regional economy as a system of independent equations.
For the purpose of compiling its ratings, Feri uses a detailed regional forecast to analyse the socio-economic development, the economic structure, as well as the ten-year indicators specific to the respective real estate market. The forecast findings are evaluated using a mathematical rating algorithm.
The objective behind the ratings is to make the markets more transparent, and thereby to support pending investment decisions of private and institutional investors. Feri ratings are updated on a quarterly basis, and are currently available for 67 German cities and counties, as well as for 60 European cities outside Germany, and 45 cities in the United States.
Feri EuroRating Services AG
Feri EuroRating Services AG is a leading European rating agency, specializing in the analysis and valuation of investment markets and investment products. Feri is also a major economic research and forecasting institute. At present, Feri employs a staff of around 60 professionals to manage about 1000 customer accounts. The company is headquartered in Bad Homburg near Frankfurt, Germany, with sales offices in the United Kingdom, France, and the United States. In addition to its global industry analyses and ratings of companies, countries, capital and real estate markets, Feri regularly appraises the investment funds registered in each country. Annual market surveys on institutional and mutual funds as well as on closed-end participations provide an overview of the perspectives and actions of institutional investors. In the real estate sector, Feri conducts global real estate research, performs real estate valuations, and provides ratings of companies, REITs, real estate, real estate portfolios, and indirect real estate investments (open-end and closed-end real estate funds).
For more information on Feri EuroRating Services, please go to http://fer.feri.de/en/about-us/portrait/.
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