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Explicit criticism of government plans to tighten mortgage lending regulations
The real estate and banking industries have been clear in their opposition to plans, announced by the Federal Ministry of Finance, for stricter mortgage lending regulations, which would involve giving BaFin, the financial supervisory authority, far more extensive powers to intervene if the housing market starts to overheat. This was reported by the IMMOBILIEN ZEITUNG on 03.11.2016. Lutz Aengevelt from Aengevelt Immobilien describes the planned regulations as “the first step of a journey towards a command economy.” The planned measures have little or nothing to do with concerns for an overheated real estate market, they are actually the start of “the inevitable and necessary repatriation of the excessive liquidity that has been pumped into the financial system”, said Aengevelt. The IVD’s president, Jürgen Michael Schick, warned against any measures that make it more difficult for people to buy property, and pointed out that it is not even clear whether the precautionary powers being given to the BaFin would actually help to cool an overheated housing market. He cautioned that it is also not clear that the BaFin could even fulfil enormous responsibilities it will be given. In particular, supervisory authorities should not be allowed to decide on individual mortgage lending approvals. Uwe Sterz, representing the Sparda-Banken, also expressed doubts about the usefulness of the BaFin’s proposed powers to intervene in the housing market and warned of future bottlenecks in mortgage lending. Burkhard Dallosch from ZIA called on politicians to focus on incentivising the construction of new housing, rather than wasting time coming up with more precautionary measures.
Implementation of mortgage lending regulations to be revised
According to the SÜDDEUTSCHE ZEITUNG on 04.11.2016, the Federal Ministry of Justice is planning a meeting between the federal ministers for justice and finance and representatives of the banking industry. The meeting will provide a platform to discuss the extent to which mortgage lending regulations could be relaxed. Ever since the new European directive on mortgage lending and consumer credit were implemented in German law, the country’s banking sector has been beset by uncertainty and there has been a noticeable decline in mortgage and construction lending.
Purchase prices are rising faster than rental prices
According to F+B’s German Housing Price Index, prices for condominiums and single-family houses increased far more rapidly than rental prices in Q3 2016. This was reported by the IMMOBILIEN ZEITUNG on 03.11.2016. While rental price inflation for re-lettings (0.3%) and new lettings (0.6%) was only moderate in comparison with Q2, condominium purchase prices added 2.2%, and single-family houses gained 1.8%. Condominium prices have increased by 7.1% this year so far, with price rises running significantly ahead of the increases registered for re-lettings and new lettings (1.1% and 2.5%). Compared to the third quarters of the last five years, condominiums are 31.1% more expensive. For re-lettings and new lettings, F+B reported increases of 10.1% and 4.6%, respectively. The biggest price increases were registered in Freiburg, at 1.6% in comparison with the previous quarter, and 8.2% in comparison with the same prior year quarter, which has pushed the city from seventh to third in the national rankings. A new “German Housing Market Report 2016″, published by NAI Apollo, reports that advertised condominium prices rose by an average of 6.5% in the eleven major cities covered by the report during H1 2016, whereas rental prices rose by 2.6%. The biggest condominium price jump, according to NAI Apollo’s data, was registered in Stuttgart (an increase of 9.8% to €4,030/sqm). Leipzig also reported rapid price inflation, with prices rising by 8.9% (to €2,090/sqm). F+B also published a ranking of house price inflation for Q3 2016. As revealed by the WELT AM SONNTAG on 30.10.2016, monthly price inflation in Germany, based on the so-called weighting scheme (shopping basket) used by the Federal Office of Statistics, showed that rental prices have been increasing faster than previously, but not at an extreme rate. Prior to 2010, rental price increases tended to average between 0.8% and 1% per year, whereas they have since averaged between 1% and 1.5%. The kind of spectacular increases which have recently dominated headlines across Germany do exist in reality, but only in major metropolitan centres, and even then, only in specific neighbourhoods. In more rural areas and smaller towns and cities, where a majority of Germans actually live, rents have remained more-or-less stable.
Rent control in Lower Saxony
On 04.11.2016, the SÜDDEUTSCHE ZEITUNG reported that, on December 1, 2016, Lower Saxony is introducing rent control (the Mietpreisbremse) in 19 of the state’s towns, cities and municipalities. This means that, in these regions, rental prices will only be permitted to exceed local benchmark rents by a maximum of 10% when rental properties are relet.
Germany’s Federal Assembly amends plans for certification of real estate agents
On 04.11.2016, the SÜDDEUTSCHE ZEITUNG revealed that Germany’s Federal Assembly has initiated major changes to the process of certifying the competences of real estate agents. According to the new proposals, real estate agents and property managers or administrators who have been active in the sector for more than six years will not be required to sit the new professional competency exams. Employees of these agents and administrators will also be exempted from requirements to demonstrate their competence. Furthermore, real estate agents will not be required to have valid professional liability insurance, although condominium managers will still be subject to this requirement. On 02.11.2016, the IVD real estate association issued a statement in which it confirmed its agreement with the Federal Assembly on the main proposals, but called for a transition period beyond the current 18 months. In the association’s view, this is important as the industry can only begin its preparations once the new regulations come into force and 45,000 businesses in the real estate sector will be affected. “It is only once the ordinance takes effect that we can really start to make preparations for the new certification regime, which, in turn, will take time for authorities and businesses to adjust to”, said the IVD’s Sun Jensch. The IVD’s National Director also highlighted the fact that the new proposals will still require condominium managers to obtain a certificate of professional competence. Sun Jensch has called for improvements to the proposals, and has suggested that all property managers and administrators, including letting managers, should be subject to the new regulations.
Housing construction in Düsseldorf still lagging behind demand
Figures released by the Ring Deutscher Makler (RDM) real estate association show that prices for residential property in the middle to lower price categories in Düsseldorf continue to become more expensive. This was reported by the IMMOBILIEN ZEITUNG on 03.11.2016. At the top end of the market, both purchase and rental prices increased, but only moderately. The average price for an existing, detached house in the premium segment remained constant at €1.15 million. Over the last twelve months, the price of a well-situated and well-equipped detached house in one of Düsseldorf’s urban districts has risen by 7% to around €750,000. In the middle price category, prices rose by 9% (from €450,000 to €490,000). On the rental market, similar developments have been reported for the rental prices of apartments in existing buildings. In the middle to lower price segment, prices have risen more strongly (5% and 6%, respectively), whereas the average rent in desirable neighbourhoods remained stable at €13.50/sqm. The only real increase in cold rents (i.e. excluding heating and utilities), of €1.00 per square metre, was reported in the newbuild rental sector in the most desirable neighbourhoods. The RDM does not expect levels of demand to change over the next few months and predicts that future price rises will fluctuate between 2% and 5%. The city’s population is set to reach up to 680,000 over the next 35 years, while the number of building permits issued by planning authorities had steadily fallen over recent years. However, from H1 2015 to H1 2016, the number of building permit approvals surged from 467 to 1,372 (a massive increase of 194%). Approvals for apartments in multi-family houses shot up by almost 245% (1,252 in H1 2016, compared with 363 in H1 2015). In any case, the RDM expects that it will take at least two years for the market to approach balance, once a sufficient number of the units now under construction actually come to market.
Potential tax breaks and extra child allowances for homeowners
Real estate industry experts are in a state of disagreement over plans suggested by Federal Construction Minister Hendricks (SPD), which would see the state co-finance German families’ home purchases, and proposals from the CDU/CSU to introduce an extra child tax allowance for homeowners. This was the subject of articles in the FAZ on 05.11.2016 and in the IMMOBILIEN ZEITUNG on 10.11.2016. Michael Voigtländer, from the Cologne-based Institut der deutschen Wirtschaft (IW), speculated that the proposals may largely be the product of electioneering, but stressed that the ideas were at least heading in the right direction. He expressed his relief that, after so much attention has been given to the rental housing market, politicians now seem to be turning their attention to homebuyers and owners. He complained that the amount of personal savings needed to buy a home in Germany are too high. The average German home currently costs €250,000, which means that a family needs to save €75,000 for their 20% downpayment and the 10% they will need to cover ancillary purchase costs, a figure which is, in many cases, simply unrealistic. Nevertheless, he believes that any form of state subsidy or a programme to provide government-funded equity loans would be too expensive. He thinks it would make far more sense to direct efforts towards reducing ancillary purchase costs, such as land and property transfer taxes. One possible approach would be to spread the payment of land transfer taxes over a ten-year period. Reiner Braun from empirica remains ambivalent to the proposal as he believes it does nothing to combat the underlying shortage or affordability of building land and instead merely treats cosmetic symptoms. As a result, he thinks that such an approach would only really make sense if it were targeted exclusively at those high-price regions where families have to compete with property investors, and not everywhere. The ZIA German Property Federation greeted the minister’s plans. The federation believes that younger homebuyers would benefit via the inclusion of property in their retirement planning. At the same time, it would make no sense if any support for homebuyers were then cancelled out by increases in property taxes or changes to mortgage lending regulations. In the FAZ on 11.11.2016, Michael Psotta warned that such ‘gifts’ could soon add up to billions in liabilities for tax payers. He also cautioned that, if the measures are introduced universally, i.e. without upper income thresholds, there is a serious risk that they would end up largely subsidising wealthier households who would have had no problem buying property anyway.
Federal Assembly approves property tax reform
As revealed by the IMMOBILIEN ZEITUNG on 10.11.2016, almost all of the states in Germany’s Federal Assembly (except Bavaria and Hamburg) approved the draft property tax reform submitted by the states of Hesse and Lower Saxony. It has not yet been decided when Germany’s parliament will debate the reforms. The coalition government now has six weeks to initiate parliamentary proceedings on the new method for value assessment in order to provide parliament with the time it needs to approve changes to the constitution. The new method for value assessment will be subjected to an immediate parliamentary vote. Whether this vote will be held before federal elections in September 2017 is unclear, especially as there are no statutory time limits within which parliament has to move on such submissions from the Federal Assembly. Should the reform proposals not be dealt with before the election, they will have to voted on again by the Federal Assembly, whereby the matter would remain open as new state parliaments are also due to be elected in Hesse and Lower Saxony in 2018. The current draft proposal specifies that the new regulations should come into force in 2022, with the reformed property tax due to be collected for the first time in 2027.
Prices for buy-to-let apartments rise faster than rents
Buy-to-let investors are having to make do with lower property yields, reported the HANDELSBLATT on 11.11.2016. According to a new study from empirica, rental yields in 215 of the 402 municipalities monitored for the study fell in Q3 2016. This was the case for 209 municipalities in Q2 2016, and three years ago for just 121. For the next three years, the study forecasts that buy-to-let prices will continue to rise at a faster rate than rental prices. In the long-term, it is still possible to achieve positive total yields as prices continue to rise, especially as the result of demographic effects. Investors who have expanded their focus to include B cities need to be aware that, alongside higher net initial yields, they will also have to accept higher risks of value losses as soon as interest rates begin to climb again. Investors may suffer losses in the value of their investments, even in larger towns and cities. Right now, however, there are few real alternatives to real estate investments.
Investors turn to B and C cities
Given the shortage of available property as demand is high and prices keep getting pushed higher, it is becoming increasingly difficult to find profitable investment opportunities in A cities, reported EXXECNEWS on 07.11.2016. This is demonstrated by the latest market report from the German Investment and Real Estate Association. It is increasingly worthwhile considering B and cities, although, even here, the market is becoming short of suitable properties. This is leading to more extensive revitalisation of housing stocks in B cities. At the same time, investors are increasingly turning to retail parks, student accommodation, micro-apartments and logistic real estate as they prioritise diversity within their investment portfolios. In doing so, investors hope that incidental investments offer positive opportunities for value gains.
Bavaria is building more
In comparison with the previous year, the number of building permits issued in Bavaria has risen by almost a quarter, reported the IMMOBILIEN ZEITUNG on 10.11.2016. According to Bavaria’s State Office of Statistics, a total of 55,456 permits were issued for new apartments during the first nine months of 2016, which is 11,300 more than during the corresponding prior year period. In total, the construction of new apartment buildings is forecast to deliver 48,435 new apartments. In multi-family houses, the increase will amount to 42%, or a total of 24,300 apartments. Almost 20,000 units (+ 6.5%) are due to be built in detached and semi-detached houses. A further 6,202 apartments will be created as a result of expanding and reconfiguring existing buildings. The increase in building permits was most noticeable in the state’s largest cities. In Munich alone, 6,900 permits were issued, of which 6,224 were for newbuild apartments. Authorities in Nuremberg issued 2,020 permits, and in Regensburg almost 1,430 applications were approved. Rural districts accounted for 34,860 approved apartments. A majority of these were approved in the areas around Munich and Regensburg.
Housing construction weakens in Rhineland-Palatinate
According to the ‘Housing Market Monitor 2016′ report from the Investitions- und Strukturbank Rheinland-Pfalz (ISB), the number of apartments built in the state of Rhineland-Palatinate suffered a significant downturn last year. This was the subject of an article in the IMMOBILIEN ZEITUNG on 10.11.2016. In 2015, 9,800 apartments were completed, which represented a decline of 11% in comparison with 2014. In contrast, the number of construction permits approved had risen by 9.1% to 12,400. A majority of the units were located in Mainz, where 1,013 apartments were completed in 2015. The most recent figures for active market vacancies are from 2014. These show that there were 24,100 vacant apartments (3.3%) across the entire state, 1.6% fewer than in 2013. Among the urban municipalities, Mainz had the lowest vacancy rate, at 1.2%. The state’s median rent for new apartment lettings at the end of Q1 2016 stood at €6.39/sqm. This represented a year-on-year increase of 4.7 %. The greatest increase (of 8.8% to €7.10/sqm) was registered in Koblenz. Mainz retained its position as the most expensive market in the state, with a peak rent of €10/sqm, even if the city’s rental prices only added an average of 2.1% between 2014 and Q1 2016. Across the state, condominium purchase prices rose by 15.5%, reaching €1,825/sqm, with the greatest increase, once again, registered in Mainz, where prices rose by 27.5% or €3,128/sqm. Detached and semi-detached houses are also most expensive in the state capital, averaging €2,952/sqm. The fastest price growth between 2014 and Q1 2016 was, in this residential property category at least, not in Mainz, but in Landau, where house prices gained 12.8%.
Big jump in logistics investment
The data for the first three quarters of 2016 clearly indicates that there was a significant year-on-year increase in transactions involving logistics, industrial and light industrial real estate, reported the IMMOBILIEN ZEITUNG on 10.11.2016. At the same time, investors stepped up their investments in secondary locations. According to Savills, around €3 billion was invested in logistics, industrial and light industrial real estate between January and September 2016, a 17% rise in comparison with the same prior year period. Of this total, almost €1.9 billion was invested in logistics properties (+ 10% compared with the first three quarters of 2015), €677 million in industrial and light industrial (+ 58%), €408 million in business parks (+ 4%). CBRE reported overall investment in the sector of €2.7 billion, and registered a 50% increase in the number of transactions, which totalled 231. According to CBRE, logistics real estate accounted for 8.4% of all commercial real estate investment during the first three quarters of 2016 (2.1% more than the corresponding nine months of 2015). CBRE attributes the growth in investment volumes to an increase in transactions outside the Big Seven logistics regions. Among the Big Seven, volumes actually declined moderately. Sale and leaseback deals increased in popularity. Net sales volumes of such deals amounted to €717 million, revealed Savills, compared with an average of €295 million over the previous five years. CBRE identified asset and fund managers as the most active buyers. Between January and September 2016, they bought logistics and warehouse properties with a combined value of €731 million, and were followed by listed real estate companies and REITs (€490 million) and open-ended and special real estate funds (€478 million). Take up of logistics space totalled almost 5.2 million square metres according to CBRE, 7% more than the year before, and 29% higher than the average over the previous five years. Across Germany, letting volumes remained at roughly the previous year’s level, totalling just under 3.1 million square metres. “By contrast, owner occupiers increased their relative share in the accumulated take-up by some 9 percentage points to 40% in a year-on-year comparison. Almost all owner-occupancies registered were realised in new property development”, said Jan Linsin, Head of Research at CBRE. The Ruhr region accounted for 912,000 sqm of take-up, followed at a distance by the Hanover region (212,000 sqm) and the Cologne region (208,000 sqm). CBRE reports that all signs point to a full-year take-up in Germany of more than 6.5 million sqm, which would make this a new record year. According to Logivest, new logistic developments contributed 832,800 sqm during Q3 2016, a clear increase in comparison with previous quarters. A majority of this newly developed space (roughly 270,000 sqm) was created in the Lower Rhine region, followed by the Rhine-Neckar region (269,000 sqm). Logivest reports that the retail industry is the largest user group (38%), followed by industry (35%) and logistic service companies (28%).
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 Dortmund
The crisis of the traditional metal industry triggered severe structural adjustment in Dortmund’s industrial sector. As local metal companies’ production plummeted, the industrial sector share of Dortmund’s regional output shrank significantly. Today, a much-reduced level of iron and steel output represents a notably smaller share of regional industrial production, while industry as a whole is far less important for Dortmund’s economy than it was before. By now though, Dortmund’s industrial downsizing process has nearly ended. In the tertiary sector, which now generates over half of total regional output, the most growth-intensive categories are business-related services, trade and insurance. Enterprises in these fields have become increasingly important drivers of economic growth. Logistics activity, based at former industrial sites, is also expanding. Dortmund is projected to post stronger output growth than the average for large German cities.
Feri rates Dortmund as a business location “C”, which is unchanged compared to the 3rd quarter 2015. It translates into “average potential, average risk”. With this rating result the city ranks 15th in the comparison of German A-Centers.
Office Real Estate
Regarding office real estate Feri rates Dortmund “B”, which is downgraded to the 3rd quarter 2015. The city ranks 5th among office locations of German A-Centers. Feri awards the office top locations “B” and the side locations “C”
With 2.6 million sq m of office stock, Dortmund belongs to a group of smaller B-office markets in Germany. The inner city is the most demanded location. During the recent years the new location “Stadtkrone Ost” has been established as an office location. The “Technologiezentrum” is for tenants from the technology sector, respectively from research and development. Due to the structural alteration of the economy in the Ruhr metropolitan area office employment is expected to increase over the long term.
In the current cycle of moderate building activity and increasing office employment, the vacancy rate is declining again. Due to the small size of Dortmund´s office market, single releases of office space have a higher, short term impact on the city’s vacancy rate, than in bigger locations. Dortmund’s office market is currently in a positive office market cycle, with rising rents in the long term trend from 2016-2020.
According to the local advisory committee of Dortmund the transaction volume of office buildings, administrative buildings and commercial properties in 2015 totaled 233.2 Mio Euros. Both the number of purchases and surface and cash turnover increased noticeably, as it has tripled its volume compared to the previous year (60.7 Mio Euros in 2014). The highest share was that of Office buildings which was 88%. A total of 35 contracts for office property sales were completed in 2015, which amounted to 205 million Euros.
Traditionally rents have the stronger impact on real estate capital values on Dortmund’s real estate market, while rental yields are relatively stable. One reason might be the comparable high share of regional investors acting less cyclical on the market. With regard to prime offices we assume a fair rental yield of 6.4%. We therefore speak of a fair valuation of the market.
Retail Real Estate
In the comparison of German A-Centers regarding retail real estate Dortmund placed 14th with a rating result of “C”, which is unchanged compared to the 3rd quarter 2015. Feri awards the retail top locations “C” and the side locations “C”.
Of the Ruhr area’s three largest cities – Bochum, Essen, and Dortmund – Dortmund is the largest retail trade center. Retailers in Dortmund are also coping better than those in the other two cities with strong competition from the “Centro” shopping center in Oberhausen. Dortmund’s “Westenhellweg” is still one of Germany’s busiest shopping streets. Nevertheless, retail rents in Dortmund have mostly dropped during recent years. This unfavorable rent performance stems from both restrained consumption due to weak general economic conditions, and competitive pressure from the many alternative shopping possibilities in the surrounding area. Since autumn 2011 the “Thier Gallery” is another attraction of the midtowns retail scape. Rents in Dortmund are projected to rise rather moderately in the years to come.
Residential Real Estate
When it comes to residential real estate, Dortmund placed 15th among German A-Centers with a rating result of “C”, unchanged compared to the 3rd quarter 2015.
In the recent to medium-term past, supply on Dortmund’s residential rental market exceeded demand. Accordingly, the performance of apartment rents, for both new and existing dwelling units, has been weak. Since building activity was low in the past, supply of apartments was reduced. Since 2014 building activity has picked up again. In the years to come, while reasonably stable demand is anticipated, rents for both new and existing apartments in Dortmund should rise. This is supported by the long term low level of building activity.
In the market for purchase of houses and condominiums, prices rose significantly in the 1990s. This price run-up was largely due to a scarcity of building lots, an outcome of the city administration’s very restrictive policy. The city later changed this policy and established special programs to counteract the shortage. Supply consequently rose, and price development on the residential purchase market weakened. Both house and condominium prices have been weak, mostly declining, in recent years. By now, a tendency for prices to rise seems to be emerging. Price increases are projected for the coming years, albeit mainly in preferred neighborhoods in the southern part of the town.
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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