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Germany’s cities reach for the skies
On 18.11.2016, the HANDELSBLATT focussed on the growing popularity of residential skyscrapers, which are enjoying something of a renaissance, particularly in Germany’s largest cities, where space for new housing is in short supply. Developers are already catering to this new growth market. Figures released by Bulwiengesa reveal that more than 2,700 new high-rise apartments are due for completion in Berlin before the end of 2018, and in Frankfurt a further 2,400 will come onto the market. Across Germany as a whole, the next two years will see 7,000 such apartments constructed. The most popular apartments are micro- and modular-apartments, which offer tremendous flexibility and can easily be remodelled in the future. “The housing of the future will definitely involve smaller-scale units,” said Thomas Zabel of Zabel Property. His company has no difficulties marketing apartments with 45 sqm of living space, especially as the residential towers boast a range of communal spaces, extra amenities and attractive facilities such as kitchens and party rooms that can be rented by residents.
Alliance for Affordable Housing and Construction put on ice for now
Germany’s real estate federations and associations have announced that, at least for the time being, they have suspended the joint activities of their Alliance for Affordable Housing and Construction. This was reported on by the FAZ and the IMMOBILIEN ZEITUNG on 17.11.2016, and by the SÜDDEUTSCHE ZEITUNG on 18.11.2016. They blamed the government’s new climate protection plan, which has raised the energy savings targets in the building sector from below 65% to roughly 66.5%. By 2030, Germany’s buildings will have to cut greenhouse gas emissions by two-thirds in relation to 1990 levels. The sector has so far achieved a reduction of 43%. According to the plan, Germany’s building stock will be close to climate neutral by 2050. In order to achieve such an ambitious target, the new climate protection plan contains proposals to revise the programme of government support for energy-efficiency modernisations. The current package of subsidies, which will expire in 2020, exclusively targets fossil-fuel fired heating systems. The new programme will shift focus and increase the promotion of heating systems based on renewable energy sources. The plans have been met by sharp criticism from business leaders and representatives of the real estate industry, as higher energy-efficiency standards can only be achieved at great financial cost. They point out that these costs won’t just be borne by the business sector, but that consumers and tenants will also end up paying more for housing and goods. They called on politicians to make sure that housing and construction are kept affordable. In a joint letter to the Federal Construction Minister, Barbara Hendricks, representatives from the GdW, DDIV, BFW, ZIA and IVD clearly formulated their objections to the repeated tightening of the real estate industry’s energy-efficiency targets and called on the minister, “to rethink this latest decision in order to avoid permanently damaging the government’s working relationship with the industry.” The Confederation of German Industry (BDI) announced that it opposes, “the imposition of arbitrary and excessive targets on individual sectors of the economy,” and Andreas Mattner from ZIA warned against overloading the real estate industry with climate protection targets. In a jointly issued statement on behalf of Germany’s largest real estate associations, the president of the IVD, Michael Schick declared: “Launching irrational attacks on property owners and increasing requirements without warning, merely to serve other sectors, sends a disastrous message to the real estate industry. The federal government should be well aware of the importance of our industry. By not involving us in their decisions – decisions that further jeopardise the viability of our industry – politicians are endangering the basis of trust for future collaboration.” According to the BDI, it should be clear by the end of January whether there is any chance of industry representatives and government misnistries working together to finalise a mutually acceptable climate plan. Hendricks announced that she understands the industry’s concerns in relation to increases in the costs of construction and modernisations, and has promised to lobby for amendments to the federal government’s subsidy and support programmes. She stressed that she wants to maintain an open dialogue with companies involved in the housing sector.
Hope of more relaxed planning regulations in urban districts
As the TAGESSPIEGEL reported in its online edition on 14.11.2016, the Federal Construction Ministry is still developing plans to further liberalise the federal building code. In contrast to the draft published in June, noise regulations could be lowered, creating more room for manoeuvre for local authorities and developers. The new noise levels are under discussion for a new zoning category, “urban area”, and would be set at a level between the levels permitted in industrial areas and mixed-use areas. This would make it easier to rezone industrial areas as “urban areas”. Anke Brummer-Kohler from the Construction Ministry announced that the Federal Institute for Building, Urban Affairs and Spatial Research (BBSR) will carry out research between 2017 and 2019, with the aim of presenting a number of model developments. These new areas may also allow “significantly bigger buildings” than are currently permitted in mixed-use zones. The draft proposals would allow, for instance, 800 sqm of a 1,000-sqm site to be covered with building structures, thereby creating up to 3,000 sqm of floor space. The plans call for the site occupancy index (GRZ) to increase from 0.6 to 0.8. “Urban areas” would allow a higher degree of flexibility in relation to land and building utilisation than existing mixed-use areas, and the amount of noise permitted during the day and at night-time would also be reconsidered. However, it is still not clear whether the new draft will be presented before Christmas, or, given parliamentary elections next year, whether any new draft will even be presented to cabinet.
Federal Justice Ministry prepared to revise mortgage lending regulations
Following the Federal Finance Ministry, the Federal Justice Ministry has now publicly signalled that it is prepared to take another look at the legislation used to implement the EU mortgage lending directive in German law. This was reported by the IMMOBILIEN ZEITUNG on 17.11.2016. Representatives of the two ministries met with representatives of the mortgage industry in Berlin on 11.11.2016 and, according to those who took part, have promised ensure legal clarity for everyone involved in mortgage lending. How exactly the ministries will achieve this is not yet clear and still needs to be agreed with colleagues in the Finance Ministry of, admitted a Ministry of Justice spokesperson. According to details made public after the meeting, no new information was provided to confirm whether there has been a noticeable decline in mortgage lending since the new regulations were introduced, but, in any case, the ministries wanted to show that they are interested in working together with the mortgage industry and saw the meeting as an opportunity to create some extra degree of clarity. The newspaper reported that the Finance Ministry favours an amendment to the legislative text, whereas the Ministry of Justice would rather that the financial supervisor, the BaFin, be tasked with issuing a text to clarify matters.
Yet another new record in Bavaria
According to IVD Süd, Bavaria’s real estate transaction market is on course to set a new transaction volume record, for the seventh year in succession, revealed the IMMOBILIEN ZEITUNG on 18.11.2016. A total of EUR 37 billion has already been invested during the first nine months of the year, a 12% year-over-year increase. The full year total looks likely to reach EUR 49 billion, whereby a lack of supply is blamed for hindering an even higher full-year result, reported Stephan Kippes, Head of the IVD Süd. “Investment in real estate continues to increase, driven by sustainably high demand for residential real estate and constant price rises for residential properties, whether new developments or from the housing stock,” explained Kippes. On 18.11.2016, the SÜDDEUTSCHE ZEITUNG revealed that land for the construction of detached houses in fair locations in Munich now costs an average of EUR 2,000/sqm, which represents a threefold increase within the space of a decade. The average price for a newly built condominium in Munich rose from EUR 6,900/sqm in Q1 2016 to EUR 7,300/sqm in Q3. The median price for the whole of Bavaria has now reached EUR 3,650/sqm. An existing terraced house of good utility value in Bavaria currently costs an average of EUR 400,000, and In the city of Munich the average price has risen to around EUR 780,000.
B cities are becoming more and more attractive
In an article on 17.11.2016, the IMMOBILIEN ZEITUNG reported that, according to Deutsche Hypo, investors are primed to increase their interest in commercial real estate in a number of Germany’s B cities in Germany, largely because these secondary markets offer both better net initial yields and more stable prices than their larger competitors. Deutsche Hypo has identified the strongest office market potentials in Münster, Hanover, Karlsruhe, Essen and Mannheim, whereas, for retail real estate, Mannheim, Nuremberg and Münster come out on top. The cities were ranked according to their economic and population growth figures, demographic forecasts and low levels of investment risk. Increased interest in B cities will also have an impact on C and D towns and cities. Deutsche Hypo classifies regional centres such as Bochum, Bonn, Bremen, Dortmund, Dresden, Duisburg, Essen, Hanover, Karlsruhe, Leipzig, Mannheim, Münster, Nuremberg and Wiesbaden as B cities. These are the cities with the next largest populations after Germany’s Big Seven cities.
Associations join forces to promote homeownership
With their new initiative ‘Wohnperspektive Eigentum’ (‘The future of housing: Homeownership’), six associations from the construction, real estate and architecture sectors have announced that they want to create a 1:1 ratio between tenants and homeowners in Germany by 2020. This was reported on by the SÜDDEUTSCHE ZEITUNG on 25.11.2016. According to a study published by the Pestel Institute for Applied Systems Research on behalf of the initiative’s partners, this would require the construction of an additional 60,000 owner-occupied apartments per year, and would need 340,000 tenants to become homeowners. Germany’s homeownership quota has remained stubbornly low in recent years. In fact, the number of 25-45 year olds who own the home they live in has actually fallen since 2008, from 37% to 32%. According to the study, this decline is primarily attributable to labour market liberalisation, which has forced employees to retain the flexibility to relocate for work, and has led to an increase in short-term and part-time employment contracts, and growth in the low-wage sector. At the same time, the study reports, it has become much more expensive to buy a home. Real estate transfer taxes have risen and homeowners’ tax subsidies have been abolished, resulting in the effective withdrawal of measures to promote homeownership more than ten years ago. In recent years, politicians have focussed almost exclusively on the rental housing sector and social housing. The associations have joined forces because they see great potential in supporting the homeownership aspirations of households with net monthly incomes of between EUR 1,300 and EUR 2,500 who want to buy a used home outside one of Germany’s major cities. They have called on the KfW development bank to provide these roughly three million Germans with open-ended, low interest mortgages, with rates set at 1.5%. This would allow households to buy their own apartments, which they could retain ownership of even during periods of unemployment, provided this complied with social security legislation. As a result, the social security system would be spared the burden of paying expensive rents, and the households would be shielded from rental increases and potential evictions in later life. The IVD’s Jürgen Michael Schick believes that many of society’s problems can be solved by promoting homeownership. Homeownership is “the best route to fully-funded retirement provision” and has a “stabilising” effect on the development of residential areas (because property owners identify more strongly with their neighbourhoods). In addition to the KfW mortgages, the initiative is calling for households with below average incomes to receive direct financial support, for banks’ strict lending requirements to be eased and for a property transfer tax exemption for first-time owner-occupiers. The initiative’s members have also called for municipal authorities to drastically increase the amount of land they approve for development, for improvements to metropolitan infrastructure and for better transport links between major cities and their surrounding communities.
Building permit approvals hit 17-year high
On 24.11.2016, the IMMOBILIEN ZEITUNG reported that Federal Office of Statistics’ data shows that building permits for 276,300 were issued between January and September of this year, which is 24% or 53,500 apartments more than were approved during the first nine months of 2015. The last year to see more permits approved was 1999 (331,600). The number of building permits for multi-family houses increased by 27.5%, or 26,700 apartments, while approvals for apartments in semi-detached houses rose by 12.6%, or 1,900 apartments, and 3% more permits were issued for apartments in detached houses, which represents 2,100 apartments. The biggest increase was seen in the number of permits approved for apartments in large-scale residential facilities, such as refugee accommodation centres, which rose by 129.6% (10,400 apartments). Excluding these apartments in large-scale facilities, the number of building permits issued during the first three quarters of 2016 rose by 16.8%. The number of condominiums among these approved apartments rose by 19.5%, from 49,316 during the same prior year period, to 58,949 this year. Permits were also issued for new non-residential buildings with a gross capacity of 159.5 million cubic metres, a year-over-year increase of 20.8 million cubic metres, or 15.0%, which is due to increases in the number of permits issued to both public sector (34.1%) and private sector developers (13.3%).
Berlin’s new local government proposes tougher regulations
Berlin’s new local government, a coalition of the SPD, Left and Green parties, has presented its coalition agreement and highlighted the creation and provision of affordable housing as one of its key priorities, reported the IMMOBILIEN ZEITUNG on 24.11.2016. In order to achieve this, the coalition partners have announced that they want to strengthen and expand existing housing market regulations. The three parties have agreed to actively “use their state-level property policy as an instrument of public provision,” and to expand the stock of the state-owned housing companies’ housing by 55,000 units and to integrate Berlinovo’s 15,000 rental housing units into the state-owned portfolio. When municipally-owned land is approved for housing construction, the state’s own housing companies and charitable housing associations will be given priority, and the proportion of rental units in Berlin with rent caps and secured tenancies will be raised from 30% to 50%. In the private rental market, the coalition government will strive to ensure that “a clear majority” of apartments in central districts are available at rents of less than EUR 10/sqm. A further aim is to free up additional development land via a sustainable and strategic land management plan, and that targeted acquisitions and disposals of state-owned land and properties will be used to develop a “strategic land reserve.” This mainly means that Berlin’s authorities will make greater use of their compulsory purchase powers and, for example, assess the acquisition of land no longer needed by the national train company. It is hoped that a substantial volume of additional housing can also be created via a process of “intelligent densification”, which will involve erecting compact buildings on sealed areas and construction on unnecessary car parks and advertising spaces. In order to boost the creation of affordable housing, the coalition government has already announced that it is planning to incrementally increase its programmes from 2018. In addition to the construction of new housing, support will be provided for the conversion of loft spaces and the addition of extra storeys to existing buildings. In principle, the programme is open to all housing market participants, although the main beneficiaries will be municipal housing societies, non-profit housing associations and socially-oriented developers. In the case of private investors’ new housing developments, the model of cooperative building land development approved in 2014 will apply “without exception.” This means that the share of rent controlled and secure tenancy units in any development will increase from 25% currently to 30%. In order to maintain the city’s existing stock of affordable housing, authorities will increase the number of special protection areas, reduce the length of time that building permits are valid for, and potentially approve a new pre-emptive purchase order in favour of the six state-owned housing companies. The new coalition government has also announced that it intends to tighten rent control regulations, make them permanent, and require landlords to disclose the level of rent paid by previous tenants. The coalition wants to ensure that the regulations also apply to existing tenancies, which are currently exempted, and to only allow landlords to increase rents by a maximum of 15% over a five-year period without substantial improvements having been made to the rental unit.
Measures to combat space shortage in Munich
The Department for Labour and Industry has announced that it plans to meet with the Department of Urban Planning and Building Regulation before the end of 2016 in order to initiate a reform of Munich’s programme for the development of commercial space, with the immediate aim of zoning an addition 35 hectares of commercial space in Munich. This was the subject of an article in the SÜDDEUTSCHE ZEITUNG on 25.11.2016. Around 280,000 new jobs are expected to be created in Munich by 2030. Roughly 180,000 of these jobs are forecast to be created in central districts, with the remaining 100,000 in the city’s surrounding regions. Demand for commercial space amounts to approximately 100 hectares, and can only be partially satisfied by the existing stock of commercial land. According to Colliers International, Munich’s office rental market grew strongly through to the end of September 2016, and the vacancy rate sank once more, falling to 3.1%. CBRE’s Rainer Knapek believes that current completion volumes are far too low to provide much relief for Munich’s commercial real estate market, estimating that demand amounts to 600,000 sqm over the next two years. Data from Colliers shows that just under 189,000 sqm of commercial space will have been completed by the end of this year, of which 82% was pre-let. The shortage of space is most pronounced at the higher end of the market in central locations. The city’s housing sector is also being targeted by a new housing construction programme, which will invest EUR 1.28 billion in new residential developments through to 2027. The programme’s key aims are to accelerate approval for building permits and ease the construction of additional storeys on existing buildings. By 2030, the authorities want as many residential, commercial and mixed-use buildings as possible to be extended, redeveloped or remodelled to increase the number of people who can be accommodated by them.
No Business Tax for Shopping Centre Landlords
As reported by the IMMOBILIEN ZEITUNG on 24.11.2016, the Bundesfinanzhof (BFH), Germany’s federal fiscal court, has ruled that letting a shopping centre does not incur trade tax, even if the landlord provides the kind of ancillary services normally associated with a retail centre, such as car parking facilities, toilets and advertising campaigns. The same ruling applies to other mixed-use objects.
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 Milan
Milan is Italy’s leading center for trade, transport and services. Traditionally, export-oriented branches – such as machinery, electrical engineering, chemicals, and printing and publishing – dominate Milan’s industrial sector. Lately, however, Milan’s economic dynamism and international competitiveness have weakened. Milan is at an increasing and imbedded disadvantage in international competition partly because of the failures of local and national policymakers. On a more positive note, a location near the southern edge of the Alps makes Milan Italy’s most important traffic junction with an excellent infrastructure. Milan also enjoys worldwide recognition as a research center. Nonetheless, Milan’s long-sustained standing as one of Southern Europe’s fastest-growing regions now depends on the enactment and implementation of needed political and economic reforms.
Feri rates Milan as a business location “C”, which is upgraded to the 3rd quarter 2015. It translates into “average potential, average risk”. With this rating result the city ranks 25th in the comparison of European Metropolises.
Office Real Estate
Regarding office real estate Feri rates Milan “C”, which is unchanged compared to the 3rd quarter 2015. The city ranks 17th among office locations of European Metropolises. Feri awards the office top locations “C” and the side locations “C”
Milan’s office market with its size of more than 12 million square meters is the largest market of Italy and is, compared to other European office locations, of above average size. Due to its function as Italy’s largest service center Milan is generally interesting for enterprises. Supply is relatively inflexible with regards to changes in demand, thus the average quality of office space is relatively low compared to Europe. The relative scarcity of high quality office space is also reflected by a positive trend of office rent development since the mid-1990 as well as in comparable high rents. Primarily, risks are seen in transparency and volatility.
Construction activity in Milan was decreasing since 2011 with low points in the years 2013/2014. Meanwhile as slight rebound is expected. In 2016 approx. 100.000 m² of new office space will enter the market. This is still below pre-crisis level of 200,000 sqm. Thus the weak construction cycle of the past 5 years would be passed through. Demand has recovered during the last year and due to the low level of building activity the office space vacancy rate decreased. Indeed the vacancy rate is still in double digits. Office employment is expected to recover time shift with Italy´s economic recovery. This will lead to a further rebound of office space demand. So rents are expected to rise in the years to come.
As further result of the economic and financial crisis and the weakness of the office market, the net initial yields in Milan have risen sharply in the years 2008/2009. This reflected the cyclical weak development of the office property market in Italy. In 2014 there was a turning point. Strong competition for prime property and a lack of this led to further contraction in the prime sector. The performance of the last two years was therefore determined by the development of net initial yields. With ongoing recovery of the rental market, office rents will rise and thus be the main drivers for the growth of capital values.
Before the crisis hit the market Milan also experienced above average decreases of rental yields. The resulting uncertainty on credit markets and more tightened credit terms caused a counter-development In 2014 there was a turning point again and a contraction of prime office rents started. Considering potential and risk we expect fair rental yields of 5.7% for the coming years. We therefore consider the market as currently highly above its fair value.
Retail Real Estate
In the comparison of European Metropolises regarding retail real estate Milan placed 17th with a rating result of “B+”, which is upgraded to the 3rd quarter 2015. Feri awards the retail top locations “B+” and the side locations “B+”.
Milan’s inner city retail rents performed quite volatile since the mid-1990s. With the proceeding economic recovery consumer confidence in Italy has risen. This will lead to income growth and rising retail sales. Retailers anticipate the economic rebound. They focus particular in highstreet locations as well in frequented shopping centers. The fashion metropolis of Milan is one of the most important locations for retailer´s expansion in Italy. In the past two years high street rents have increased in double digits. Milan’s economic forecast is sufficiently positive to support rising consumption, and hence rising demand for retail space. Thus, once economic recovery accelerates, rents at both top and secondary locations are expected to increase.
Residential Real Estate
When it comes to residential real estate, Milan placed 22th among European Metropolises with a rating result of “B”, unchanged compared to the 3rd quarter 2015.
On Milan’s apartment market, rents rose without interruption for a full decade. The trend in rental housing demand in Milan, as in numerous other regions, shows a rising preference for more spacious, high-quality apartments. A large stock of not renovated apartments reduces the region’s marketable supply of dwelling units. Economic conditions have now brought this series of yearly rent increases to a halt for the time being. In the years to come, after the expected economic recovery takes hold, some degree of excess demand relative to the available supply will induce ongoing moderate rent increases for both existing and new apartments in Milan.
On Milan’s residential property sales market, the share of old dwellings, including many in need of complete renovation, is very large. The region’s exceptionally strong economic performance at the end of the nineties, in conjunction with a rising total number of households, served to boost demand. As a consequence of the economic collapse in 2009, sale prices in the region registered decreases. However, prices for home ownership will benefit from a middle-term improvement of Italy’s economic situation and the regained confidence in a full recovery.
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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