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Germany’s real estate economy is in good health
The latest survey from the Cologne-based Institute of Economic Research IW has revealed that their economic index climbed to a record 89.5 points in Q4 2016. This was reported bin an article in the HANDELSBLATT on 16.12.2016. The key factors for this outstanding result were identified as Germany’s stable economic growth, a further rise in employment, continued population growth and the historically low interest rate environment. For this quarter’s survey, researchers also asked respondents to predict when they thought interest rates would be at least 1% higher than they currently are. Roughly 8 % of respondents said that they expected this to happen during the course of the coming year, whereas 40% think that this could happen in 2018. Among property developers it was striking that, for the first time since Q3 2015, more respondents expect conditions to get worse rather than improve.
The CDU wants more flexible building regulations
As reported by the TAGESSPIEGEL online on 12.12.2016 and the IMMOBILIEN ZEITUNG on 15.12.2016, Angela Merkel’s CDU party passed a motion during its party conference in Essen to make it easier for families to build their own houses. Alongside direct funding to help families with young children (Kinderbaugeld), the new plans include creating a tax-free allowance for property transfer taxes, which would be aligned with the cost of an average detached house. The CDU also announced that it intends to campaign for the “introduction of state-backed mortgage guarantees”, which would support young families in saving the equity they need to secure mortgage financing. In this regard, the party announced that the practical impact of the recently introduced mortgage lending regulations should be reassessed and any new regulations should first be tested for their real-world effects before they are introduced. In rural areas, the party also called for social and technical infrastructure to be designed to attract more young families. The party conference motion also called for building and energy-efficiency regulations to be reexamined to determine which could be made more flexible in order to keep continually increasing building costs “within an affordable range.” The real estate industry body ZIA broadly welcomed the party conference’s resolution, whilst pointing to the fact that legislators bore much of the responsibility for the significant increase in the cost of building. “For this reason, we recognise the fact that the CDU now wants to focus on these aspects,” said Andreas Mattner from ZIA.
No legal problems with the moderate tightening of regulations on real estate share deals
The research services of the German Bundestag (parliament) sees no constitutional problems with a reduction of the threshold at which the sale of shares in a property is interpreted as a change in ownership, subsequently triggering a property transfer tax liability, from its current 95% to a future 75%. This was revealed by the IMMOBILIEN ZEITUNG on 15.12.2016. However, the German constitutional court’s requirements mean that the potential for abuse of this regulation must be a realistic proposition. A reduction of the threshold to 75% would not result in a “systematic breach of the tax regime”, as the legislature had already “solved the question of the acquisition of property rights by adopting the 95% regulation and chosen an appropriate economic approach”. There is no realistic likelihood that such an amendement would change the character of Germany’s property transfer tax into a capital transfer tax. Whether a more dramatic decrease of the threshold to 50% would meet the constitutional court’s requirements is doubtful according to the research published on September 15, 2016.
Property around Berlin is becoming ever more expensive
As reported by the IMMOBILIEN ZEITUNG on 15.12.2016, the latest IVD Berlin-Brandenburg Property Price Index reveals that the price of land, houses and condominiums in the region around Berlin have risen by 20 percent within the space of a year. This applies in particular to areas within one kilometre of a commuter or regional train station with a direct link to the city, as well as to communities in areas around Berlin-Brandenburg International Airport. The highest prices were registered in Kleinmachnow on the southwestern border of Berlin, where a house costs an average of EUR 490,000 and building land averages EUR 350/sqm. Around Strausberg and Fredersdorf to the east, Oranienburg and Wandlitz to the north and Brieselang to the west, houses cost an average of EUR 250,000 and building land averages EUR 75/sqm. In Potsdam, house prices in upmarket, fair and good locations have risen by an average of 5.8 percent to EUR 430,000. In less prosperous districts prices have risen more strongly, adding 12.5 percent over the last twelve months to reach EUR 200,000. Rents in fair to good neighbourhoods had risen by 11 percent by the end of the year, with the most expensive apartments costing EUR 12.50/sqm. The prices for mixed-use residential/commercial buildings in Potsdam rose by an average of 10 percent and now cost between EUR 1,100 and 2,900/sqm.
Frankfurt needs 40,000 more apartments, construction activity declines
On 15.12.2016, the IMMOBILIEN ZEITUNG revealed that according to bulwingesa’s new market study, Newbuild Apartment Building Developments, Frankfurt had a shortage of approximately 40,000 apartments in 2016, and that this shortage was coupled with a decrease in new construction activity. Figures released by Frankfurt’s Housing Office show that there were 375,006 apartments for the city’s 415,054 households, which results in an arithmetical shortage of 40,048 apartments and results in a housing supply ratio of 90.4 percent. The study reported that the city’s housing shortage has been exacerbated by strong population growth. Following a growth in apartment building in 2015, bulwiengesa reports that, between October 2015 and October 2016, construction activity declined by around 18 percent. The current annual report counts 2,741 apartments as under construction. The average weighted price of the developments analysed for the study stood at EUR 5,400/sqm, which is around 10 percent higher than at the same time one year earlier. The most expensive project is the ‘F 39’ at the intersection of Wiesenau 36 and Friedrichstraße 39-41 in Frankfurt’s Westend, which will see the completion of 19 apartments by Q3 2017 at a weighted average price of EUR 9,300/sqm, followed by The Flagship at Liebigstraße 11 with 16 apartments at asking prices averaging EUR 8,800/sqm and the Grand Tower at Europa-Allee 2 with 401 apartments available at around EUR 8,700/sqm. Residential towers such as the Grand Tower, the Porsche Design Tower or the Praedium boosted the average price level by an estimated 14 percent. In order to prepare city authorities for their urban development decisions, Mike Josef (SPD) from Frankfurt’s planning department presented a range of possible scenarios to outline how Frankfurt could develop in the future. If the only approach adopted was to increase housing density, this would enable the construction of just 60,000 new apartments by 2030, whereas the city actually requires 90,000 new housing units. This would result in a significant proportion of the city’s population being forced to move out of the city, which would lead to massive changes in the character of numerous neighbourhoods. An alternative scenario assumed a requirement of 100,000 new apartments, which could be achieved via a combination of increased housing density, more building on the city’s outskirts and the construction of new urban quarters.
Low levels of fluctuation in Munich’s top retail locations
As revealed in a study from IVD Süd, there is a low level of tenant fluctuation in Munich’s 1A and 1B retail locations, reported the IMMOBILIEN ZEITUNG on 15.12.2016. Fluctuation levels were at their lowest in ten years on Rosenstraße, Kaufingerstraße and Neuhauser Straße. These locations also registered the highest consumer footfalls in Munich. The street with the longest-term retail tenants in the city is Rosenstraße, which has only seen two changes of tenant since 2006. During the same period, Kaufingerstraße has seen seven tenant changes. The third lowest tenant fluctuation rate in Munich’s central retail district was registered in Neuhauser Straße at 42 percent (28 tenant changes). The highest rates of fluctuation among retailers were recorded in Residenzstraße, at 67 percent, and Sendlinger Straße, at 73 percent. Rents for shops with 80 sqm of space and a 5-metre glazed shopfront in an 1A location stood at EUR 410/sqm and in 1B locations at EUR 170/sqm. Rents for shops with 200 sqm of space and an 8-metre glazed shopfront in one of Munich’s prime retail locations had reached EUR 320/sqm, whereas in the best secondary locations tenants are now paying EUR 110/sqm.
Retail vacancies, shortage of office space
The increase in digitalisation is having an impact on demand for retail and office property, reported DIE WELT on 14.12.2016. Savills believes that rental price growth is likely in only a small number of 1A locations. In all other urban districts, Savill’s analysts forecast an increase in innovative retail concepts, including pick-up stations, in which online orders can be collected in the offline world, along with more showrooms and restaurants, in place of clothing retailers. In contrast, the office market will be boosted by strong economic growth and a corresponding rise in the number of companies in the digital economy. In many of Germany’s largest cities, office vacancy rates have tumbled from an entrenched 10 percent to lows of 3 percent. Even in the capital, Berlin, there is now hardly any decent office space coming onto the rental market. In Germany’s seven biggest cities, vacancy rates have fallen to an average of 5.9 percent. Savill’s expects a further decrease to 5.7 during the coming year, as newbuild activity is set to slow once again. This applies especially to Berlin, Hamburg and Munich. Above a certain size category, there is no modern office space available at all.
Cost of German housing set to rise again in 2017
As revealed by DIE WELT on 24.12.2016, the latest F+B market report reveals that average net cold rents (i.e. excluding heating, warm water and utilities) now average EUR 16,32/sqm in Munich, EUR 13,31/sqm in Frankfurt and EUR 11.43/sqm in Hamburg, with rental prices continuing to rise despite the Federal Office of Statistics reporting that 308,700 new apartments were approved for construction between January and October 2016. The German Tenants’ Union has also announced that it expects housing to become more expensive in Germany over the coming year, as reported by the FAZ and DIE WELT on 27.12.2016. The tenants’ union claims that this will primarily be the case in large cities, metropolitan growth areas and university towns. House and apartment prices will also continue to increase, despite early indications of moderate price declines in rural regions. Preliminary data suggests that the volume of real estate investment rose again in 2016. Rental prices for new tenants in large cities are now between 7 and 8 percent higher. Rents for existing tenants did not rise as strongly, but there are also no indications that increases in 2017 will be lower than the levels seen in 2016. Germany’s housing shortage has now grown to approximately 850,000 apartments. In order to address a shortage on such a scale, it will be necessary to build entirely new city quarters.
20 year high for construction industry order books
An article in the BÖRSEN ZEITUNG on 24.12.2016 reported that the construction industry’s order books are are fuller than they have been in decades. As a result, the Confederation of German Builders has raised its prognosis for 2016 for the third time. In 2017, growth of between 5 and 6 percent is expected. Major public investment is due to be made in public infrastructure projects. Vibrant housing construction activity has also contributed to the industry’s healthy order books. Roughly 280,000 new residential units were completed in 2016, and more than 300,000 are forecast to be completed in 2017. Nevertheless, the Federal Construction Minister, Hendricks, believes that 400,000 new units are needed each year. With the exception of logistics real estate, for which the e-commerce sector is responsible for driving high levels of demand, the order books for the construction of light industrial and industrial real estate are filling more slowly. The sector’s 3 percent growth is primarily due to significant investment from Deutsche Bahn, without which growth would have “hovered around zero,” observed the confederation’s Heiko Stapelmann. “We don’t trust the market,” he added. As the FAZ reported on 19.12.2016, current figures from the German construction industry paint a picture that slightly contradicts his assessment. According to key figures, the final three quarters of 2016 saw overall revenues rise by 8 percent, including 4 percent growth in non-residential construction revenues, an 8 percent rise in public works revenues and a 15.4 percent increase in residential construction revenues. Overall, orders were up by almost 16 percent. At EUR 52 billion, revenues were at their highest level since 1996.
Mortgage lending regulations clarified, intervention powers for a property price bubble agreed
As the HANDELSBLATT reported on 21.12.2016, followed by the BÖRSEN ZEITUNG and DIE WELT on 22.12.2016, the German cabinet met on the Wednesday before Christmas to start the parliamentary procedure to clarify the recently introduced, and much criticised, mortgage lending regulations. According to their new draft legislation, increases in the value of a piece of real estate, for example as a result of construction and renovation works, will in future be taken into account before any mortgage lending decision is made. In addition, home equity conversion mortgages (reverse mortgages) would no longer be classed as consumer credits and would be excluded from the protective provisions of consumer credit regulations. Furthermore, the Finance and Justice Ministries would be required to work together to draft clear legal guidelines for creditworthiness assessments. Industry representatives greeted the clarification of the regulations. They claimed that the country’s financial supervisory authorities already have access to appropriate instruments to deal with the threat of a property price bubble. According to a study published by Kreditvergleich.net, even with the impact of the new regulations, lending in Q2 2016 was up in comparison with the corresponding prior year quarter, reported the FAZ on 30.12.2016. These figures were, however, based on overall lending volumes, rather than on the number of individual mortgages approved. It is possible that fewer mortgages were approved, but that those that were approved were for larger sums, or that any negative impact of the new lending regulations may only be felt at a later date. It is clear that that the regulations created a great deal of uncertainty among many lenders. They pointed to a lack of clear formulations in the regulations, which would have helped bankers in their decision making. In parallel to the clarification of mortgage lending regulations, the German cabinet also approved new powers for the country’s financial supervisory authority, the BaFin, to intervene in the event of a property price bubble, reported a number of newspapers on 21.12.2016 and 22.12.2016. The new powers were sharply criticized by real estate industry representatives and a large group of cross-party parliamentarians also announced its opposition to the new measures.
New Berlin government prioritises tenants
The new Berlin government, a coalition of SPD, the Left Party and the Greens, has prioritised tenant protection in its coalition agreement. This was reported by DIE WELT on 28.12.2016. Under the new Senator for Urban Development, Katrin Lompscher (the Left Party), neighbourhood conversation orders will be broadened and residents will be given a greater say in issues that affect their neighbourhoods. It is now doubtful whether as many new apartments will be approved over the coming twelve months. In addition, district authorities will be allowed to exercise pre-emptive purchase rights under certain circumstances. The three coalition partners have announced that they will increase their support for the six state-owned housing companies, which are described in the coalition agreement as “the most important pillars of social housing provision.” By 2025, the coalition plans to expand the stock of state-owned housing to 400,000 apartments. This places the state-owned housing companies under massive pressure. They need to launch substantial acquisition and modernisation programmes, and will make huge losses for which the taxpayer will be left to foot the bill, warns Jacopo Mingazzini from Accentro Real Estate. “The coalition agreement from this red-red-green government demonstrates a complete lack of trust in market forces” and is a step towards quasi-nationalisation. Mingazzini criticised the fact that the city’s government does not promote homeownership, although this is prescribed by the Berlin constitution. Dirk Wohltorf from the IVD describes the new Senator for Urban Development, Katrin Lompscher, as “a senator who views homeownership and investment as something negative.” Jakob Mähren from Mähren AG commented, “They are doing everything they can to drive investors away.”
Munich’s apartments are getting smaller and more expensive
As the SÜDDEUTSCHE ZEITUNG reported on 30.12.2016, bulwiengesa analysed a total of 101 property developments in Munich for its latest Newbuild Apartment Building Developments study, all of which are either in advanced planning or due for completion before the end of 2016. The projects included in the study comprise 5,960 condominiums with a total of almost 509,000 sqm of living space. The prices for these new condominiums are significantly higher than for units completed in previous years, in part because of huge increases in the price of building land. In a number of the most central districts, luxury condominiums costing between EUR 15,000 and 16,000/sqm are being built. Nevertheless, there were also a number of comparably affordable offers with average prices of between EUR 4,800 and 5,300/sqm. A majority of condominiums in Munich are bought before they are completed. The average price for a condominium in the city stood at EUR 7,464/sqm. On average, apartments in Munich are becoming progressively smaller, and in two-thirds of the developments the average apartment size was below 90 sqm. There are very few large condominiums, especially in the luxury segment. Condominiums in the 150 sqm and above category cost an average of EUR 13,500/sqm.
Office rents increase
Office rents increased across the board in Germany in 2016, irrespective of city or usage type, revealed the FAZ on 30.12.2016 in reference to the latest IVD Commercial Real Estate Price Index, which monitors office rents in 350 cities and municipalities. In Germany’s largest cities, price increases have lost some of their previous dynamism and net cold rents for standard office space only increased by a moderate 1.6 percent. Rental growth for offices with basic utility value slowed from 3.4 percent in 2015 to 0.5 percent in 2016. In contrast, in cities with between 250,000 and 500,000 inhabitants, rental prices increased at a faster rate in 2016 than they had done in 2015. Offices with fair utility value became 4.1 percent more expensive (prior year: 1.1 percent). In small and mid-sized towns and cities with less than 100,000 inhabitants, office rents increased by between 1.6 and 2.9 % percent. These increases were primarily driven by an overall increase in demand for office space across Germany as a whole. “Th rise in demand is based on a foundation of healthy jobs growth,” said the IVD’s Jürgen Michael Schick. The number of office employees rose by 2.2 percent between Q2 2014 and Q2 2015, and has risen by an impressive 10 percent since 2010. As Germany’s labour market continues to grow favourably, the IVD expects further rental price growth in 2017, even if the rate of growth is expected to slow somewhat. As previously, the most expensive office space with average utility value is located in Munich, where rents have reached EUR 22.50/sqm. Frankfurt occupies second place in the ranking, at EUR 14.40 Euro/sqm, followed by Düsseldorf (EUR 13.00/sqm), Cologne (EUR 12.00/sqm) and Stuttgart (EUR 10.00/sqm). Munich also registered above-average rental price increases, with year-on-year growth of 2.3 percent. The biggest increase, though, was registered in Berlin, where office rents increased by 4.5 percent during 2016, climbing to an average of EUR 8.88/sqm.
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 Vienna
Vienna is Austria’s capital and, along with New York and Geneva, seat of several UN institutions. Vienna’s Central European location – close to Eastern and Central Europe’s emerging, fast-integrating economies – has prompted various international firms to coordinate their Eastern European business activities from Vienna. Vienna’s stock exchange makes the city Austria’s most important financial center. A favorable geographic position and excellent transport links serve as an important asset for Vienna’s regional development. Upcoming infrastructure improvements, including an expansion of the airport, will make Vienna an even more attractive and competitive location. Furthermore, Vienna is an internationally known science and research center.
Feri rates Vienna as a business location “A”, which is unchanged compared to the 3rd quarter 2015. It translates into “high potential, low risk”. With this rating result the city ranks 9th in the comparison of European Metropolises.
Office Real Estate
Regarding office real estate Feri rates Vienna “C”, which is unchanged compared to the 3rd quarter 2015. The city ranks 18th among office locations of European Metropolises. Feri awards the office top locations “C” and the side locations “C”
Vienna’s office market is of average size in comparison to European regions. Its particular feature is stability. Only few markets show such low volatility of rental prices and rental yields. This could be also observed since the crisis in 2007, which had only minor impact on the market. Vienna’s function as capital and its favorable location for the entrance to the Eastern European market, both stabilize demand. Compared to other European metropolitan centers however, Vienna is a relatively cheap location. Overall, its office real estate market is less risky than other European office markets.
Development of rents in the coming years will be slightly above the growth trend of 1.7% per year. Building activity slowed down in the years 2013/2014 and was below its long term level of 200.000 m². Indeed 2015 construction level will match with the long term average. Office employment is back on a moderte growth path, after a slight downturn in 2009. Vienna’s rental market is not known for excessive growth. It is expected that the structural growth will approximately match inflation.
Rental yields have been on a downward pressure since 2009. This is due to Investor´s sentiment considering Vienna being one of Europe´s “Safe havens”. In combination with an increase of rents, purchase prices are rising. In the past the performance was almost exclusively determined by the development of rents. During the financial crisis, the price development was dominated by the increase of rental yields, although the exaggerations were not as predictable as in other European metropolitan centers. Rental yields are expected to rise slightly, due to increasing interest rates over the long term. As a result, price development will be damped.
Before the crisis hit the market, a similar contraction of rental yields as in other European metropolitan areas was only marginally observable. In coming years it is likely, that the stability on Vienna’s office market will attract investors looking for more reliability. Taken potentials and risks into account we expect fair rental yields of 5.4% in the years to come. Thus the market is currently above fair value.
Retail Real Estate
In the comparison of European Metropolises regarding retail real estate Vienna placed 18th with a rating result of “B+”, which is unchanged compared to the 3rd quarter 2015. Feri awards the retail top locations “B” and the side locations “A”.
Before the financial crisis, the rent performance of Vienna’s market for retail space was rather good in both prime and secondary locations. In prime locations – such as “Mariahilfer Strasse”, “Kohlmarkt”, and “Kärtner Strasse” -supply of retail space is scarce and definitely exceeded by demand. During the crisis, rents remained comparatively stable in comparison to other European metropolises. Thus, only modest rent decreases were recorded. Over the long term, a trend of moderately rising retail rents in both prime and secondary locations is expected.
Residential Real Estate
When it comes to residential real estate, Vienna placed 15th among European Metropolises with a rating result of “B+”, upgraded to the 3rd quarter 2015.
Strong building activity in the rental housing market during the 1990s produced an excess supply of apartments in Vienna. But for a number of years now, the pace of new residential construction has been falling continuously. Posing a fundamental problem for Vienna’s rental housing market, residential property purchase prices in the region are quite high, while rents for apartments tend to be comparatively low, except in a few districts of the city (districts 13, 18, and 19). Low rents in the other districts are caused by legal regulation. Thus, Viennese households include an exceptionally high proportion – one of the highest in the world – of those who own their dwellings.
Given Vienna’s low new building activity, increasing rents for both new and existing apartments are projected for the upcoming years.
Building activity of the 1990s has put purchase prices under a lot of pressure in the past. This development however, remains a thing of the past as housing market prices developed strongly in recent years, even during the financial crisis. The biggest increase was registered in the inner belt of the city.
Vienna’s slow pace of new building activity, in conjunction with a relatively optimistic projection for overall demand growth for the upcoming years, should support a trend of rising prices in all segments – detached single-family houses, town 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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