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Regulations to be watered down
As reported in the BÖRSEN ZEITUNG on 04.01.2017, harsh protests from the financial sector in Germany and internationally have forced politicians and supervisory authorities to weaken the recent sharp tightening of conditions for real estate financing. It is not yet clear how the German implementation of the EU mortgage lending directive in its revised version, and the conclusion of the Basle III regulatory package, which is due to be finalised shortly, will effect real estate financing. On the basis of the first proposals made by the Basle Committee, Strategy& (PwC) estimated that risk activity for the mortgage business of European banks in November 2016 stood at between 65 and 95 percent. A number have changes have been successfully lobbied for since the committee made its initial proposals. One such compromise would allow mortgage lenders to continue to split their mortgage exposures to a single retail client into a mortgage credit and a personal credit. This would allow credit institutes to divide their credit into a secured and an unsecured loan, thereby maximising the permitted loan-to-value ratio at a significantly lower weighted level of risk. This would fulfil one of the German credit industry’s key demands. Proposed restrictions to limit the application of internal model method (IMM) will also probably end up being weaker than originally envisaged. In contrast to the original plans, banks will still be able to use the advanced version of the internal model method, at least until the Basle Committee has revised its “slotting approach”. The Bundesbank and Germany’s financial supervisory authority (the BaFin) also argued that the new Basle regulations should take account of the fact that, in international comparison, Germany’s real estate market exhibits above-average high levels of stability. Real estate financiers would be well advised to quickly calculate the implications of the amended regulations as soon as the rules are established, even though the Basel Committee provides for generous transitional periods.
Property price growth to slow slightly in 2017
On 06.01.2017, the HANDELSBLATT published a detailed analysis of property price forecasts for 2017. According to figures from empirica indicate that condominium prices in Germany’s strongest growing cities will rise by an average of 3 percent in each of the next two years. Rises of 5 percent are to be expected in Munich, while rental prices will add between 1 and 2 percent. These forecasts exclude declining regions, and in a number of cities, including Berlin, property and rental prices are forecast to rise far more aggressively. As in many cities, the volume of new apartment construction on Berlin is nowhere near enough to satisfy growing demand for housing. Ziegert, one of Berlin’s largest real estate agents, predicts that square metre prices will rise by a further 20 percent by 2018. Although such increases may appear very high by German standards, they are nothing unusual in international terms. In Turkey, Knight Frank registered a year-over-year increase of almost 14 percent in the third quarter of 2016, along with 12 percent in Canada and 9.5 percent in Austria. “In Germany, the risk of overheating, after the real price declines between 1995 and 2005, is increasing, but remains limited to metropolises and regional hotspots”, said Manfred Binsfeld from Feri Euro Rating. Rolf Buch from Vonovia went as far as to speak of a housing crisis in booming metropolitan areas. He estimates that Germany has a shortage of up to one million apartments. The only possible solution, he says, is to increase the construction of new apartments. In order for more housing to be built, the housing industry would like to degressively depreciate its building stock by one to two points above the current regular depreciation rate of 2%, and would be boosted by an exemption from property transfer tax. However, critics fear that this would only serve to drive property prices even higher. Jürgen Michael Schick from the IVD countered that degressive depreciation could be restricted to regions of positive population growth: “It would also be possible to restrict any increased depreciation by property sector, for example to the social housing sector, or to apartments with a rent cap of eight to nine euros per square metre, in order to target subsidies to the creation of more affordable housing.” He also suggested that any exemption from property transfer tax could be linked to a requirement to lease apartments for a maximum of EUR 9.00/sqm for the first five year. This would dampen any potential speculation with development land which could arise from a blanket property transfer tax exemption. A positive piece of news was that loan-to-value ratios in Germany have remained unchanged at 80 percent for years, which limits the risk of widespread forced sales or foreclosures should interest rates begin to rise once again. Rental price increases have also shown that there are clear limits to what the market will stand. “In Hamburg you can see the maximum housing cost burden has almost been reached. Asking rents within the city limits are hardly increasing at all right now,” said Henrik Baumunk from CBRE.
Why there is no threat of a property price bubble in Germany
Manfred Binsfeld from Feri EuroRating Services, a Scope Group company, wrote in the BÖRSEN ZEITUNG on 11.01.2017 that price rises are only one of a number of factors that can contribute to an asset price bubble. In relation to the property markets, he suggested that it makes far more sense to consider both the relationship between property prices and rents on the one hand, and rents and wages on the other. As he observed, it is not just rents that are increasing in Germany, wages are on the rise too, which means that households are typically paying between 15 and 30 percent of their incomes on their housing. He also identified stable overall economic growth in Germany, and highlighted the fact that prices are increasing organically. A similar pattern emerges when one considers levels of household indebtedness. In terms of GDP, Germany has much lower levels of household debt than many other European countries. Whereas household debt amounts to 120 percent of Denmark’s GDP, Germany registers a level of less than 60 percent. A particular characteristic of Germany’s property price boom is that it was barely affected by the financial crisis and that the house price increases only really gathered steam from 2010 onwards. This shows that potential volatility is far lower in Germany’s property markets, as prices have developed relatively independently of capital market developments. A further key factor identified by Bindsfeld is construction activity. No one could talk of excessive construction of housing in Germany, which would be symptomatic of a property price bubble developing. Nevertheless, he does concede that much of the new housing that has been developed in Germany has not been effectively targeted at satisfying existing demand. New apartments are often built in the wrong locations, or not designed with modern housing needs in mind. The biggest problem in Germany’s largest cities, however, is a shortage of suitable housing. He concedes that this has led to localised overheating, but believes that this is limited to a small number of inner-city hotspots. For a majority of German cities and regions, he observes, price rises should not be viewed as a sign of an asset price bubble forming as they are solely being driven by an imbalance between supply and demand. Rather than too much new housing being built, the issue is that too little new housing is being developed. Cologne’s Institute of the German Economy (IW) confirms this assessment, according to DIE WELT AM SONNTAG on 08.01.2017. A long-term analysis of property prices, mortgages and loans, incomes and economic growth shows that residential property prices are actually rising and that the credit volume of EUR 15 billion at the end of 2014 has risen to just under EUR 20 billion (with a moderate decline in H2 2016). Nevertheless, taking both developments together, the situation, according to the IW, looks entirely normal.
The Federal Ministry of Construction wants to reform itself
In response to ongoing criticism, the Federal Ministry of Construction has prepared a list for better cost, deadline and quality assurance, reported the IMMOBILIEN ZEITUNG on 12.01.2017 and the BÖRSEN ZEITUNG on 10.01.2017. The paper, entitled “Reform of Federal Construction”, largely adopts the proposals of the ‘Reform Commission for the Construction of large-scale Projects’, which was set up by the Federal Ministry for Transport a number of years ago, and contains requirements such as planning every stage of a development from the outset, i.e. before construction starts, and ensuring that safety margins are included at every stage of any project. Rather than awarding tenders to the lowest-priced bidders, the Transport and Construction ministries will both select on the basis of the most economical bid. The new requirements are also designed to promote consortiums of bidders, and improve collaboration between tenderers and successful bidders on large-scale construction and infrastructure projects. Too much consideration has been given to smaller planning offices and construction companies, which can quickly become overwhelmed by the fast pace of digital change, suspects Heiko Stiepelmann from the main association of the German construction industry. However, he believes that the lack of reference to digital tools in the construction ministry’s reform catalog is an oversight, especially as, internationally speaking, Germany has a lot of catching up to do.
Highest rate of property transfer tax in Thuringia
On 12.01.2017, the IMMOBILIEN ZEITUNG reported that property transfer tax in Thuringia was raised from 5 to 6.5 percent, bringing the state into alignment with the group of top property tax rate states in Germany, which includes Schleswig-Holstein, Saarland, North Rhine-Westphalia and Brandenburg.
Stuttgart investment market delivers surprise record result
As reported by the IMMOBILIEN ZEITUNG on 12.01.2017, property investments in Stuttgart during 2016 reached an unexpected total of around EUR 2 billion. The surprise result was largely due to the EUR 900 million of investment in Q4 2016, which Colliers described as the highest ever single-quarter result in Stuttgart. A total of 80 transactions were registered last year, of which 60 percent were in the tens of millions range and five were in the triple-digit million range. Ellwanger & Geiger identified open-end funds and special funds as the most dominant buyer groups (36 percent), while Colliers reported that international private equity and opportunity funds accounted for 33 percent of transactions and represented the most active buyers. In comparison with 2015, international buyers increased their market share to 50 percent of transactions, especially as a result of the sale of the IVG subsidiary Officefirst. On the seller side, Ellwanger & Geiger reports that project developers and property developers were the most active group, responsible for 33 percent of transactions. The strongest asset class was office (approximately 65 percent), followed by retail (11 percent), development land, development and housing, each with 9 percent of the market. As a result of a shortage of product, yields in the core and core-plus segments suffered significant declines in year-over-year comparison. Given low interest rates, a shortage of investment alternatives and buyers’ strong equity reserves, market conditions are positive for the investment market in the current year, and investment volumes are expected to increase, even if it might not be possible to break the 2016 record.
Declining residential real estate investments
The analysts of CBRE, Dr. Lübke & Kelber and BNP Paribas Real Estate (BNPPRE) have reported total residential investment market transaction volumes of between EUR 13.5 and 13.8 for 2016, revealed the IMMOBILIEN ZEITUNG on 12.01.2016. Savills put the figure at EUR 10.7 billion. Forecasts for 2017 are in line with the 2016 figures. Savills predicts a transaction volume of EUR 10 billion, while CBRE expects around EUR 13 billion. Above all, Q4 2016 was an incredibly strong quarter, with CBRE’s analysts registering transactions totalling EUR 6.3 billion. Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne and Munich accounted for 42 percent of the total investment market. Whereas the number of existing buildings coming to market declined, there was a significant rise in project developments. According to Savills, 21 percent of the transaction volume can be attributed to the acquisition of project developments. The average condominium sale price according to Dr. Lübke & Kelber was around EUR 97,000 (up 49 percent in comparison with 2015). Changes in the product coming to market also had an impact on the buyer side. Savills identified special funds as the most active investors, accounting for 32 percent of the transaction volume, followed by housing companies at 11 percent and insurance/pension funds at 5 percent. CBRE’s analysis also registers increased interest among international investors. Their market share rose from 15 percent in 2015 to 30 percent in 2016.
Regional centres are more attractive than major cities
Many B, C and D cities are now more attractive for investors than the Big Seven of Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart, reported the HANDELSBLATT on 11.01.2017. This is the finding of a study published by the real estate agency Engel & Völkers. The study analysed real estate offers in 57 German cities, including properties in a range of locations, building standards and ages. Despite Germany’s general shortage of housing, higher prices and rents can be achieved in university towns and the regions around the largest metropolises than within the Big Seven, finds a study published by the researchers and consultants at F+B. The main reason for this is that prices and rents in A cities have already reached such high levels. Square metre prices for condominiums are already higher than the square metre prices for mixed-use residential/commercial buildings. F+B points out that as property prices accelerate at a faster rate than rental prices, rental yields are driven ever lower.
Berlin office market registers record result
Take up of 860,000 sqm in Berlin’s office market in 2016 broke the previous record set in 2015 by almost 3 percent, reported the IMMOBILIEN ZEITUNG on 12.01.2017. The city’s vacancy rate stands at 3 percent and demand is far outstripping supply. As 2016 drew to an end, around 370,000 sqm of new space was under construction, of which roughly 245,000 sqm was as yet unlet. Nevertheless, only around one quarter of the office space currently being developed will come onto the market during 2017. At the same time, office developments are competing with hotel and housing projects for the small number of development sites in Germany’s capital city. As a result, peak rents at Potsdamer Platz and Leipziger Platz have now risen to EUR 28.50/sqm. This is 14 percent higher than in 2015 and approaching the level seen during the new economy boom, when tenants had to part with up to EUR 31.00/sqm. Double-digit percentage increases have also been registered in other sough-after locations. There is now almost no office space available for less than EUR 10.00/sqm. More companies are now looking at co-working spaces in order to bridge space shortages. There are now 92 co-working space providers with a total of 5,000 sqm of office space in Berlin. Another 30,000 square metres is set to be added in 2017.
Rents are up and vacancies down in Hamburg’s office market
On 12.01.2017, the IMMOBILIEN ZEITUNG reported that, for the third year in a row, take-up in Hamburg’s office market exceeded 500,000 sqm in 2016. BNPPRE registered take-up of 543,000 sqm and Angermann reported 551,000 sqm, representing growth of between 1 and 3 percent. Lettings accounted for 492,000 sqm, whereas owner-occupiers accounted for just 58,000 sqm, reported Grossmann & Berger (G&B). Demand has remained high for a number of years now, which has driven vacancies down to between 5 percent (E&V) and 5.9 percent (BNPPRE). Crease was registered in the City South district, where BNPPRE registers a 61 percent decline in available office space, which now stands at just 25,000 sqm. In Hamburg’s CBD, the vacancy rate has fallen by 17 percent to 87,000 sqm. As a result of the shortage of available space and the high-price project development segment accounting for 20 percent of lettings, both the average office rent and peak office rent rose. G&B and BNPPRE both place the peak rent at EUR 26.00/sqm, which BNPPRE is higher than at any point since 2008. The average office rent at the end of 2016 lay between EUR 14.70/sqm (Angermann) and EUR 15.50/sqm (G&B). The analysts expect take-up to exceed 500,000 sqm again in 2017, rents to climb higher and vacancies to continue to decline.
Retail rents stagnate in top locations
According to CBRE, rental prices for prime retail space are no longer increasing, as reported by the HANDELSBLATT on 10.01.2017. CBRE’s figures show that peak rents for retail space in Germany’s most expensive major cities have stabilised at high levels and are no longer increasing. Berlin was the only major city to register a moderate increase in monthly rents during 2016, from EUR 330/sqm to EUR 335/sqm. Cologne actually saw monthly peak rents decrease, from EUR 280/sqm to EUR 270/sqm. CBRE’s analysis describes the current inner-city retail space market as a “tenants market”. “As tenants, retailers now have very specific ideas about the profiles of their store locations,” said Frank Emmerich from CBRE. Store layouts and technical installations have become increasingly important, and even landlords in prime locations are having to invest considerable sums in renovations and modernisations in order to attract tenants. The Association of German Retailers (HDE) has brought city and municipal authorities together to form an ‘Alliance for City Centres’ in order to improve conditions for retailers with new store concepts and integrated approaches ton urban development. The alliance has suggested that a new approach could be modelled on the Business Improvement Districts seen in the USA. With such a designation, districts and streets can benefit from up to five continuous years of development measures. Local property and landowners are required to make a contribution to help cover municipal development costs. Eight German states already have the necessary legal frameworks in place to allow such measures to be implemented, but very few towns or cities have so far made use of their powers.
Healthy result in commercial real estate market
Investment in German office, retail, hotel, logistics and care properties in 2016 totalled almost EUR 53 billion, not far off the record set in 2015 (EUR 55 billion). This was covered in detail by the IMMOBILIEN ZEITUNG on 12.01.2017, and the BÖRSEN ZEITUNG and FAZ on 13.01.2017. Colliers credited a strong Q4, which saw transactions totalling more than EUR 20 billion, for making a major contribution to such an impressive full-year result, reported the IMMOBILIEN ZEITUNG on 12.01.2017. Institutional investors were under extreme pressure to invest, which became especially evident in the last few weeks of the year, following the dampening impact of rising prices and supply shortages. Peripheral asset classes also gained in importance during 2016. BNPPRE highlighted the hotel market’s record transaction volume of EUR 5 billion, which was trailed by logistics real estate (EUR 4.7 billion) and care homes (EUR 3 billion). These three asset classes promise higher initial yields than top office and inner-city commercial real estate (each below 4 percent). In the retail real estate market, EUR 24.6 billion was invested (prior year, almost EUR 33 billion), primarily involving small-scale portfolios of supermarkets and retail centres. According to BNPPRE, there was a disproportionate decline in portfolio deals (down 13 percent), although activity could increase in 2017 as investors are now more interested in “management intensive objects”, project developments and peripheral locations. It is likely that 2017’s transaction volume will again approach EUR 50 billion, with at least EUR 45 billion forecast. CBRE expects further growth in the categories beyond office and retail, Colliers expects profit-taking from “investors who prioritised value appreciation.” According to Savills, most commercial property investment was registered in Frankfurt, at EUR 6.3 billion, reported the FAZ on 13.01.2017. Munich followed with EUR 5.3 billion, then came Berlin (EUR 4.9 billion), Hamburg (EUR 4.7 billion), Düsseldorf (EUR 2.3 billion) and Cologne and Stuttgart (EUR 1.8 billion each).
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 Berlin
After the relocation of the federal government, parliament and other federal institutions from Bonn to Berlin was completed, a second wave consisting of international and foreign-national political and industrial institutions, embassies and lobbies followed. Politically and culturally, Berlin has started to function as the restored capital of Germany, but from an economic point of view, structural changes are still in progress. The service sector largely specializes in business-oriented services. Positive economic impulses come from financial services, research and development, software engineering, and a growing tourism sector. Moreover, Berlin is well-known for scientific activity in various other fields.
Feri rates Berlin as a business location “B”, which is downgraded to the 3rd quarter 2015. It translates into “above average potential, below average risk”. With this rating result the city ranks 23rd in the comparison of European Metropolises.
Office Real Estate
Regarding office real estate Feri rates Berlin “C”, which is unchanged compared to the 3rd quarter 2015. The city ranks 9th among office locations of European Metropolises. Feri awards the office top locations “C” and the side locations “C”
Berlin has the largest volume of office stock of all economic centers in Germany. During the years after Germany’s reunification, Berlin significantly augmented its stock of office space. In the recent past, however, building activity has moderated. Investors opened up Berlin’s real estate market at quite a late date, compared to other markets, due to Berlin’s historical “island position.” In comparison to other European markets the rent level here is noticeably low.
Berlin´s rising demand for office space has led to a declining office space vacancy over the last years, as well as rising rents. Between January and September 2016 Berlin´s office market showed a dynamic development with a high letting volume and decreasing office vacancy. These lettings consist of a mix of large and midsize rental spaces, what gives the market a solid base. Due to the growth in office employment, we expect office rents to further increase during the period from 2016 to 2020.
Caused by the difficult conditions on investment markets, net initial yields for office properties rose in 2008 and 2009, the year 2010 marked a turning point. The yield compression together with the rental increase, have led to rising capital growth in the market of Berlin. We expect yield compression to be well advanced in the current investment cycle. In the years to come rents will be the main driver of capital values.
Real estate investment in Germany has attracted investors during the last years. This was due to the positive economic situation and the lack of investment alternatives with a suitable risk profile. Berlin´s property investment market profits from this developments. Due to the high demand of domestic and foreign investors looking for investment opportunities in a low interest rate environment property yields came under pressure. For Berlin´s office market we anticipate a fair rental yield of 5.4 % during the years ahead. Thus, we regard the existing price level above its fair value.
Retail Real Estate
In the comparison of European Metropolises regarding retail real estate Berlin placed 25th 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 “C”.
On Berlin’s market for retail space, demand from national and international luxury retailers had a positive effect on rents during the last several years. Additionally the Kurfürstendamm was enhanced by prestigious projects. The region’s potentially high purchasing power and its attractiveness as a travel destination have turned Berlin into an important test market for international retailers to enter the German market. Dynamic demand for prime locations has resulted in a shortage of supply. Due to this development, we expect rents to continue to increase in the near term. Due to the strong competitive pressure of numerous peripheral shopping centers, peripheral locations are expected to grow only moderately.
Residential Real Estate
When it comes to residential real estate, Berlin placed 18th among European Metropolises with a rating result of “B+”, unchanged compared to the 3rd quarter 2015.
Many years after the German reunification, Berlin’s residential real estate market was still dominated by a high supply of available apartments, as well as low and decreasing rents. This is no longer the case. Berlin’s population has grown and its longstanding low building activity has led to a declining apartment vacancy, as well as rising rents. Berlin started to increase their building activity, nevertheless excess demand will not be dismantled within the short term. The region’s real estate market is very differentiated. Supply of high-quality apartments in preferred locations, as well as luxury apartments is quite short. By contrast, excess numbers of ordinary-quality apartments in peripheral locations are evident. On average, rents have been rising for quite a few years. They are expected to continue rising, for both new and existing units, based on our anticipation for rising demand.
The residential market has benefited from people moving back into the city from rural areas. Furthermore, highincome groups from the policy, art and business fields represent a source of strong demand. Correspondingly, a noteworthy portion of demand focuses on high-value residences in the most prestigious districts, as well as in trendy neighborhoods. Only Berlin’s suburbs are suffering from excess supply. Overall, Berlin has transitioned from a “renters” to a “buyers” market and there is excess demand due to the increasing population. Building activity has increased since 2007 and thus slowly increasing prices are expected.
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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