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German real estate market remains extremely popular
The publication of this year’s EY Real Estate ‘Trend Barometer Real Estate Investment Market Germany’ was covered by DER TAGESSPIEGEL and the IMMOBILIEN ZEITUNG on 17.01.2017 online, the BÖRSEN ZEITUNG on 18.01.2017 and both the SÜDDEUTSCHE ZEITUNG and the FAZ on 20.01.2017. According to EY’s forecasts, demand for investment property in German 2017 will remain strong in 2017, but will decline only moderately due to lack of supply. Demand for office buildings, particularly in Berlin, Stuttgart, Hamburg and Munich is high, while Frankfurt is the centre of demand for condominiums. EY’s survey of 135 investors also revealed that the transaction volume for real estate in Germany looks set to reach between EUR 60 and 65 billion this year. There are also indications that uncertainty could lead to increasing volatility in the real estate market over the next 12 months. “We are not expecting a crash or crisis scenario,” stressed Schulz-Wulkow. Nevertheless, he advises investors to keep liquidity in reserve in order to avoid any bottlenecks in refinancing, for example, to soften the impact of rising interest rates or tenant fluctuations. 96 percent of respondents rate the German real estate market as attractive to very attractive. Due to the tight supply, however, there will be a continued decline in the transaction volume. Investors’ are increasingly interested in what used to be peripheral asset classes, such as car parks, nursing homes, student residences and micro-apartments. Offices and apartments in prime locations are likely to become even more expensive, for example in Berlin.
Surge in prices for new residential real estate
As reported by the IMMOBILIEN ZEITUNG on 19.01.2017, empirica has compared the advertised prices of newbuild condominiums in Q4 2016 with the same quarter of 2015, revealing a 9.9 percent price surge in Germany’s urban districts and an increase of 7.6 percent in suburban and exurban areas. For the same period empirica reports that the prices of detached and semi-detached houses rose by 9.1 percent in urban areas and 7.7 percent in the suburbs. In comparison with Q1 2004, the first quarter recorded in empirica’s price index, asking prices for newbuild condominiums in urban districts have increased by a total of 52.6 percent, and newbuild detached and semi-detached houses are 33.8 more expensive, while advertised rents in the newbuild sector have increased by around a third. Munich retains its position as the most expensive city in Germany. In Q4 2016, a new condominium in Munich cost an average of EUR 7,062/sqm, and a detached or semi-detached house EUR 7,261/sqm.
Record year in the care home market
According to research from CBRE, transactions involving German care homes totalled EUR 3 billion in 2016. This was reported by the FONDSTELEGRAMM on 18.01.2017. The large volume of portfolio deals, which accounted for almost 90 percent of all transactions, was the major reason for the record total. As a result, the care home market accounted for 6 percent of the overall transaction volume in the commercial real estate sector. Yields averaging 5.5 percent in the care home sector continue to outperform those of many other asset classes. The prime yield for care homes is 190 basis points higher than the prime office yield and 210 basis points higher than retail real estate. CBRE’s Jan Linsin expects, “that the market for care homes will continue to develop dynamically throughout 2017: A transaction volume of around EUR 1 billion is well within the realms of possibility.”
Mixed-use neighbourhoods are good for investors
A Savills’ study suggests that investors benefit from mixed-use neighbourhoods. Higher prices for residential real estate mean that higher revenues can be generated, and diversification also ensures greater income stability. This was reported by the IMMOBILIEN ZEITUNG on 19.01.2017. A comparison of prime suburban office rents with the most expensive apartments at first occupancy, showed that higher prices could be achieved with apartments in Düsseldorf and Frankfurt. In Berlin, Düsseldorf and Frankfurt, net present values and square meter purchase prices are also higher for apartments than for offices.
Will the Bestellerprinzip soon apply to residential property sales?
As reported by the IMMOBILIEN ZEITUNG on 19.01.2017, the German government’s junior coalition partner, the SPD, has proposed that condominium buyers should in future only be required to pay a flat fee to cover ancillary purchase costs, such as notary fees and land register fees. In addition, they have called for single agent regulations, known in Germany as the Bestellerprinzip, to be extended to condominium sales, and for the termination of tenancies on the grounds of a landlord’s personal use of the property to be made more difficult. These plans are part of a concept to revise rent control legislation. The government’s coalition partners, the CDU/CSU and the SPD, have so far been unable to agree on a joint approach. If the Bestellerprinzip is extended to cover residential property sales, it is likely that sellers will simply add their additional costs to the price of the property. Politicians are right to want to introduce measures to promote homeownership, but all they are doing here is making property more expensive, said the IVD’s Jürgen Michael Schick.
Berlin closes the investment gap to Munich
According to the BNP Paribas Real Estate Investment Market Report 2017, Berlin became the most expensive investment location in Germany in 2016, reported the IMMOBILIEN ZEITUNG on 19.01.2017. The net initial yield in the office sector now stands at 3.3 percent, 70 basis points lower than a year earlier. The net initial prime yield for downtown retail/office properties also stands at a maximum of 3.3 percent. Only logistics premises remain suitably profitable, with yields of 5.2 percent. The transaction volume in Berlin was EUR 5.4 billion in 2016 (compared with EUR 8 billion in the previous year). This decline was not due to waning interest, rather it was the result of a shortage of product, especially in the core segment. The average price per sale was EUR 29 million (prior year: EUR 40 million). The most active buyers and sellers were funds. A majority of sales involved portfolio transactions. The average price for commercial real estate transactions increased by 44 percent to between EUR 10 and 25 million. The same increase was registered for Berlin office real estate.
Record on Hamburg investment market?
Thanks to a very strong Q4 2016, the Hamburg investment market ended the year with a total turnover of between EUR 4.5 and 4.9 billion, once again significantly higher than the previous year’s total. This was reported by the IMMOBILIEN ZEITUNG on 19.01.2017. Whether 2016’s full-year total managed to exceed the previous record set in 2007 (EUR 4.5 billion) is the subject of disagreement between market observers and participants. Colliers reported a new record of EUR 4.9 billion for the year, topping the previous record by a good 9 percent. One thing the brokers do agree on is that strong demand and a limited supply of real estate has pushed the prime office yield down by a further 50 to 60 basis points. The fall in the prime yield for retail real estate was not quite so substantial. The prime retail yield now stands at between 3.3 (G&B) and 3.4 percent (Colliers), level with the prime office yield. Moderate yield compression was also reported in the logistics sector, where the prime yield fell to between 4.9 (G&B) and 5.5 percent (Colliers). Investors continue to focus on office real estate, which accounted for between 60 (BNPPRE) and 73 percent (G&B) of investment. According to CBRE’s Michael Mikulicz, yields on the city periphery now stand at 4.5 percent: “With yields 110 basis points higher than in the central business district (CBD), peripheral districts are the subject of increased investor demand. As a result, we expect that the yield spread to the CBD will continue to narrow.” Accounting for 56 percent of transactions, far more core properties were traded in 2016 than in 2015 (39 percent). The volume of core-plus transactions, however, fell from 49 to 27 percent.
Slight slowdown in price rises for residential property in Frankfurt
According to Frankfurt’s Property Valuation Committee, newbuild apartments in urban districts cost an average of EUR 4,800/sqm in 2016, which is 9 percent more than in 2015. Prices are expected to continue to rise this year as the city’s population continues to grow, interest rates remain low, and demand once again far outstrips supply. Nevertheless, the rate at which prices are rising has recently slowed somewhat, following a 12 percent increase from 2014 to 2015. In some sectors, the prices for existing apartments have risen more quickly. Pre-1949 apartments are 10 percent more expensive than 12 months ago, while units built between 1950 and 1974 cost roughly 11 percent more. Price inflation for apartments built between 1975 and 1999 is running much lower at just 3 percent. In addition to condominium price increases, the price of land in Frankfurt has also risen, contributing to the overall upward price trend.
Strong demand for logistics real estate as eCommerce sector grows dramatically
According to CBRE, some 6.7 million square metres of logistics space was let in Germany last year, reported the SÜDDEUTSCHE ZEITUNG on 20.01.2017. This represents an 11 percent year-on-year increase. This dynamic increase has largely been driven by the rapid growth of the eCommerce sector, explained Rainer Koepke from CBRE. As many companies are not able to find enough modern logistics space on the market, they are often building their own. Around 70 percent of the newly let space was situated in newly built logistics centres. The high levels of tenant demand in the sector have attracted increased interest from investors. As an asset class, logistics is no longer an insider secret, and increased demand has pushed yields significantly lower.
Shortage of logistics space in and around Munich
According to Realogis, 240,000 square metres of logistics space was taken up in the greater Munich area in 2016, while Colliers put the figure at 265,000 sqm. This was reported by the IMMOBILIEN ZEITUNG on 19.01.2016. Including owner-occupiers, total take-up rises to 342,400 sqm (+54 percent). Supply shortages were the only reason the figure was not even higher. Many retailers were looking for space in urban areas in order to facilitate express deliveries to customers within the city limits, but suitable space is in very short supply, which has forced companies to turn to vacant retail and office space. Colliers reckons that the vacancy rate is a little over 2 percent and reports potential tenants for almost all available logistics space. The shortage of space represents an opportunity for Munich’s surrounding areas.
Germany’s real estate market is in rude health
According to an EY survey of 135 investors active in the German real estate market, 35 percent of respondents believe that political instability will lead to growing uncertainty in the German real estate market. The survey’s findings were reported by the IMMOBILIEN ZEITUNG on 27.01.2016. Given that the survey was carried out in October and November 2016, i.e. before Trump’s victory in the US presidential elections and before the chances of a hard Brexit became so great, it is likely that the result would be quite different, reflecting more fully current political risks, if the survey were carried out again today. Trump’s declarations that free trade is not necessarily a good thing do have the potential to cause problems for the German economy, which could feed through to the country’s real estate markets. And yet, thanks to its reputation as a safe investment haven, the current political uncertainty could actually be beneficial to Germany. Christian Schulz-Wulkow from EY Real Estate has advised investors to play through a range of negative scenarios and prepare their portfolios for any potential shocks. He suggests building adequate liquidity reserves to create a financial buffer big enough to cope with the loss of a major tenant. In all other respects, Germany’s real estate economy is in rude health. 2016 saw a total of EUR 65.7 billion of commercial and residential property portfolios change hands, down somewhat from the previous year’s EUR 79 billion. EY forecasts a further moderate decline in transactions in 2017, and expects a full-year total of around EUR 60 to 65 billion. Despite the decline, the total will still be very healthy in relation to the long-term trend. The major reason for the lower transaction volume is the shortage of available real estate product as more and more owners decide to hold on to their real estate for longer. There has been no change in the high level of demand for German real estate. “The fact that prices have risen and some sub-sectors are exhibiting signs of over-heating has done nothing to dent Germany’s attractiveness,” said Paul von Drygalski from EY Real Estate. Almost all of the surveys respondents believe that the low interest rate environment will continue throughout 2017. A majority of respondents also agree that prices will remain stable or continue to increase. They agree that the pent up excess demand is particularly good for project developers and 90 percent of respondents expect further growth in the volume of forward deals.
German real estate prices make up lost ground
A survey of 4,000 consumers’ financial obligations carried out by BPD Immobilienentwicklung has revealed that tenants and homebuyers in Germany are now paying more than consumers in France or The Netherlands. This was reported by DIE WELT on 25.01.2017. The average residential property purchase price across all metropolitan regions stands at between EUR 3,500 and 4,000/sqm, whereas the average property price in The Netherlands is between EUR 2,900 and 3,600/sqm. The price that would-be condominium buyers in France are prepared to pay rose from EUR 3,102/sqm to EUR 3,188/sqm between 2011 and 2016, and in The Netherlands it fell from EUR 2,435/sqm to EUR 2,355/sqm. In Germany, purchase prices rose from EUR 1,861/sqm to EUR 3,032/sqm within the space of just five years. When terraced houses and newbuild housing are included in the comparison, German property climbs above the levels seen in the other two countries. BPD identifies increased land prices, which are the result of growing urban populations, as a major driver of the price rises in Germany. The ‘Confederation for Increased Homeownership’ has concluded that higher prices mean that homeownership is now beyond the financial reach of even more households. Although younger households are inheriting more real estate than ever before, the Pestel Institute points out that homeownership rates continue to fall. “The promotion of homeownership also has a social dimension,” said Jürgen Michael Schick, President of the IVD real estate association. “When the state pension fails to maintain living standards and private pension funding doesn’t work, the only answer is property.” As a result, the IVD is calling for reductions in property transfer tax to a uniform 3.5 percent for owner-occupiers, as initially proposed by Schick at the first German Housing Day, reported the IMMOBILIEN ZEITUNG online on 25.01.2017.
Berlin’s rents are rising faster
Rental apartments in Berlin were offered at an average of EUR 9.00/sqm per month last year, excluding heating, warm water and service charges. This was one of the findings of the ‘Berlin Housing Market Report 2017’ from CBRE and Berlin Hyp, reported DIE WELT on 26.01.2017 and the SÜDDEUTSCHE ZEITUNG on 27.01.2017. The city-wide figure is therefore 5.6 percent or 50 cents higher than a year earlier and growing at the same rate as had been reported two years ago. The rate at which rental prices are increasing would be even higher if furnished apartments were included in the calculations. Furnished apartments now represent 27 percent of all rental offerings in Berlin. According to CBRE’s Michael Schlatterer, this would push the price increase up to 9.6 percent, the same rate at which house and condominium prices are increasing. Across all market segments, the average advertised price for a condominium in Berlin has risen to just under EUR 3,300/sqm. The median asking price for multi-family housing across all market segments has risen even more dynamically, adding 15.7 percent and climbing to EUR 2,253/sqm. As a result, Berlin has become even more attractive for investors. “Germany, and Berlin in particular, continue to be regarded by equity-rich global investors as safe havens and as highly attractive inestment destinations,” said Schlatterer. In 2016, sales in Berlin involving more than 50 units accounted for roughly EUR 3.4 billion, almost one quarter of the transaction volume for the whole of Germany. The rapid growth in purchase and rental prices in Berlin is largely due to the city’s dynamic population growth and ten years of insufficient housing construction. The city’s vacancy rate fell to a new historic low of 1.2 percent.
Berlin’s premium property segment takes top spot
An analysis published by the premium residential property company Dahler & Company claims that the volume of premium condominiums and detached and semi-detached houses in Berlin, Frankfurt, Düsseldorf and Cologne is increasing, while the markets in Hamburg and Stuttgart are in decline. This was reported by the FAZ on 26.01.2017. The study analysed data from the Property Valuation Committees in six of Germany’s largest seven cities, focussing on residential real estate transactions in the EUR 750,000+ segment, comparing figures for Q1 2016 with Q2 2015. Data from Munich was not included because the city’s Property Valuation Comittee has not yet published the relevant information. With the exclusion of the Bavarian capital, which is traditionally home to Germany’s leading premium residential property market, Berlin occupied top spot, registering an increase in transaction volumes of almost 50 percent to EUR 523 million. The figures indicate that “Berlin is becoming a true European metropolis.” Berlin has become especially attractive for buyers from other German cities and international buyers, followed by Frankfurt.
Take-up of office space in Stuttgart has never been higher
2015’s total of 290.000 sqm set a new record for the take-up of office space in Stuttgart, but the record didn’t remain for long, reported the IMMOBILIEN ZEITUNG on 26.01.2017. Market analysts are in unanimous agreement that take-up in 2016 beat the previous year’s record by almost 50 percent, surging to 432,000 sqm, the highest full-year total ever recorded. A total of 351 new leases were reported, and a particularly strong Q4 helped to deliver such a strong overall result, stressed Ralf Spieth from Colliers International Stuttgart. According to Ellwanger & Geiger, around 132,000 sqm of the total take-up can be attributed to five owner-occupiers. The strongest submarket was Stuttgart-Vaihingen, where take-up totalled roughly 130,000 sqm, followed by Feuerbach with 64,700 sqm and the CBD approximately 52,800 sqm. The vacancy rate has fallen to a critically low level of 2.8 percent, the lowest level seen in Stuttgart since 2002 and the lowest among Germany’s top seven cities.
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 Copenhagen
Copenhagen, the Danish capital, is one of the biggest cities in Scandinavia and anchors a dynamic Northern European region. Its harbor, airport, and direct train connections to several European metropolises provide outstanding transport links. When the Öresund Bridge, which connects Sweden and Denmark, opened in 2000, Copenhagen became the major hub for road traffic between Northern and Central Europe. The Copenhagen stock exchange is Denmark’s most important financial center. Along with the service sector, especially business services, the public sector is the biggest contributor to total output. In recent years futuristic fields of enterprise – such as biotechnology, pharmaceuticals, environmental technology, computer science and telecommunications – have expanded rapidly. After dynamic growth in the past decade, regional production is expected to increase at slightly under the urban European average during the years to come.
Feri rates Copenhagen 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 12th in the comparison of European Metropolises.
Office Real Estate
Regarding office real estate Feri rates Copenhagen “C”, which is downgraded to the 3rd quarter 2015. The city ranks 2nd among office locations of European Metropolises. Feri awards the office top locations “C” and the side locations “C”
Copenhagen is Denmark’s commercial center, with around 9 million square meters of office space, making it the third largest Scandinavian office market after Stockholm and Oslo. Prime locations are in the vicinity of the old harbor. Other attractive locations are Österbro, Nörrebro, Frederiksberg, Hellerup, Herlev/Ballerup, the western corridor, Sydhavnen, and Amager/Örestad. In Copenhagen, as in other Nordic capitals, most demand comes from financial and business-related services and a relatively large public sector. The market is not particularly transparent, but volatility of total returns is relatively low.
Although Denmark went into recession relatively early in 2008 due to an overheated housing market, rents did not react to the delayed weakening of the job market until the following year, when they declined by around 7 percent. The vacancy rate started to increase in 2007, but it did not exceed the equilibrium rate until around mid-2009. At that point high vacancies combined with weak demand put noticeable downward pressure on rents. The Danish economy, which stagnated in 2012, is expected to perform only weakly for the time being. That is why office rents are expected to post only slight increases. ? For the forecast horizon, we expect rents to rise at an average rate of 1.5 percent per annum, slightly above the long-term trend.
Net initial yields for office properties in Copenhagen began their correction as a reaction to the looming recession in the second half of 2006, out of phase with most European markets, which at the time were still in the final phase of what is known as “yield compression.” Since then this adjustment has led to an average increase in rental yields of around 80 basis points. As rents will rise only moderately during this year due to continued uncertainty about the overall economic situation, further compression of rental yields is not anticipated at this time. For the years ahead we expect rising interest rates leading to slight increases of rental yields.
After the crisis-driven price correction at the end of 2009, rental yields in 2010 compressed to the level of “fair value”. At this level, they remained stable due to the prolonged recessionary economic development by the end of 2014. During 2015 Investors entered the market again providing a surge in transactions, causing yields to move inward by about 50 Basispoints. The medium-term outlook is favorable since the rental cycle is yet in its beginnings. Furthermore, valuation irelatively fair in comparison to the leading European markets. Total Return Expectations should be exceeding European averages.
Retail Real Estate
In the comparison of European Metropolises regarding retail real estate Copenhagen placed 6th with a rating result of “A”, which is unchanged compared to the 3rd quarter 2015. Feri awards the retail top locations “A” and the side locations “A”.
Around the turn of the century, strong demand for retail space in Copenhagen enabled the market to post sharp rent increases. Copenhagen is an attractive shopping location, drawing customers from surrounding areas, while tourists supply much additional purchasing power. Particularly in the “Stroget” pedestrian area, the main shopping street, retail space is in high demand and short supply, and rents are quite high. In coming years, retail rents at top locations are expected to begin rising steadily once the present economic downturn is over – but, due to growing competition from new peripheral shopping centers, they will not increase at a high rate. Retail rents in secondary locations should trend modestly upward, too, after a somewhat longer delay.
Residential Real Estate
When it comes to residential real estate, Copenhagen placed 9th among European Metropolises with a rating result of “A”, unchanged compared to the 3rd quarter 2015.
Throughout the recent as well as medium-term past, Copenhagen’s apartment market has been characterized by continuously increasing rents for both existing and new dwelling units. Supported by a consistent (though moderate) increase in the number of new residents ever since the mid-1990s, demand has far exceeded supply, with the most acute supply shortages in the inner city. In order to help ease the tight supply situation, Copenhagen’s administrative authorities have announced initiatives to build new apartments in so-called development areas. Nevertheless, during the forecast period one can expect ongoing rent increases in the region, with respect to both existing and new apartments.
Copenhagen’s recent population growth also boosted prices on its residential property purchase market. In a trend that began in the mid-1990s, demand outpaced supply. Rising preference for home ownership has further supported the market. Cumulatively, prices in all segments – detached single-family houses, town houses, and condominiums – almost doubled in just several years. But the upturn peaked in 2005. Prices then stagnated, respectively fell. At present, there is some degree of oversupply; moreover, higher interest rates may be upcoming. Thus, while residential property sale prices in Copenhagen should begin rising again in coming years, the rate of increase is projected to be only moderate.
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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