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Berlin’s office market more dynamic than Frankfurt’s
On 03.02.2017, the FAZ reported that 913,000 square meters of office space was let in Berlin last year. This is two-thirds higher than the ten-year average, and some 70 percent higher than the total in Frankfurt. According to bulwiengesa, 150,000 new office jobs have been created in the German capital over the last ten years, and the Investitionsbank Berlin has forecast economic growth of 2.2 percent for the year ahead. CBRE reports that 34 percent of 2016’s office lettings involved the technology, media and telecommunication (TMT) sector, which is dominated by start-up companies. “As a result of the shortage of suitable office space, the Berlin market has become increasingly attractive for property developers in all areas of the city,” explained CBRE’s Mattias Hauff. Many developers are working on speculative projects, as demonstrated by the “Cube” near Berlin’s central rail station.
Gentrification of the retail sector accelerates
As revealed by the SÜDDEUTSCHE ZEITUNG on 03.02.2017, German retail real estate worth a total of EUR 12.8 billion was traded last year. The figures were compiled by CBRE. The volume may have been roughly one third down on the previous year, but it was still well ahead of the long-term average. Of particular note was the fact that Germany’s Top Seven cities only accounted for 19 percent of overall investment. This was largely due to the severely limited availability of real estate product. In addition, yields in many B and C locations have been rising. The IVD’s Jürgen Michael Schick identified a shift in investment, with buyers moving away from prime locations in major cities and increasingly focusing on the best locations in smaller cities. “Following an extended period of subdued rental increases in these locations, prices are now starting to rise,” said Schick. Stationary retailers are benefiting from new growth impulses, despite competition from Internet retailers, and are increasingly investing in the modernization of their retail space. This trend is being driven by the marked slowdown in eCommerce growth and the blurring of online and offline shopping, especially as a result of multi-channel retail concepts.
What impact has the Mietpreisbremse really had?
As reported by the IMMOBILIEN ZEITUNG on 02.02.2017 and the FAZ on 03.02.2017, F+B’s Housing Index shows that advertised rents for newly listed rental properties rose by an average of 2.2 percent between Q4 2015 and Q4 2016, although the increases were not quite as high in a number of larger German cities. In Hamburg and Munich, advertised rents rose by 1.2 percent to EUR 10.10/sqm per month and EUR 13.00/sqm, respectively. Asking rents for newly listed properties in Frankfurt rose by 1.4 percent to EUR 10.90/sqm, and in Cologne there was a 1.5 percent increase, to EUR 9.60/sqm. F+B is currently working with the Institute of Housing and the Environment (IWU) on behalf of the Federal Ministry of Justice to assess the impact of rent control legislation, known in Germany as the Mietpreisbremse, in a number of selected cities, including Munich. Advertised prices for multi-family properties increased by 1.7 percent, roughly the same as the gains registered for new lettings and for existing tenancies (+1.1 percent). Prices for condominiums rose by 6.9 percent over the same period, while prices for detached houses added 6.2 percent. The greatest increases in condominium prices were registered in Kempten, Unterschleißheim and Freising. Wertgrund’s Thomas Meyer appeared in the IMMOBILIEN ZEITUNG on 02.02.2017 to highlight one side effect of the Mietpreisbremse: a surge in demand for new-build residential real estate. Such massive demand for rental housing from private buy-to-let investors, but above all from institutional investors, has caused a significant increase in prices for existing housing, an effect that has only been exacerbated by rent control legislation. Nevertheless, without the potential to increase rental prices, the prices currently being paid by investors can no longer be justified, and existing properties are becoming increasingly unattractive to investors. This has also boosted the rising popularity of new-build housing.
Energy efficiency: Hendricks and real estate associations drawing closer to consensus
As reported by the TAGESSPIEGEL on 28.01.2017 and the IMMOBILIEN ZEITUNG on 02.02.2017, a new report issued by Germany’s largest real estate industry confederation, the BID, and Barbara Hendricks (SPD), the federal government’s minister of Construction and the Environment, contains a warning against a further tightening of energy efficiency regulations (EnEV). According to the report, adopting the current KfW-55 standard as the benchmark for energy efficient construction would drive housing construction costs up by 10 percent and occupancy costs would be one euro per square meter per month higher. Taking the example of a new, 40-unit residential development, the report shows that construction costs would be driven up by as much as EUR 650,000. In addition, the costs per tonne of CO2 saved in the building sector amounted to up to EUR 1,100. The real estate associations deplored this as disproportionate. At the same time, they praised politicians’ rapid reactions and acknowledged that there has been a readiness to engage in discussion following the associations’ withdrawal from the Alliance for Affordable Housing and Construction as a result of the provisions contained in the government’s climate protection plan. In a speech delivered at the formal New Year’s reception, Hendricks assured her audience that economic viability would be taken into account when it comes to the construction of affordable housing. Now is the time to develop “sustainable and pragmatic” solutions, said Hendricks. A number of association representatives criticized the impractical organization of the ministries. They highlighted conflicts between the interests of construction and the environment, and called for an overarching Ministry of Urban Development, Construction and Housing. The Ministry of Economics and Technology (BMWi) responded cautiously to a suggestion from a number of associations that the BMWi should join the BID.
Bavaria to step up its fight against property misuse
On 02.02.2017, the IMMOBILIEN ZEITUNG reported that the two major parties in Bavaria’s state parliament, the SPD and the CSU, have both published draft legislation to prohibit the commercial use of residential property without prior consent. The two draft laws are extremely similar, and both seek to add clarity to the term “misuse of property” (Zweckentfremdung). According to the CSU’s proposal, this would include all apartments that are made unsuitable for residential purposes following redevelopment, and those which are kept vacant for more than three months. In contrast, the SPD wants to limit rentals to tourists to a maximum of six weeks per year. The SPD also wants to limit the rents charged for short-term rentals to a maximum of 15 percent above local comparable rents. In addition, letting agents, housing administrators and internet platforms such as Airbnb would be required to keep local zoning authorities informed about the utilization of the properties they list and manage. Violations of the regulations could result in fines of up to EUR 500,000, a tenfold increase on the current maximum of EUR 50,000. In serious instances, the SPD suggests that a property should be temporarily seized and forcibly leased by a trustee. The CSU plans to submit its draft law to the state parliament before the end of the month, and hopes that it will become law in June.
Continued growth in Frankfurt’s real estate market
According to Frankfurt’s Land and Property Valuation Committee, real estate transactions in Frankfurt totaled EUR 6.7 billion in 2016, the second highest transaction volume ever recorded. This was the subject of an article in the IMMOBILIEN ZEITUNG on 02.02.2017. The average square meter price for a new-build condominium has now risen to EUR 4,930, a year-on-year increase of 13 percent. Across all age categories, the square meter price for residential property rose to an average of EUR 3,940, or 6 percent above 2015’s figure. Around 30 percent of all new-build condominiums developed in 2016 were in residential towers. Frankfurt’s Land and Property Valuation Committee dismissed the widespread claim that these expensive apartments are being developed as speculative investment objects for international investors. In fact, 81 percent of those buying apartments in high-rise developments are German residents, and almost half already live in Frankfurt.
Hamburg approves more apartments
Authorities in Hamburg approved the construction of 12,471 new apartments last year, reported the IMMOBILIEN ZEITUNG on 02.02.2017 and the SÜDDEUTSCHE ZEITUNG on 03.02.2017. This means that the target of 10,000 new approvals set by the Alliance for Housing was easily beaten. Since 2011, a total of approximately 58,900 new apartments have been granted approval.
Rents in Düsseldorf remain static
While rental prices in the mid- and low-range segments in areas around Düsseldorf continue to increase strongly, rental price growth in the city itself has ground to a halt, reported the IMMOBILIEN ZEITUNG on 02.02.2017, in reference to figures from the Ring Deutscher Makler (RDM). Depending on the segment and location, rental prices in districts around Düsseldorf rose by between 12 and 15 percent last year. However, in Düsseldorf’s urban districts, rental prices in basic locations (EUR 11.50/sqm) and average locations (EUR 15.50/sqm) showed little to no movement, with the only moderate rise registered in the mid-range category, where rents rose by 50 cents to EUR 14.00/sqm.
Disagreement on Bestellerprinzip single agency rules
On 09.02.2017, the IMMOBILIEN ZEITUNG devoted extensive coverage to the controversy surrounding political manoeuvrings by the SPD, Greens and Linke parties to extend the provisions of the Bestellerprinzip, Germany’s law on who real estate agents are allowed to serve and charge for their services. While the IVD described the introduction of the Bestellerprinzip as both a political mistake and impractical, Thomas Zabel from Zabel Property said that, “as different markets across Germany have very different conventions, a uniform regulation could help to make it easier to compare services and prices.” Thus, Zabel hopes that any reform will further increase professionalism within the industry and ensure consistent services, clear responsibilities and high ethical standards. However, it is clear that any reform will do little to alleviate the current housing shortage in Germany’s major metropolitan regions. According to an analysis of data from ImmobilienScout24 carried out by the IW in Cologne, 59 percent of all apartments and houses on the market in Germany are listed by real estate agents. One common argument is that any extension of the Betsellerprinzip would benefit buyers, as sellers would in future be liable for agents’ commissions. The IVD believes that this is a naive assumption to make, and that agents are likely to add the cost of their commissions to the price of the property, to the extent the market will allow. The IVD warns that this would be the case in areas with an undersupply of housing, while in other areas sellers already pay the agent’s fees. “Property prices will increase and, as a direct result, buyers will have to pay higher property taxes. The only party that benefits from the current situation is the government, because they include the real estate agent’s commission in their calculations when they assess the amount of property tax due,” said Jürgen Michael Schick from the IVD.
Residential property prices drive index higher
According to bulwiengesa’s Price and Rent Index, the residential segment’s 5.5 percent increase in 2016 (following 4.8 percent growth in 2015) is yet again responsible for ensuring that the overall index gained ground. This was the subject of a report in the IMMOBILIEN ZEITUNG on 09.02.2017. This is the strongest result since German reunification and was largely driven by substantial price growth in the new-build terraced house (+ 7.5 percent) and new-build apartment (+ 7.3 percent) segments. Property and rental prices rose in a majority of the 125 cities included in bulwiengesa’s index. The price of development land for private homes was up by a moderate 3.6 percent. In contrast, in the commercial property sector (office and retail), price increases were limited to Germany’s Top Seven cities, and even then only in relation to office rents and land zoned for commercial property development. Office rents in A cities added 4.6 percent, compared with just 1.1 to 1.4 percent in smaller cities. Rents for retail properties stagnated in prime retail locations in Germany’s pedestrianized shopping areas (+ 0.1 percent), while an increase of 0.4 percent was reported in secondary locations. The commercial property subindex developed weakly in 2016, rising by just 1.8 percent (2015: 2.6 percent). For 2017, bulwiengesa expects property prices to continue to develop independently of rental prices. Overall, the German real estate market index rose by 4.2 percent.
Rent index values rise in line with market prices
According to the F+B Rent Index, local comparable rents rose by an average of 1.8 percent last year, matching the previous year’s increase, reported the IMMOBILIEN ZEITUNG on 09.02.2017. F+B based its analysis on net cold rents (i.e. excluding heating and other unavoidable costs) for standard, 65 square meter apartments in the 345 towns and cities in Germany with more than 20,000 inhabitants. The average local comparable rent in Germany was EUR 6.54/sqm (prior year: EUR 6.39/sqm), although there were
significant regional differences: The comparable rent in Munich was EUR 11.18/sqm, 71 percent higher than the national average. Stuttgart followed with EUR 9.76/sqm, then came Düsseldorf with EUR 8.26/sqm, Cologne with EUR 8.24/sqm, Hamburg with EUR 8.07/sqm and Frankfurt with EUR 7.94/sqm. The overall increase in rental prices, particularly for new lettings, is also gradually leading to increases for existing tenancies. Housing in Berlin remains comparatively affordable. In Berlin’s western districts, the rent index average is EUR 6.46/sqm, compared with EUR 5.85/sqm in eastern districts. Rents in existing buildings average EUR 6.15/sqm, while EUR 8.03/sqm is typical in new-builds, although there was above-average rental price growth for newly refurbished older buildings in eastern Germany. The most significant rental increases in western Germany were for apartments constructed in the 1970s and 1980s.
Higher quota for rent-controlled housing
Since Berlin’s authorities updated their “Model for Cooperative Land Development” on February 1, 2017, private developers have been obliged to ensure that 30 percent of their housing developments are rent-controlled apartments, rather than the previous quota of 25 percent. This was reported by the IMMOBILIEN ZEITUNG on 09.02.2017. The quota is no longer based on the number of apartments being developed, but on a development’s gross floor area. The previous quota will still apply to developments that had received a signed planning decision notice by January 31, provided urban development contracts are signed by July 31, 2018.
Duty to inform consumers of participation in alternative dispute resolution
As reported by the IMMOBILIEN ZEITUNG on 09.02.2017, legislation on alternative dispute resolution for consumer disputes (VSBG, Section 36 Para. 1 No 1) became law on February 1, 2017, requiring businesses in Germany to inform consumers whether they are willing to participate in alternative dispute resolution procedures or not. Companies have to make reference to their alternative dispute resolution policy and add a link to their chosen dispute resolution platform in their terms and conditions and in the legal notice on their homepage. For the real estate industry, the new regulations mainly apply to housing companies, real estate agents and construction companies. Should a company fail to provide the relevant information, it risks a fine. Companies with less than ten employees are exempted from the new law. The construction industry and Haus & Grund Deutschland have published compliant texts which have been adapted for different industry segments.
Substantial interest in retail real estate despite rising prices and stagnating rents
Despite increasing vacancy rates and stagnating rents, the market for retail real estate continues to grow strongly, according to Colliers International. This was reported by DIE WELT on 08.02.2017. An analysis published by Savills shows that transactions involving retail real estate in Germany in 2016 totaled EUR 12.9 billion. Although this represents a year-on-year decline of 38 percent, the decrease was not due to a collapse in investor interest in the sector, it was due to the lack of retail real estate coming to market. Prices have continued to rise and buyers are prepared to pay more as yields in the sector remain far more attractive than the returns on government bonds. Many investors are shifting the focus of their investments to secondary locations in pursuit of lower prices, despite facing higher vacancy risks. According to CBRE’s Frank Emmerich, this requires a certain tolerance of risk: “It all comes down to the strength of the retail concept.”
Declining take-up of office space in Hanover
In 2016, 120,000 sqm of office space was taken up in Hanover, a year-on-year decline of 5,000 sqm, according to annual figures published by the Hannover real estate market, a partnership of Hannover’s regional authorities and the real estate industry. Take-up in 2016 is thus lower than the five-year average of 130,000 square meters (2010 to 2015). The figures were reported by the IMMOBILIEN ZEITUNG on 09.02.2017. However, the reported figures relate exclusively to rental turnover, which was significantly higher than the average of the last few years (108,000 sqm). There has been a clear trend towards lettings in peripheral city locations. In 2015, 65,000 sqm of office space was let in central districts, a figure which fell to just 20,000 sqm in 2016. In contrast, a 70 percent increase in lettings was reported for the city centre periphery and along arterial roads, where lettings rose from 40,000 sqm in 2015 to 68,000 sqm in 2016. The peak rent in these locations rose significantly in 2016, from EUR 11.00/sqm to EUR 12.50/sqm, whereas the peak rent in city centre districts rose by a mere 20 cents to EUR 15.00/sqm.
GERMAN REAL ESTATE NEWS
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Scope Real Estate Market Rating
The Scope 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 Duesseldorf
Duesseldorf, the capital of the federal state of North Rhine-Westphalia, is located in one of the most economically important and dynamic regions of Germany. The city enjoys particular recognition as an international center for trade, services and fairs. The trade, transport and communication sectors’ aggregate share in regional production is well above German average. Duesseldorf’s very good connections to the European transport network – including an international airport ranked third in Germany – provide further key advantages. The service sector specializes in the fields of media, advertising, legal advice and consulting. Banking and insurance comprise yet another focal point of the economy. While the manufacturing output share for Duesseldorf is below the German average, the region’s manufacturing base, because of its modern, growth-intensive structure, is a positive factor in the local economic configuration. Yet Duesseldorf’s regional production, based on a diversified business mix, does not depend on any one sector.
Scope rates Duesseldorf as a business location “B+”, which is unchanged compared to the 4th quarter 2015. It translates into “above average potential, below average”. With this rating result the city ranks 22th in the comparison of European Metropolises.
Office Real Estate
Regarding office real estate Scope rates Duesseldorf “D”, which is downgraded to the 4th quarter 2015. The city ranks 20th among office locations of European Metropolises. Scope awards the office top locations “D” and the side locations “C”
With total office stock volume of approx. 7.75 million sq m, Duesseldorf is one of Germany’s top 5 office real estate markets. In a national comparison, Duesseldorf’s level of economic activity in the sectors of trade, transport and telecommunication is above average, and this configuration influences the structure of demand for office space. Still, the greatest determinant of demand is activity in business-related services, media and advertising, followed by legal advisory services and business consulting. Since Duesseldorf is a regional capital, public administration constitutes an additional source of demand. A well-diversified industrial structure and a growing service sector will be key drivers for future growth in office.
With a rental turnover of about 410,000 sqm in 2016, Dusseldorf’s office market shows marginal lower market activity compared to last year´s result (minus 7% according to CBRE). Indeed it was a solid year for the letting market as the volume was well below ten year´s average. The low level of new office development as well as the conversion of office space to residential units has helped to reduce office vacancy further. Indeed Düsseldorf’s well-diversified economic structure and ongoing growth of the region’s service sector will contribute to an increasing number of office employees in the long term. This should further contribute rental growth for prime offices.
The commercial investment volume in Dusseldorf totaled in 2016 approx. 2.6 billion Euros according to CBRE. The record investment volume of the previous two years could not be reached. However, compared to the long term average, 2016 can be regarded as an exceptional investment year. Office transactions provide, with a share of more than 60% of the transaction volume, the dominant asset class. Net initial yields for offices are already highly compressed. However, further compression has been observed in recent months.
After the boom years 2006 and 2007 Düsseldorf’s investment market underwent a price correction, as both the likely potential, and the degree of risk, came under re-newed scrutiny in the asset class of office properties. Lately, investors’ interest in office real estate has increased noticeable. A lack of alternative investment possibilities supports this development. The fair rental yield for Düsseldorf’s prime office properties is judged to be 5.4%. At present, we view prices to be highly above its fair value.
Retail Real Estate
In the comparison of European Metropolises regarding retail real estate Duesseldorf placed 1st with a rating result of “A”, which is unchanged compared to the 4th quarter 2015. Scope awards the retail top locations “A” and the side locations “A”.
Duesseldorf is one of Germany’s top shopping cities, an internationally important retail center for fashion and highvalue consumption goods. Purchasing power is well above German average, near the top for the country. Yet, only prime locations have gained from this elite status in terms of rising retail space rents. The Königsallee is one of the top locations in Germany. In contrast, Duesseldorf’s secondary retail locations registered sharp rent declines due to shopping centers in surrounding areas. Duesseldorf will remain one of Germany’s leading retail venues. Due to continuously low retail space supply, rising retail rents are expected in the future.
Residential Real Estate
When it comes to residential real estate, Duesseldorf placed 12th among European Metropolises with a rating result of “B+”, unchanged compared to the 4rd quarter 2015.
Long-term low building activity and the rising population have led to a shortage of rental apartments. The ongoing trend towards smaller household size (i.e., rising numbers of one- and two-person households) has contributed to this as well. City planning now faces the challenge of mobilizing building lands, as well as planning alternatives such as the conversion of commercially used space to living space. Building permits increased since 2012. During 2016 rising rents can be expected on Düsseldorf’s apartment market This is caused by low market vacancy rates and the rising number of households.
Due to a stable demographic outlook and fairly favorable projections for incomes and overall economic activity, a continuous increase of demand for property ownership is expected on Duesseldorf’s residential purchase market. This is heavily supported by the current low mortgage interest rate. After construction activity has reached the lowest point since 20 years in 2011, activity has risen since 2012. In the years 2014 and 2015, building permits reached 2,911 resp. 1.453 flats.
Contact:
Franz Wolfgang Kubatzki, w.kubatzki@scopeinvestors.com, phone +49 (0) 69 66 77 389 – 61
Scope Real Estate Market Rating
The “Scope Real Estate Market Ratings” issued by Scope appraise the value potential of regional real estate markets, taking into account the attendant risks. The methodological approach underlying Scope 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, Scope 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, Scope 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. Scope 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.
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