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Five lessons from Buffett’s latest deal

by Dr. Rainer Zitelmann

This is Warren Buffett’s largest ever single investment: For $37.2 billion he has bought Precision Castparts Corp (PCC), a company that supplies parts to the aerospace industry, including Boeing and Airbus, as well as to numerous energy companies. What can we conclude from this deal?

The first lesson: Concentration, not diversification. In one fell swoop, Buffett is investing more than half of Berkshire Hathaway’s accumulated cash reserves. Diversification makes sense for those with limited investment experience. Such investors are well advised, even according to Warren Buffet, to invest in an ETF index fund. Of course, that will never lead to untold riches. “Diversification is protection against ignorance. It makes little sense if you know what you are doing,” as Buffet once famously said. Also: When you understand the ins-and-outs of an investment vehicle – real estate, for example – you can forget widely accepted advice such as, “Don’t place all your eggs in one basket.” You can also ignore Harry M. Markowitz’s famous Portfolio Theory. It is concentration that leads to riches, not diversification. If you are firmly committed to an investment, you can turn concentration risk into tremendous opportunity.

The second lesson: View crises as opportunities! Forget what other people say, such as, “The trend is your friend,” or, “never touch a falling knife.” These stock market wisdoms may well apply to stock traders with a short-term investment strategy – but not to long-term investors. PCC’s stock price had lost a third of its value since June 2014. Falling oil and gas prices had caused a number of customers to delay planned investments. “When you get a chance to buy a wonderful company you know there is usually some reason why you are getting that chance and perhaps the slump in oil and gas helps us in this case,” was one of Buffet’s comments on his mega-deal. Many anti-cyclical investors have been wondering how to turn recent drops in oil and gas prices into profits. The best approach rarely involves a direct investment (e.g. buying oil futures); there is more potential in indirect investments – in this case from buying a company whose prospects are indirectly linked to the development of oil and gas prices. “Cash combined with courage in a crisis is priceless”, is, after all, Buffett’s credo.

The third lesson: Be patient and take a long-term view. Buffett spent a long time sitting on three per cent of PCC’s stocks. When the time was right and sentiment towards the company was at its most negative, Buffet seized his chance in big style. This is typical Buffet: He gets to know a company and bides his time, sometimes for years, before he takes advantage of low prices, caused by a stock exchange crash, for example, to make his move.

The fourth lesson: Don’t trust the analysts. UBS shifted its assessment of PCC’s stocks from “neutral” to “buy” in January 2013, entirely wide of the mark. Their timing was dreadful, coming just as PCC’s stocks started their long decline. RBS Capital revised its valuation of the stocks at the end of October 2014, admittedly saving some face with a minimal downgrade from “top pick” to “outperform”. Just last month, JP Morgan gave the share a “neutral” rating. “Hold” is the rating PCC’s stocks have received from an overwhelming majority of analysts over recent months. Given the convoluted and deliberately opaque language typically used by analysts, in most cases “hold” actually means “sell.”

The fifth lesson: Investment opportunities will always present themselves, even in an investment climate like the current one, when pretty much every asset class – stocks, bonds, real estate, etc. – is highly over-priced.

These five basic principles may sound simple – but who really lives and acts by them? Living according to these principles requires just as much know-how as courage: concentration, not diversification; swimming against the mainstream tide; not being unsettled by analysts’ commentaries; and having the patience to play the long game. This is how Buffet became a rich man.

Read more about these tenets for successful investment in my recently published book, “Reich werden und bleiben” (“Become rich and stay rich”).

Read also Rainer Zitelmanns Finance Blog.

Bremen launches Bundesrat share deal initiative

As reported in the IMMOBILIEN ZEITUNG on 06.08.15, the state of Bremen has announced an initiative in the Bundesrat (Germany’s upper house of parliament) to prevent Grunderwerbsteuer avoidance (property transfer tax) via share deals. The initiative was welcomed by the upper house’s various parliamentary groups. According to respected property consultants at Aengevelt, share deals have become increasingly attractive as property transfer tax rates have been ramped up in a number of major cities between 2011 and 2013. The proportion of share deals increased from 19% to 22.5% in Berlin, from 11% to 32.6% in Frankfurt and from 3% to 20% in Düsseldorf. Of course, legal changes in 2013 have at least temporarily reduced the benefits of share deals. Nevertheless, the number of share deals seen in Düsseldorf and Frankfurt is still much higher today than it was in 2011 and 2012.

CBRE points to potential savings for DAX companies

The HANDELSBLATT on 03.08.15 highlighted a new study from CBRE detailing the sizeable savings DAX companies could potentially achieve via more effective management of their company properties. If all of the DAX-listed companies made the most of the savings, their combined profits would be higher to the tune of €3 billion. This is equivalent to 10% of the accumulated dividends they paid out to stockholders in 2014. According to CBRE, the companies pay out €30 billion per year in operational property-related costs. “Depending on the composition and maintenance of the portfolios, there are often substantial rental charge reductions to be made. Average savings of 15% are definitely achievable,” said Martina Williams of CBRE. An EY study published in 2014 showed that the companies are fully aware of these potential savings. At the time, financial service providers and insurers admitted that they could reduce real estate costs by about 20%.

CBRE posts revenue growth of 75%

On 06.08.15, the IMMOBILIEN ZEITUNG reported that revenues generated by CBRE in Germany in H1 2015 were up by 75%. The major contributors to the improved results were the transaction and lettings divisions. JLL saw revenues jump by 40%. At a global level, the firms’ strong European growth was counteracted by the strength of the dollar. CBRE’s EBITDA suffered to the tune of $14.3 million as a result of foreign exchange adjustments. Nevertheless, after adjustment for non-recurring effects, EBITDA was up by 19% to $550.5 million and net profits climbed by 26% to $218 million.

Student apartments: New builds to saturate the market?

The IMMOBILIEN ZEITUNG on 06.08.15 contained an article on a new student accommodation study published by Savills. The study claims that the market in a number of Germany’s university towns will reach saturation point over the next few years. Almost all of the private developers and investors active in the sector have targeted high-end projects. Experts from GBI and International Campus criticised the assessment, pointing out that Savills based its conclusions on figures compiled by the Deutsche Studentenwerks (German Students’ Union) as far back as 2012, data that does not accurately reflect current market conditions. The IMMOBILIEN ZEITUNG went on to report on plans announced by authorities in Berlin to develop new student accommodation by 2020. A total of 16 projects offering more than 2,800 units of student housing are being developed by the municipal housing associations Degewo, Howoge, Gesobau, Gewobag, Stadt und Land, along with the Wohnungsbaugesellschaft Mitte housing association. In parallel, Berlinovo is developing 2,800 units for young academics. Of the 5,600 planned units, Berlin’s Senate finance department says that at least 5,000 will actually be built. Berlin’s municipal housing associations currently offer 12,500 student apartments. Taking into account the 171,000 students in the city, this is no more than a drop in the ocean. Not such a surprise then that private investors are so willing to try their luck in Berlin.

Fewer foreclosures in H1 2015

In H1 2015, there were approximately 20,500 fewer court dates for foreclosure hearings than during the same period a year earlier, a fall of almost 11%. This was reported in the SÜDDEUTSCHE ZEITUNG on 07.08.15 in reference to figures provided by the specialist Ratingen publisher Argetra. Foreclosures of detached and semi-detached homes rose by 2.1% and forced sales of condominiums were up by 0.8%. In contrast, there were 1.8% fewer foreclosures of commercial real estate and mixed-use apartment buildings. Almost 70% of all foreclosure hearings involve private residential properties (condos, detached and semi-detached houses). An average of €164,000 was raised by each forced sale, representing an increase of 5% over the last 12 months.

Hotels operating at record highs

As DIE WELT reported on 05.08.15, Germany’s flourishing economy has led to high occupancy rates across the country’s hotel sector. There were around eight million overnight stays in Frankfurt last year, a plus of 7.3% year-on-year. This was the fifth year in a row that Frankfurt’s hotels have set new records. As a result, Frankfurt’s hotel sector has become increasingly attractive to both operators and investors, a point made emphasised by Daniela M. Bense from Dr. Lübke & Kelber. As reported in a ranking of Germany’s top ten hotel locations produced by Dr. Lübke & Kelber, Frankfurt shared the top spots with Munich and Hamburg in both the average room rate and average room yield categories.

34 large hotels changed hands for a total of €1.48 billion across Germany last year. This amount also set a new record. According to Philipp Kraneis of CBRE, yields for hotels in prime locations and with long term leases within Germany’s major cities now stand at around 5%. Forecasts point towards investors broadening their focus to include mid-sized and even smaller cities.

Market for luxury housing grows

As both the FAZ and the SÜDDEUTSCHE ZEITUNG, along with the WELT, reported on 12.08.15, 3,000 luxury residential properties worth a combined €3.7 billion were sold in Germany’s top seven locations in 2014. According to a report issued by Dahler & Company, this represents an increase of close to 25% over 2013. Dahler & Company defines luxury residential properties as those that cost more than €750,000. Of the almost 3,000 luxury villas and apartments that changed hands in 2014, Munich had the most active market. The 920 transactions in the city were worth a total of €1.2 billion (+41% YoY). Germany’s other major cities also reported high demand, although supply often lagged behind. The number of luxury properties sold in Berlin actually fell last year. As reported by Dahler & Company, 468 luxury properties worth a total of €595.4 million swapped owners in Berlin in 2014. In 2013 there were 480 sales worth €636 million. The number of detached and semi-detached houses sold in Berlin last year was lower than during the preceding year, whereas condominium sales were slightly higher. Taken together, Berlin saw the weakest developments in comparison to the other six cities covered by Dahler & Company’s market study. Einar Skjerven of the Skjerven Group hasn’t budged in his positive assessment of Berlin’s housing market. Skjerven is clear, “Apartments in any other modern metropolis, anywhere else in the world, are nowhere near as cheap to buy as they are in Berlin. The market still hasn’t reached equilibrium. Prices will continue to rise, maybe not as quickly as in the past, but they are still heading higher.” Last year alone, Skjerven sold condominiums with a combined value of more than €60 million. Almost 40% of his buyers came to his company via Facebook. At Strausberger Platz in Berlin Skjerven is looking for buyers for 170 apartments. He has made the neo-classical apartments ready for investors. Skjerven has a strong track record of selling apartments in Charlottenburg, Mitte, Friedrichshain and Prenzlauer Berg via his Part-B Immobilien subsidiary.

Berlin: rent increases slowing

On 13.08.15, DIE WELT reported that apartment rents in Berlin are increasing more slowly even as the supply of housing dries up. The article is based on the IVD’s latest Rental Market Index. The index is based upon 1,000 data sets from privately financed apartments at the point they are relet. The figures reveal that rents for apartments in standard locations rose from €6.90/m² to 7.40/m² over the last two years. In more upmarket districts like Berlin-Mitte, rents rose from €8.40/m² to €8.80/m² during the same period. A slowdown in rent increases is most noticeable in sough-after inner-city districts. “The rental market is no longer as dynamic as it once was,” says Dirk Wohltorf from the IVD.

There is widespread concern surrounding the effects of rent controls. An IVD study reveals that the recently introduced legislation is having the biggest impact in areas populated by better-than-average earners. As rent increases have been capped, wealthier tenants are now able to afford even bigger apartments. There has been limited impact in districts with lower rents as it is extremely unlikely that the higher rent thresholds will be reached anyway. If anything, landlords might be tempted to see the Mietpreisbremse as an excuse to start demanding rents up to the maximum levels that are permitted. The only solution to the housing shortage is to build more housing.

Owning property is out of most Germans’ reach

The FAZ on 13.08.15 reported on the construction financing sentiment index released by Comdirect Bank. 58% of those surveyed agreed with the statement that property prices in their region are too high. In larger cities, the numbers were even higher- more than two-thirds complained about excessively high prices. The Bundesbank has been monitoring property price developments with concern. The bank takes the view that prices for property in Germany’s largest cities are overinflated by between 10-20%. At the same time, 64% of those surveyed by Comdirect think that current conditions mean that now is still a good time to buy a home. Nevertheless, this was 2% less than June’s figure. An analysis published by Standard & Poor shows that house prices across the whole of Germany have risen by 20% over the last six years. In the big cities, prices have gone up much more rapidly, equating to 46% since 2009. Forecasts reveal projected increases of 5% during 2015, 4.5% in 2016 and 3.5% in the following year.

Illegal holiday apartments in Berlin

The SÜDDEUTSCHE ZEITUNG contained a report on Berlin’s illegal holiday apartments on 14.08.15. Figures released by authorities in Berlin-Mitte reveal that there are up to 17,000 illegal holiday apartments in the Germany capital. Previous estimates from Berlin’s Senate placed the number at 12,000. Stephan von Dassel, Mitte’s District Councillor, has said that extra personnel will be required if he is to get to grips with the problem and increase the number of inspections. The latest figures are based on research conducted across 15 websites that offer holiday accommodation. The conversion of apartments for housing into holiday apartments was banned in May 2014.

Conwert breaks off talks over BGP portfolio

The IMMOBILIEN ZEITUNG reported on 13.08.15 that Conwert has backed out of its planned purchase of BGP’s German portfolio of 16,000 apartments worth an estimated €1.1 billion. The sudden change of heart is likely due to harsh criticism of the proposals from Conwert’s stockholders. In the days following the proposed deal’s announcement, Conwert’s stock price tumbled by 7.5%. BGP has pointed out that it always had a dual-track plan for the disposal of its German portfolio. Both a direct sale and an IPO are possible.

German retail real estate investment market slips

On 13.08.15, the IMMOBILIEN ZEITUNG reported that JLL has identified large-scale, international retailers as the dominant force on the German retail real estate market during H1 2015. Despite the increased presence of foreign acteurs, overall investment was down on the previous year’s figures, while rents rose slightly. JLL calculated that a total of 252,000 square metres were let during the first six months of the year, 12% less than the same period during 2014. Prime rents for retail space have risen by 1.5%. At the end of H1 2014, JLL recorded annual rental increases of just 0.7%.

Recommended reading – by Dr. Rainer Zitelmann

Outliers. The Story of Success

Malcolm Gladwell, Outliers. The Story of Success, Penguin, London 2009, 309 pages.

This is a remarkably well-written book. The author puts forward a clear and determined argument and successfully captivates and engrosses readers from the very first page. His assertions are presented in the most compelling manner. I appreciate books with a strong, one-sided thesis, even when – as is the case with this book – the author’s opinions differ markedly from my own. As a reader, such assertions force you to challenge and test your own opinions and ultimately sharpen the focus of your own views.

Gladwell’s thesis, in short: Extraordinarily successful people are not so successful because of any singular personal characteristics or remarkable strategies they have followed, but rather because they have benefited from amazing luck at key points in their lives. The author presents the stories of two incredibly intelligent men – the renowned physicist Oppenheimer and the largely unheard of and unsuccessful genius, Chris Langan (IQ 195) – to illustrate the fact that intelligence alone is no guarantee of achievement. According to Gladwell, research demonstrates that intelligence is a definite factor in success or failure, but this truism only applies up to an IQ of 130. Having an IQ above this level does not increase a person’s chances in life and people with an IQ of 130 have just as much chance of winning a Nobel Prize, for example, as those with higher IQs. With an IQ of 130 myself, this fact reassured me just as much as I am sure it will other readers. However, I already knew that having a genius-level IQ was not the most decisive factor in achieving uncommon success before I read this book. More important, in Gladwell’s opinion, is “practical intelligence”, for example, “knowing what to say to whom, knowing when to say it, and knowing how to say it for maximum effect” (p.101). These skills are not something we are born with, rather something we learn – and children from wealthier families pick these skills up earlier in their lives than children from poorer families. Also not such a great surprise. But is it a step too far to conclude from this that success is the result of pure luck?

What about someone like Coco Chanel, one of the richest and most successful individuals of the previous century, who entered the world as an orphan? And how about Howard Schultz, an orphan who grew up in a deprived, melting-pot district and worked his way up from a Xerox sales representative to one of the richest people in America as his Starbuck’s chain grew from five coffee shops into an international concern with more than 17,000 outlets worldwide? Or Arnold Schwarzenegger, who rose from humble beginnings to enjoy incredible success in many spheres of life (sport, the film business, politics, real estate)? Are his parents, his father was a police officer, to thank? It might be possible to argue that Schwarzenegger was fortunate in terms of the genes he inherited. But that would be to ignore the fact that there are even more muscular bodybuilders and none of them have gone on to earn millions from movies or serve California (twice) as governor. There are also the “serial entrepreneurs,” business people that don’t just taste success once, but set up successful businesses again and again. Is that just down to luck, again and again?

The author then proceeds to introduce Bill Gates as a further example of the crucial role played by good fortune. Gladwell has a long list of all the times Bill Gates was smiled upon by lady luck. The facts are indisputable and explain how Bill Gates became a better programmer than almost all of his contemporaries. But, what the author seems to ignore: Gates didn’t become the world’s richest man by being the world’s best computer programmer. Not at all. Gates even went as far as copying innovative ideas from other, or at least buying them at knockdown prices. His success is a result of his incredible business mind, not his incredible programming skills. Exactly the same is true for Steve Jobs and for a large number of the billionaires of the internet age.

Gladwell quotes Gates as he refers to his own good fortune. Whether this is enough to support the author’s position is another question entirely. Lots of extremely successful people will mention “luck” or “fortune” when asked to explain their success. Above all, from a psychological perspective, this is a strategy to deflect jealousy and envy. Successful and wealthy individuals are envied for what they have achieved. The explanation that success is simply a result of having had more luck comes across as more sympathetic than saying, “I am more intelligent, hard-working and cleverer than you.”

Of course, chance and coincidence do play a roles in everyone’s lives. It is recognising and making the most of these opportunities that makes the greatest difference. There are millions of people who have been presented with fantastic opportunities, but have either failed to recognise or grasp the importance of what lies before them, or have lacked the understanding or ability to make the most of the chances they have had. Vice versa: Who can say what would have become of Bill Gates if he hadn’t founded Microsoft and gone on to become a billionaire? He may not have become the world’s richest man, but he probably would have gone on to enjoy more success – irrespective of the field – than 99.99% of his peers. Of course, it’s impossible to prove this. It’s also impossible to prove that he was only successful because of the luck, chance and happy accidents that Gladwell believes lined Gate’s path. We’ll simply never know how things would have turned out if things had been different.

The author puts forward a weak argument when he suggests that 20% of the richest people in history made their fortunes in one country and in one century (America in the twentieth century). This shows that external forces play a decisive role (p.50 ff.). Well, there were not only far fewer billionaires 500 years ago, there were also fewer millionaires and there was no comfortable middle-class, either. The fact that it is easier to become rich in a country such as the USA than it is in an African country, for example, is also from being a shocking revelation. Surely the real question is why, out of the 320 million people that live in the United States, only 4% become millionaires and the remaining 96% do not? Did the 4% simply have much more luck?

The author relates many stories, all intended to prove his thesis, in a readable and vivid style. If he had wanted to, Gladwell could also have included the stories of people who really were touched by lady luck, such as lottery

winners. Unfortunately, most major lottery winners don’t fit into his schema as most of them end up just a few years after their big wins with less money than they had to begin with. Just Google “lottery winners who blew it all” and you will be presented with hundreds of results, each one proving that luck alone is not a guarantee of success. On the other hand there are plenty of examples of financially successful individuals who went through numerous bankruptcies, bouncing back on each occasion to amass huge fortunes. Could luck really be responsible, time and time again, for their success? Or do these individuals possess qualities and strategies that others miss?

Nobody would deny that external factors and good fortune contribute to success. In the same way, nobody would seriously argue that certain individuals go through their entire lives blessed by good luck or cursed by misfortune. In most cases, the positive and the negative will balance each other out over a period of years or decades. Bill Gates and the Beatles, to take two of the book’s central examples, didn’t just experience uninterrupted good fortune; they also faced considerable problems, setbacks and difficult situations. This is true for all successful people. Their success is because of the problems they faced, not in spite of them – down to the fact that they reacted differently (better) than their less successful peers.

The book’s extensive international success is not just a result of the author’s exceptional writing style, it is also a result of Gladwell’s central thesis, which soothes and reassures less successful individuals: No, you are not less intelligent, you don’t work less, you are not lacking in specific personal qualities – you’ve just not had quite as much luck and good fortune as people like Bill Gates or the Beatles. R.Z.

For more reviews of interesting business books, see Zitelmanns Book Reviews


Only the contributions titled “Commentary – by Dr. Rainer Zitelmann” reflect the editor’s opinion. Responsible: Dr. Rainer Zitelmann. The facts represented in press items are not checked for accuracy. Copyright for GERMAN REAL ESTATE NEWS: Dr.ZitelmannPB.GmbH, Rankestr.17, 10789 Berlin, Germany. Copying or electronic forwarding of the newsletter, except by contractual agreement with Dr.ZitelmannPB.GmbH, constitutes a violation of applicable copyright laws.

Dr. ZitelmannPB. GmbH

Dr. ZitelmannPB. GmbH is Germany’s leading consulting company for the positioning and communication of real estate companies and fund companies. It advises national and international clients in the areas of strategic press and public relations work, capital market communication, and positioning. Other spheres of activity include the compilation of track records and statements of account, surveys and research documents, as well as the conceptualising of, and copywriting for, customer newspapers, newsletters, Internet presentations, and brochures. Dr. ZitelmannPB. GmbH supports the market entry of foreign companies in Germany, and brokers collaborations for real estate and fund companies. For detailed information about service spectrum and reference customers of Dr. ZitelmannPB. GmbH, please visit www.zitelmann.com or send an inquiry directly to info@zitelmann.com.

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 Paris

Paris is the national capital, and by far the pre-eminent center for trade, finance and services in France. The city is one of Europe’s most important transport hubs. Two major international airports provide outstanding international connections; Paris also benefits from high-speed TGV passenger rail service, and its extensive road network. Despite a tendency ongoing since the 1960s for industrial production to be outsourced to surrounding areas, industry is still somewhat important. In fact, the industrial sector’s quite rapid decline explains much of the city’s relatively weak performance during the 1990s in terms of gross value added (GVA) growth. The service sector specializes in knowledge-intensive business-oriented services. Moreover, Paris is a major international location for conferences and trade fairs, and of course one of the world’s foremost tourist magnets. In coming years, however, the rate of increase in regional production is likely to trail the European urban average.

Feri rates Paris as a business location “A”, which is unchanged compared to the 2nd quarter 2014. It translates into “high potential, low risk”. With this rating result the city ranks 13th in the comparison of European Metropolises.

Office Real Estate

Regarding office real estate Feri rates Paris “D”, which is unchanged compared to the 2nd quarter 2014. The city ranks 25th among office locations of European Metropolises. Feri awards the office top locations “D” and the side locations “C”

Paris’ office market with about 16 million square meters of office stock is one of the largest continental European office markets. The most important French enterprises are headquartered in Paris and international corporations have also established their European main office in this city. Considering its global attractiveness Paris is, at least within Europe, comparable to London. Due to both its size and its marketability Paris is characterized by an above-average liquidity and transparency. The volatility of rents and yields is above the European average. However, the corresponding income risk is significantly lower than it is in London.

The current stagnation in the French economy will lead to weaker demand for new office space. Despite positive employment figures in the greater Paris area, cost containment and productivity improvement will determine business behavior in the meantime. Supply of high quality office space is relatively scarce and the office vacancy rate is decreasing to a cyclically low. Since building activity sets in only slowly, it is unlikely that supply will put considerable pressure on rents before 2016. After a decline in rents during 2013 and 2014, we expect – due to the weak French economy – an average increase of rents of only about 2 % per year in the forecast period.

Before the crisis resulted in the correction of the investment market, international investors were similarly interest in the office market in Paris as in London’s. Due to the strong interest of these investors and their risk tolerance initial yields fell to a record low in the mid-year 2007. The following period of price correction led to increasing rental yields of 6.5 %. This favorable price level was especially used by international investors, aware of risks and rich in equity capital, for entering the market. Since the third quarter 2009 rental yields have dropped again. New uncertainties, considering the economic recovery could not reverse this trend up to now.

On Paris’ office market net initial yields have converged again until the end of the year 2010 to about 70 basis points under the fair value due to interest in core objects. However, the present price level is considerably higher than the level which is justified by the fundamental economic expectations and the risks involved. The ‘Fair Value’- rental yield determined by Feri is of 5.6 %. The historically large gap of rental yields in relation to Government Bonds will lead to further compression. In upcoming years the overall performance will be primarily sustained by the positive development of rents. Slowly rising interest rates may have a slightly dampening effect on rental yields.

Retail Real Estate

In the comparison of European Metropolises regarding retail real estate Paris placed 2nd with a rating result of “A”, which is unchanged compared to the 2nd quarter 2014. Feri awards the retail top locations “A” and the side locations “A”.

Paris is one of the world’s leading shopping locations. The development of retail rents has been positive since the mid-nineties. Top retail locations have generally posted the strongest rent increases. The level of retail rents is relatively high: within Europe, only London and Moscow are comparable. The recessive economic development tends to dampen consumers’ buying proclivities and hence retail sales, but a considerable decline in retail rents is not likely. In the best locations the supply of retail space is quite scarce, as a low vacancy rate attests. The central importance of Paris in France and its global importance as a tourism destination exert reliably positive influence on the development of rents. However, secondary retail locations and low-end mass merchandisers are hit harder by the weak economy than other retail segments.

Residential Real Estate

When it comes to residential real estate, Paris placed 2nd among European Metropolises with a rating result of “A”, unchanged compared to the 2nd quarter 2014.

Following substantial rent decreases in the early nineties, the residential rental market in Paris had recovered quite strongly by the end of that decade. Due to a notable uptrend in incomes, demand for housing space is still rising and has already driven a significant further acceleration in rents (with exception of the years when the economic crisis hit the market). Given Paris’ prospects for ongoing above-average income growth, together with a limited supply of rental housing space, the trend of increasing rents is projected to continue, despite some limited dampening in the next couple of years. As condominiums now fetch excellent prices, many owners now prefer to sell rather than rent their dwelling units. This phenomenon, in turn, will further limit the available supply of residential rentals.

In the late 1980s, a speculative bubble contorted the price pattern in the Parisian market for sale of residential property. This unsustainable price run-up particularly affected high-value residential locations. When the bubble burst at the beginning of the 1990s, prices fell steeply. However, prices subsequently rose sharply once again; the condominium market, especially, posted a series of remarkable yearly price increases. Now, though, amid general economic cooling and uncertainty related to the European financial crisis, demand has definitely weakened, so prices will tend to correct over the course of the next two or three years. For the long term, Paris’ projected positive performance in disposable incomes along with restricted supply augmentation should support further increases in residential property

purchase prices.


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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