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Low interest rates are a dead-end street
By Dr. Rainer Zitelmann
The markets’ have become just as hooked on low interest rates as a junkie craving their daily dose of heroin. The merest hint of withdrawal is enough to provoke anxiety.
For the markets to be plunged into turmoil, it needs some kind of external shock – whether the developing economic situation in China, or some other event. Whatever the trigger, the real root cause will be found elsewhere. It is revealing that market tensions eased at the exact same moment it was suggested that an interest rate rise in the United States, provisionally pencilled in for September, was being reconsidered, or at least put on ice for the time being. As soon as these “glad tidings” spread, all worries about China’s slowdown or the stock market crash in Shanghai evaporated – for the Dow, Dax & Co., the only way was up.
This is not the first time that fears of an interest rate hike have led to a slump, or that swift denials have caused shares to rebound. A reminder: In June 2013, the Fed’s then chairman, Ben Bernanke, signalled a shift in monetary policy and the markets descended into turmoil. It took interventions from numerous Fed spokespersons to qualify Bernanke’s statements and calm the markets. The interest rate hike was abandoned.
History is repeating itself: In the aftermath of the latest worldwide stock market falls, voices within the Fed have been raised to challenge the timing of any interest rate increases in September. Among market players, the certainty has quickly spread that interest rates won’t be touched. According to Bloomberg, traders and analysts now assess the chance of an interest rate hike next month as just 1 in 4. Some analysts expect rates to start going up from December, others don’t think we’ll see any changes until next year. And, if they were being totally honest, most hope that hell freezes over before rates go up. Even the ECB’s chief economist announced just a few days ago that the European Central Bank was ready to ratchet up its already sizeable and highly aggressive bond-buying programme if necessary. Another signal joyously greeted by Europe’s stock markets.
All that have really been exposed are the fatal consequences of low interest rate policies, something I have using this column to warn of from the very beginning: This is a dead-end street. There is no prospect of increasing rates in Europe. The impact on Italy, France, or any number of other European countries, would be close to catastrophic. Of course, interest rates will have to increase “at some point” – and rates in the USA will almost certainly have to go up before rates in Europe. Nevertheless, central banks are almost paralysed by fear at the prospect of increasing rates. They dread the massive stock market crash that will surely follow and are terrified that things can only end in another financial crisis (see my last commentary for more on this). No one will put it in these terms in public, but this is indeed the real reason for repeatedly postponing changes to interest rate policies.
Against this current backdrop, the fears among a number of real estate investors that interest rates in Europe will be raised anytime soon strike me as being totally irrational.
Read also Rainer Zitelmanns Finance Blog.
Study: Residential real estate trumps stocks and bonds
As reported in FOCUS MONEY issue 36/2015, investments in German residential real estate have clearly outperformed stocks and bonds between 1992 and 2014. The report is based on the “Returns on German Residential Real Estate” study published by bulwiengesa and commissioned by Wertgrund Immobilien AG. According to the study, the average gross yields generated by residential real estate investments in Germany’s first-tier cities amounted to an annualised 7.9% In the country’s second-tier cities average returns were even higher, at 8.3% per year. In contrast, the MSCI World Index achieved total returns averaging 6.9%, and the Rex bond index delivered just 6.3% per year. Admittedly, the DAX generated higher total returns (10%) than the residential real estate sector, but the DAX also proved to be much more volatile than investments in Germany’s housing stock.
While the DAX’s returns fluctuated between -26.7% and +44.5% during the period in question, the total returns from residential real estate in Germany’s 127 largest cities ranged from -0.6% to +15.4%. “The dependability of returns from residential property investments, known in Germany as “concrete gold”, has proven that investors who put their money into property made exactly the right choices, even during the financial crisis,” explained Thomas Meyer from Wertgrund.
If the period covered by the study is limited to the last five years, the total returns from residential real estate in Germany’s A and B cities actually outstrip the DAX. Moreover, there is no timeframe during which housing investments delivered negative total returns.
IT industry breathes life into Berlin’s office market
According to an article in the FAZ on 28.08.2015, technology, media and telecommunications (TMT) start-ups are driving increased demand for office space in Berlin. A CBRE study reports that TMT companies were responsible for 40% of office space turnover in the city during H1 2015. Office space, such as the Zeughof commercial complex in Berlin-Kreuzberg that is managed by Beos, will be met with “substantially high demand,” according to Holger Matheis. Johannes Nöldeke of Beos sees the Zeughof’s flexibility as a major advantage, claiming that the property can be easily adapted to meet the specific needs of a variety of target tenants. Marc Balkenhol of IC Immobilien is more sceptical when it comes to the sector’s true market potential, “For investors, TMT companies are not exactly the goose that lays the golden egg. Managing real estate for TMT tenants is extremely demanding.”
Industry-specific networks fail to gain traction
The IMMOBILIEN ZEITUNG of 27.08.2015 contained a piece on the failed attempts to establish social networking within the real estate industry in response to an announcement that mapolis is withdrawing its online service. This is the latest in a series of failures, following earlier unsuccessful attempts by ourbania, Haufe BC and PropertyKöpfe to get off the ground. Julian Caspari of Dr. ZitelamnnPB. GmbH questions whether key decision makers are any easier to reach via such industry-specific networks than they are via existing channels such as Xing and LinkedIn.
He generally thinks that sector-specific networks only make sense if they are used as secondary communication channels. The Skjerven Group has been successful with its social network operations in the B2C (business-to-consumer) market. The company has invested heavily in its social media channels and has attracted 25,000 followers on Facebook. On LinkedIn, in contrast, Skjerven Group only has 166 connections. Einar Skjerven, CEO of the Skjerven Group, is sceptical about the potential of B2B networks within the real estate industry due to the sums of money involved, “you want to meet people face-to-face and establish a firm foundation of trust,” Skjerven observed.
Bestellerprinzip challenged in Germany’s Constitutional Court
Once the summer holidays have drawn to an end, constitutional judges in Karlsruhe will be focussing their attention on the Bestellerprinzip (the law introduced on June 1, 2015 to clarify who should pay a letting agent’s fees, i.e. the party that commissioned the agent), as
three constitutional challenges have been launched. This was the subject of an article in the IMMOBILIEN ZEITUNG on 27.08.2015. One of the three challenges has been submitted by agents belonging to the IVD real estate agents’ association. The IVD has appointed lawyers from Berlin’s Schultz & Seideneck offices to support its eight members throughout the case. “Each of the plaintiffs has suffered financially as a result of the Bestellerprinzip. Together they represent a solid cross-section of the IVD’s members,” explained IVD spokesperson, Andreas Besenböck. The complaint alleges that the Bestellerprinzip disproportionately infringes on the agents’ constitutional rights to practice their profession as letting agents as the law drastically limits the scope of the services they can offer to those looking for apartments. A spokesperson for the constitutional court (BVerfG) confirmed that three separate challenges to the Bestellerprinzip had been lodged with the court.
Record proceeds from property transfer tax
According to the Federal Office of Statistics, proceeds from property transfer taxes in H1 2015 climbed to a record high of €5.3 billion. The figures were picked up by DIE WELT on 26.08.2015. At this rate, income for the full year could smash through the €10 billion barrier. This represents a doubling over the last decade. Property transfer taxes generated €4.7 billion for the Germany’s coffers in 2005. Taken together with other ancillary costs, property buyers in Germany have to pay an average of 10% in additional fees, excluding estate agent’s commissions, when buying real estate in the country.
Prices for properties in the suburbs of large cities increase
On 28.08.2015, the HANDELSBLATT reported on price increases for housing in the suburbs and exurbs around Germany’s largest cities. A study by the Hamburg research institution, F + B, has revealed that prices in the areas around Munich, Hamburg and Berlin had risen by up to 14.4% by the close of Q2 2015. Prices in Dachau near Munich added 8.3%, housing in Ahrensburg near Hamburg cost 10.0% more and properties in Falkensee, on the edge of Berlin, had risen by 14.4%.
Smaller homes are the response to spiralling prices
Also in the HANDELSBLATT on 28.08.2015: A survey of 2,000 potential homebuyers carried out by Immobilienscout24 and the financial services provider Interhyp has revealed that a third of buyers are looking for ways to compensate for rapidly rising property prices. The most widespread strategies involve buying a smaller property than originally intended, or widening search criteria to include less popular districts. There is a long-term trend towards more living space per capita in Germany, a trend that will continue for many years to come. Forecasts issued by the Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR) indicate that there will be an average of 47 square metres of housing space per citizen by 2030. In comparison, the current figure is an average of 41 square metres.
Ever more green buildings
The IMMOBILIEN ZEITUNG contained a report on JLL’s Certification and Sustainability Radar (27.08.2015), a study revealing that Germany has an ever growing number of office buildings certified according to DGNB, LEED or BREEAM sustainability criteria, or awarded Hamburg’s Hafencity-Siegel (harbour city seal of quality). The growth of certified office space in Germany’s top seven cities during the first six months of 2015 represented 13%. This means that a total of 6%, or 5.4 million square metres, of office space across the country has been awarded some form of certification. One of the highest rates of growth has been recorded in Berlin. With a share of 5.1%, Germany’s capital has already clambered to third place, just behind Frankfurt and Düsseldorf.
IW: Housing construction has lost touch with demand
On 20.08.2015 there were reports in the FAZ, HANDELSBLATT, SÜDDEUTSCHE ZEITUNG and DIE WELT on a study published by the German Economic Institute (IW) into housing construction across Germany. According to the study, too few apartments are being built in Germany’s big cities and too much construction activity is taking place in rural areas. 245,000 new apartments were built in Germany last year, of which just 66,000 were constructed in cities with more than 100,000 inhabitants. Demand in metropolitan areas is running at an estimated a minimum of 102,000 apartments per year. In contrast, there is an oversupply of apartments in rural areas such as the Eifel, the Black Forest and parts of Eastern Germany. When considering Germany as a whole, the study’s authors concluded that housing construction is struggling to keep up with demand.
Number of building permits issued climbs further
As reported in both DIE WELT and the FAZ on 19.08.2015, the development of new apartments continues to move forward. Figures released by the Federal Office of Statistics show that building permits were issued for 140,400 new apartments during the first half of 2015. This is 3,600, or 2.6%, more than during the equivalent period in 2014. Figures for the previous year were 9.6% higher than the first six months of 2013, meaning that the pace of the increase has slowed somewhat this year. During 2014 as a whole, the number of building permits issued for new apartments stood at 289,000, a year-on-year increase of 5.4%. The number of apartments actually completed during the year grew even more rapidly, with final figures showing 245,300 new apartments, an increase of 14.2%. The Minister of Construction, Barbara Hendricks, has said that 270,000 new apartments are needed every year until 2020 if rising demand for housing is to be satisfied.
Subsidies for micro-apartments
As reported in the SÜDDEUTSCHE ZEITUNG on 19.08.2015, the Federal Ministry of Construction is launching a programme to encourage the construction of more micro-apartments. The programme is being funded to the tune of €120 million by 2018. The micro-apartments total 22 square metres of floor space, 14 square metres of which are reserved for the living room, kitchen and a mini-bathroom. “Micro-apartments, student flats and furnished housing”: These subjects will be addressed at a special edition of the BERLINER IMMOBILIENRUNDE on September 15, 2015. Request programme details at:info@immobilienrunde.de. Guests will include representatives from the Ministry of Construction who will be introducing the new micro-apartment programme.
Foreign investors driving German property prices higher
The FAZ and the BÖRSEN ZEITUNG both highlighted a report published by the Association of German Mortgage Banks (VDP) revealing that real estate prices in Germany rose by an average of 4.9% during Q2 2015 in comparison with the same quarter a year earlier, including particularly strong price increases for residential real estate averaging 6%. Foreign investors are responsible for driving prices higher. As a group, they are primarily interested in apartment buildings. Prices for investment objects were up by 7.6%, whereas owner-occupiers had to pay an average of 4.4% more than 12 months ago. The VDP attributed ongoing interest from foreign investors to Germany’s ongoing economic stability, the weakness of the euro and comparatively easy access to what has become a very transparent market. In addition, foreign investors still view German residential property as under-priced. In contrast to developments in the housing market, price increases for commercial real estate slowed during the second quarter of 2015, up by just 1.5%. Retail real estate added 3.0% and office properties cost 0.8% more.
Compromise reached between Berlin’s Senate and citizen’s groups
As reported in DIE WELT on 19.08.2015 and 20.08.2015, as well as by the FAZ on 20.08.2015, an initiative calling for a referendum on rents in Berlin has reached agreement with the city’s Senate on draft legislation that satisfies many of the groups central demands whilst at the same time abandoning a number of their most expensive or unworkable proposals. The Senate is scheduled to approve the new legislation by November 15, 2015. Jan Kahnert of the tenants’ collective was careful to point out that the referendum had definitely not been cancelled, and wouldn’t be withdrawn from the table until the law had been rubber stamped. The agreement reached between the citizens’ groups and the city’s authorities envisages a total of €1.4 billion being spent on municipal housing over the next five years. Tenants in municipal housing will be subsidised to the tune of €45 million per year. The draft law also proposes that the rents charged by municipal housing associations should be limited to 30% of a tenant’s net monthly income. A further measure would introduce a definite ban on the sale of municipally-owned apartments, anchoring a prohibition of this nature in law for the very first time. Another new provision is a modernisation investment fund intended to support landlords with the energy-efficient renovation of the city’s housing stock. The draft law contains a stipulation, also the first of its kind, designed to require municipal housing associations to let 55% of their apartments to those in extreme need of social housing (tenants with a WBS certificate). One fifth of these apartments will have to be made available to the homeless, refugees and other suitably needy and vulnerable groups.
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Feri Real Estate Market Rating
The Feri Real Estate Market Rating provides a forward-looking assessment of potentials and risks for investment return on regional real estate markets. Ratings are based on detailed econometric forecasts of regional real estate markets including regional economic development. The rating currently includes more than 150 cities in Europe, in the United States and in Asia.
In this issue:
Real Estate Market Rating for Berlin
After the relocation of the federal government, parliament and other federal institutions from Bonn to Berlin was completed, a second wave consisting of international and foreign-national political and industrial institutions, embassies and lobbies followed. Politically and culturally, Berlin has started to function as the restored capital of Germany, but from an economic point of view, structural changes are still in progress. The service sector largely specializes in business-oriented services. Positive economic impulses come from financial services, research and development, software engineering, and a growing tourism sector. Moreover, Berlin is well-known for scientific activity in various other fields.
Feri rates Berlin as a business location “B+”, which is unchanged compared to the 2nd quarter 2014. It translates into “above average potential, below average risk”. With this rating result the city ranks 23th in the comparison of European Metropolises.
Office Real Estate
Regarding office real estate Feri rates Berlin “C”, which is downgraded to the 2nd quarter 2014. The city ranks 9th among office locations of European Metropolises. Feri awards the office top locations “C” and the side locations “C”
Berlin has the largest volume of office stock of all economic centers in Germany. During the years after Germany’s reunification, Berlin significantly augmented its stock of office space. In the recent past, however, building activity has moderated. Investors opened up Berlin’s real estate market at quite a late date, compared to other markets, due to Berlin’s historical “island position.” In comparison to other European markets the rent level here is noticeably low.
Berlin´s rising demand for office space has led to a declining office space vacancy over the last years, as well as rising rents. In the first quarter of 2015 Berlin´s office market showed a positive development with an increasing amount of lettings and decreasing vacancy. These lettings consist of a mix of large and midsize rental spaces, what gives the market a solid base. However building activity turned upwards, so that 2014/15 the number of completions amounts to over 200.000 sqm, which is the highest level since 8 years. Due to the growth in office employment, we expect office rents to further increase during the period from 2015 to 2019.
Caused by the difficult conditions on investment markets, net initial yields for office properties rose in 2008 and 2009, the year 2010 marked a turning point. The yield compression together with the rental increase, have led to rising capital growth in the market of Berlin. We expect yield compression to be well advanced in the current investment cycle. In the years to come rents will be the main driver of capital values.
Real estate investment in Germany has attracted investors during the last years. This was due to the positive economic situation and the lack of investment alternatives with a suitable risk profile. Also Berlin´s property investment market profits from this developments. Due to the high demand of domestic and foreign investors looking for investment opportunities in a low interest rate environment property yields came under pressure. For Berlin´s office market we anticipate a fair rental yield of 5.4 % during the years ahead. Thus, we regard the existing price level above its fair value.
Retail Real Estate
In the comparison of European Metropolises regarding retail real estate Berlin placed 25th with a rating result of “B”, which is unchanged compared to the 2nd quarter 2014. Feri awards the retail top locations “B+” and the side locations “C”.
On Berlin’s market for retail space, demand from luxury and international retailers brought about a stabilization in rents during the last several years. Additionally the Kurfürstendamm enhanced due to prestigious projects in the last year. The region’s potentially high purchasing power and its attractiveness as a travel destination have turned Berlin into an important test market for international retailers to enter the German market. Dynamic demand for prime locations has resulted in a shortage of supply. Due to this development, we expect rents to increase in the near term. In comparison to this retail rents in secondary locations will not change significantly. This is mainly due to the strong competitive pressure of numerous peripheral shopping centers.
Residential Real Estate
When it comes to residential real estate, Berlin placed 15th among European Metropolises with a rating result of “B+”, unchanged compared to the 2nd quarter 2014.
Many years after the German reunification, Berlin’s residential real estate market was still dominated by a high supply of available apartments, as well as low and decreasing rents. This is no longer the case. Berlin’s population has grown and its longstanding low building activity has led to a declining apartment vacancy, as well as rising rents. Berlin started to increase their building activity, nevertheless excess demand will not be dismantled within the short term. The region’s real estate market is very differentiated. Supply of high-quality apartments in preferred locations, as well as luxury apartments is quite short. By contrast, excess numbers of ordinary-quality apartments in peripheral locations are evident. On average, rents have been rising for quite a few years. They are expected to continue rising, for both new and existing units, based on our anticipation for rising demand.
Overall, a longstanding trend of falling prices on Berlin’s housing property sales market has bottomed out. The residential market has benefited from people moving back into the city from rural areas. Furthermore, high-income groups from the policy, art and business fields represent a source of strong demand. Correspondingly, a noteworthy portion of demand focuses on high-value residences in the most prestigious districts, as well as in trendy neighborhoods. Only Berlin’s suburbs are suffering from excess supply. The general building activity is expected to increase in the years to come. Currently, due to missing supply extension in the past and the trend of population growth, excess demand is in existence. Looking ahead to the years to come, one can expect purchase prices for housing property in Berlin to rise.
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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