2015-11-10

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Forbes: The world’s most influential politicians: Putin – Merkel – Obama

By Dr. Rainer Zitelmann

According to the world famous ranking published by Forbes magazine last week, Putin, Merkel and Obama (in that order) are currently the most powerful people in the world. This ranking says a great deal about, as well as going a long way towards explaining, why the world has been rocked by serious crisis after serious crisis over the last few years without any real prospect of lasting solutions on the horizon.

Obama is without a doubt one of the weakest presidents in US history. He may be an excellent public speaker and political campaigner, but the fact that he is so resistant to outside advice makes him a poor president indeed. There is an excellent book that I cannot recommend highly enough, aptly titled “The Amateur,” which paints an unsparingly honest picture of Obama: The Amateur – by Edward Klein.

Following his election in 2008, many hailed Barack Obama as a political messiah. He was awarded the Nobel Peace Prize even before he had actually achieved anything. In Germany he has largely been able to retain his positive image. The exact opposite is true back home in the United States, where he not only attracts extreme criticism from Republican sympathisers, but also from a large number of his former supporters. Hillary Clinton is one of his severest critics. She has been very clear on why she couldn’t serve longer as Obama’s Secretary of State. His administration’s policy towards Syria, which she sharply criticised last year, is just one example of Obama’s total failure to deliver on his earlier promises.

Putin’s strengths simply serve to reflect Obama’s weaknesses. Putin is a ruthless, power-hungry politician who has coldly exploited Obama’s failings in his pursuit of an aggressive and expansionist foreign policy. As far as Russia’s economy is concerned, Putin has delivered very little. Russia is still a country in which corruption thrives, dependent almost exclusively on oil and gas.

And Merkel? Although she talks more about “sustainability” than any German Chancellor before her, the policies she has enacted have delivered exactly the opposite. The long-term problems created by Merkel’s misguided policies, such as her approach to rescuing the Euro and her mismanagement of the energy transition and mass migration of refugees, are going to place tremendous burdens on Germany and its future generations.

I actually cannot think of another German Chancellor with a worse record. Adenauer fought hard for to establish West German post-war sovereignty and – along with his successor Ludwig Erhard – to establish market economics. Willy Brandt initiated a process of reconciliation with our eastern neighbours. Helmut Schmidt pushed Nato’s double-track decision of 1979 through against the wishes of his own party, one of the key factors in the later collapse of the Soviet Union. Helmut Kohl made the most of the opportunities presented by German reunification and Gerhard Schröder, with his Agenda 2010 – also in the face of considerable opposition from within his own party’s ranks – made Germany competitive once more and established the foundations of Germany’s current economic strength. Schröder actually contributed more to today’s positive economic climate than Merkel has since she took over the reigns.

What has Angela Merkel achieved? Together with her SPD coalition partners, She has rolled back some of Schröder’s key reforms, extended the reach of the state (minimum wage, Mietpreisbremse rent cap, etc.) and failed to introduce a single forward-looking reform of her own. Instead, with a series of legally questionable decisions, she has created a series of massive problems for Germany’s future.

Above all, Merkel’s chancellorship has become synonymous with three (supposedly “inevitable”) decisions, each of which will cost tens to hundreds of billions:

Greek bailout: Greece has been bankrupt for ages, even if the fact is not acknowledged by officials. The renowned Ifo Institute and the Institute of German Economics (IW) have both calculated the costs of saving the Euro. The Ifo Institute estimates the cost of a Greek default at €89 billion. The IW places the costs at €80 billion.

Refugee policy: Also based on calculations from the Ifo Institute, the refugee crisis will cost Germany €10 billion in this year alone. The figure is based on the arrival of 800,000 refugees; in reality the final figure is likely to be considerably higher.

Energy transition: A whole range of estimates have been published on the costs of the energy transition. The current Chancellery Minister Altmaier mentioned a figure of €1 trillion in February 2013. The figure on the government’s website is much lower, “Investment of up to €550 billion will be required for the energy transition by the middle of the century.” An IW study reveals that electricity consumers alone are forking out €28 billion a year for the energy transition.

The three decisions that have led to these costs are all linked with serious legal breaches:

Greek bailout: Numerous contractual provisions have been violated, in particular the Maastricht Treaty’s prohibition on economic bailouts and the contracts that established the ESM rescue package.

Refugee policy: For months now there have been almost daily violations of established law, in particular against the provisions of the Dublin Agreement, which are still legally valid.

Energy transition: Decommissioning Germany nuclear power stations in the wake of the Fukushima catastrophe was unlawful. This fact has since been confirmed by Germany’s highest court.

Forbes latest list of the world’s most powerful people is a depressing affair. My mind is drawn back to the days when Ronald Reagan and Margaret Thatcher were the most influential politicians on the international stage. Politicians like these, with strong principles and policies that shaped the future, are sadly nowhere to be found today.

Read also Rainer Zitelmanns Finance Blog.

Still not enough apartments being built in Germany

Asking rents up by 9.1 % in Berlin

According to the most recent “Cost of Renting and Housing” study published by the Federal Ministry of Transport, Building and Urban Affairs, the market for rental apartments has continued to tighten in many regions across Germany. This was reported on by the FAZ on 29.10.2015. The ministry identifies problems caused by housing shortages and rising rents as being most severe in metropolitan areas, large cities and university towns. The study reports that asking rents in Berlin are up by 9.1% over the last twelve months, while in Stuttgart an increase of 6.8% has been recorded and in Wolfsburg rents have climbed by an astonishing 19.1%. Newly built rental apartments have been put on the market at €15.50 per square metre. In Frankfurt am Main, Hamburg and Stuttgart tenants moving into new build rental apartments are being charged an average of between €12.50-13.00 per square metre. Rents have risen over the last few years in every region of Germany. Asking rents in Germany’s metropolitan areas rose by almost 5% per year between 2011 and 2014, reaching €8.79 per square metre. Rents increased at a slower pace, 2.5%, in smaller urban municipalities and the pace was slower still in rural areas, at 1.8%. Roughly half of all households pay gross cold rents of between €300-400 per month and around a quarter pay between €500-700 a month for their rented apartment.

Historically low interest rates are driving mortgage banks abroad

As DIE WELT reported in its 28.10.2015 edition, insurance and fund companies are providing stiff competition to Germany’s mortgage banks (Pfandbriefbanken) when it comes to lending. While low base rates and the ECB’s massive government bond buying programme mean that the mortgage banks could pretty much refinance the loans they have issued on the capital markets for free, the mortgage banks are having to fight insurers and credit funds for every single customer. It has got to the point that competition in Germany’s real estate markets is so heated that yields are dropping significantly. A new study published by IREBS claims that the rapid growth in the volume of business done by commercial real estate financiers has now passed its peak. From 2011 to 2013, lenders saw their new business growing by up to 22% per year. In 2014 the figure was more than 9%. “This year we are looking at just 8.8%,” said Professor Tobias Just from IREBS. As a result, a growing number of mortgage banks have been increasing their engagements outside Germany.

Repayment rates for home mortgages rise again

On 05.11.2015, DIE WELT reported that German homeowners have once again stepped up the rate at which they are repaying their mortgages. The average rate has risen above 3% for the first time. This is revealed by a study carried out by the mortgage brokers Dr. Klein & Co. Low mortgage interest rates, currently averaging just 1.6%, are the major factor. German buyers are shying away from the risks associated with big mortgages. September saw the size of the average mortgage fall again, down to €164,000. At the same time a year earlier the figure was €169,000. A parallel development has seen homebuyers increasing the proportion of equity capital they are using, rising from 21.19% last year to 22.37% this year.

Germany’s High Court approves Berlin-wide rent increase cap

As reported in the HANDELSBLATT on 05.11.2015, Germany’s High Court has confirmed the legality of the 15% rent increase cap that has been introduced across the whole of Berlin by state authorities. Even though this specific judgement only applies in Berlin, the court’s decision has been interpreted as sending out a signal to the other eleven federal states that have introduced similar caps. Some commentators also believe that the judgement could have an impact on the introduction of Mietpreisbremse rental price brakes given the similarities. In both cases there have been heated discussions about whether restrictions on landlords’ abilities to raise rents should only be imposed in districts with over-heated housing markets, or whether it’s better to introduce them across the board.

Hurdles for new housing construction in Berlin

The IMMOBILIEN ZEITUNG on 05.11.2015 examined the numerous hurdles real estate developers need to overcome if they are to deliver badly needed new housing projects. One of the major factors hampering developers is that the poorly staffed building authorities in many of Berlin’s districts are totally overstretched. Communication is nigh on impossible and building permits are endlessly delayed because the staff needed to process applications efficiently are simply not available. Another major problem that makes construction in Germany’s capital so difficult is the shortage of building land. This shortage is something of an open secret. Berlin’s Senate claims that there is enough land available for construction. The city’s Urban Development Plan 2025 (StEP) lists 24 large-scale new building areas that are ready to be built on in the short- and medium-term. This would provide enough space for 43,000 new apartments. The reality looks quite different though: the Senate has voted to redraw its housing policy. As a result, Berlin has stopped selling state-owned plots to the highest bidders, instead selling clusters of land. This change in policy has caused the market to grind to a standstill. Private landowners have adopted a wait-and-see tactic in the hope of prices rising further for the land they once bought so cheaply. Last but not least, the state of Berlin, with debts of around €60 billion, simply doesn’t have enough money. Building affordable housing has become an expensive undertaking, particularly thanks to energy-efficiency regulations, fire safety specifications and increasingly demanding accessibility requirements. One solution could be offered by the €120 million federal programme to develop modular construction techniques. The programme aims to deliver apartments in over-heated housing markets, such as Berlin, at rents of €280 per month (including heating and warm water). Funding of up to €500 per square metre is available. Even so, accessing this money in Berlin won’t be easy.

Berlin first choice for sophisticated real estate buyers in Germany

The HANDELSBLATT on 06.11.2015 revealed that Berlin’s luxury property market is attracting ever greater attention from wealthy foreign private investors. “We are on the verge of breaking through the ten-million-euro mark for exclusive penthouses,” said Thomas Zabel from the Zabel Property Group. Zabel observes that high net-worth overseas buyers no longer view Berlin residential property simply as a lucrative investment. They also view the city as, “a place where it is worth maintaining a residence.” As a result, wealthier buyers want more luxurious features, which leads to higher prices. A concierge is an absolute “must” for sophisticated buyers. They don’t merely want a doorman who accepts deliveries, but a concierge who provides all manner of services for them. This is the type of concept behind Frankonia Eurobau’s Schinkelplatz ensemble in Berlin-Mitte, on which ground will soon be broken.

Property in Berlin remains in demand

HANDELSBLATT and WIRTSCHAFTSWOCHE both reported on 23.10.2015 that demand for property in Berlin continues to rise. Both highlighted the fact that the city’s population just keeps on growing. In the last three years alone, the city has added 135,000 inhabitants. “The trend looks set to continue, without any substantial change, for the next ten years”, forecast Manfred Binsfeld of Feri EuroRating. As the construction of new housing cannot keep pace with these levels of population growth, prices and rents are set to climb further. “Purchase prices have been rising at a much faster rate than rents in comparable areas, which has led to declining yields,” said Ulrich Jacke of Dr. Lübke & Kelber. Despite demand for condominiums flagging somewhat, buyer interest remains strong. “Berlin’s condominiums are enjoying an extended period of unbroken popularity among both owner-occupiers and investors, especially given Germany’s historically low interest rates”, explained Jacopo Mingazzini of Accentro.

Munich: Fewer sales of residential investment properties

The IMMOBILIEN ZEITUNG reported on 29.10.2015 that sales of residential investment real estate in Munich continue to decline, despite sufficient levels of supply. The cause of the fall in sales is down to the diverging expectations of buyers and sellers. In 2014, Munich’s panel of real estate valuation experts registered €917 million of transactions, three years earlier the figures were well over €1 billion. The downward trend continued in H1 2015. According to the panel of valuation experts, transactions were down by another quarter. According to a market report issued by Munich’s Aigner real estate brokers, the average sale price for an apartment building in Munich was €6.2 million. A majority of buyers were private investors, paying an average of between €2-3 million. Michael Goldbacher of Grenbell Advisors reports buyers paying prices of between 33 and 35 times net annual rental income for purely residential properties. Asking prices higher than these have been seen to put buyers off. Prices for properties with a high proportion of commercial tenants have weakened, down to multiples of between 25 and 27 of net rental income per annum.

SPD in Bremen still plans 19% property transfer tax for professional investors

On 29.10.2015, the IMMOBILIEN ZEITUNG reported that the SPD faction of Bremen’s Bürgerschaft council is still interested in examining proposals to increase property transfer taxes for what it sees as predatory investors. The tax has become known as the “locust tax” because it targets investors who “descend on German cities like a swarm of locusts.” Bremen’s Social Democrats are sticking to their goal of introducing a property transfer tax of up to 19% for professional real estate investors.

Mietpreisbremse rent brake largely ineffective

The HANDELSBLATT reported on 06.11.2015 that Baden-Württemberg had now become the sixth German state to enact Mietpreisbremse rental price brake legislation. By the end of this year it is expected that 250 German towns and cities will have designated areas as having “overheated” housing markets subject to rental controls. Nevertheless, the regulations won’t have the desired effect everywhere they are introduced as not every city has a suitable rent index, which is the basis for the rental controls. Even in cities with appropriate rent indexes (e.g. Berlin), rental prices have started to climb again after brief initial drops.

Successful year for German house builders

On 28.10.2015, DIE WELT highlighted what has been an extremely successful 2015 for German prefabricated and modular house manufacturers. Building permits for 9,834 prefabricated detached and semi-detached houses were issued between January and July 2015, an increase of 7.5% on the first six months of 2014. In total, 59,752 building permits were issued for new detached and semi-detached houses, an increase of 1.8% on the 58,674 permits issued during the same period a year earlier. The proportion of prefabricated homes was up to 16.5% (2014: 15.6%). The Bundesverband Deutscher Fertigbau (Association of German Prefabricated House builders) expects revenues to swell by 4.2% to €1.95 billion.

Housing associations invest in new construction

DIE WELT revealed on 28.10.2015 that Berlin’s housing associations had never invested more money in the construction of new housing than they did in 2014. The Association of Berlin and Brandenburg Housing Associations (BBU) reckons that investment in 2015 will top 2014 by a considerable margin. The association reported investment of €426 million in new construction, modernisation and maintenance during 2014, €111 million of which was invested in new building. This was the highest level of investment seen since record-keeping began 25 years ago. The housing associations expect that their invest in new housing will reach €184 million by the end of 2015.

Investment in student housing doubles

As reported in the FAZ on 06.11.2015, private investment in student accommodation in Germany more than doubled to €220 million last year. This was revealed in an analysis published by Savills. The study places Germany third in its international ranking, some way behind Great Britain and the United States, where investment totalled almost €6 billion and around €2.7 billion, respectively. Savills believes that the investment gap between Germany and the two leading countries will narrow over the next few years.

GERMAN REAL ESTATE NEWS

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.

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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 Madrid

Madrid is Spain’s capital and thus its main center of government administration, so the public sector share of regional production is significantly above average. Madrid is also Spain’s top location for trade and service industries. The service sector is strongly focused on financial services and insurance. This sectoral distribution and the city’s high national profile make Madrid Spain’s leading financial center. The importance of companies in the information, communication and software branches is continuing to rise. Especially South American countries use Madrid as a base for extending their international trade relationships. The manufacturing share in regional output, despite an ongoing decline, still exceeds the corresponding average for European metropolises. Madrid’s main industrial segments are vehiclee assembly, electrical engineering, food processing and printing. In coming years Madrid’s economy is expected to grow at about the average rate for European metro areas.

Feri rates Madrid as a business location “AA”, which is upgraded to the 3rd quarter 2014. It translates into “high potential, low risk”. With this rating result the city ranks 5th in the comparison of European Metropolises.

Office Real Estate

Regarding office real estate Feri rates Madrid “C”, which is downgraded compared to the 3rd quarter 2014. The city ranks 11th among office locations of European Metropolises. Feri awards the office top locations “C” and the side locations “B”

Madrid’s office market comprises 11 million square meters of stock. Madrid, followed by Barcelona, is the largest and most important office real estate market in Spain. The top locations are in the Central Business District (CBD) along the city’s main traffic road (“Paseo de la Castellana”), as well as other areas close to the city. Demand for prime office space comes mainly from the financial services and business-related services sectors. Due to Madrid’s position as federal capital, the large public sector is an important element in the demand for office space. The main risk is high volatility on the rental market.

The recent collapse of Spain’s economy, due to financial crisis, has driven the unemployment rate up above 20%. Given these adverse circumstances, Madrid is one of the laggards in the emergent recovery of European office markets. Office rents in Madrid have still not bottomed out in 2012, though some early signs of economic stabilization can now be observed in the CBD. The situation in regard to demand is currently still characterized by cost-cutting efforts rather than space expansion. The vacancy rate still continues to increase. Rents will not begin to recover before 2014. The Spanish economy shows only little signs of recovery and restructuring. Thus, we expect rents to increase at a below average annual rate.

At the peak of the recent investment cycle yield levels in Madrid climbed to speculatively excessive heights. Since summer 2007, rental yields have increased by 200 basis points due to necessary price adjustments. Even though rents are still decreasing, risk-averse investors have taken advantage of the now-favorable price level to acquire top-quality properties in the prime segment since 2010. International investors, in particular, show strong confidence in the market’s profit potential after the current recession has run its course. Since mid-2012 further uncertainties in banking and public finance fields have facilitated moderate rising yields.

Initial yields have currently surpassed the ‘fair value’ initial yield by 40 basis points. Rental yields estimated by Feri are 5.8%. The market has reached this level due to a weak rent performance and a further uncertainty about the future of the Euro on the capital markets. The current price level thus supports favorable purchase opportunities, provided solidifying positive expectations on the rental market. However, net initial yields will decrease only if a reduction of the high risk premium that capital markets still offer will take place.



Retail Real Estate

In the comparison of European Metropolises regarding retail real estate Madrid placed 2nd with a rating result of “A”, which is unchanged compared to the 3rd quarter 2014. Feri awards the retail top locations “A” and the side locations “A”.

Madrid’s favorable economic development and strong income growth induced a sharp rise in retail rents beginning in the mid-1990s. Demand is greatest for retail space in Madrid’s historic center, which is also the city’s most frequented shopping area, largely because of heavy tourist traffic. As opportunities to add more retail shops in the inner city are limited due to lack of space, as well as tight planning restrictions, no large supply expansion can be expected. It can be assumed that after current consumer reluctance wanes rents for retail shop space in both prime and secondary locations will rise at a steady rate in the coming years.



Residential Real Estate

When it comes to residential real estate, Madrid placed 16th among European Metropolises with a rating result of “B”, upgraded to the 3rd quarter 2014.

Rents for both existing and new apartments had risen continuously for several years before the global financial crisis and recent collapse of Spain’s home buying market set in. Positive economic trends led to population growth with new residents coming from both Spain and abroad. This had a positive impact on rents, which slowed significantly in 2009. Moreover, amid the recent economic downturn, rental housing has become a more important segment in Madrid, which historically preferred home ownership as opposed to renting. Demand should stay solid, with the greatest focus on existing apartments in Madrid’s historic districts. Rents for both existing and new apartments are projected to rise steadily over the forecast horizon.

During the real estate boom residential property sale prices rose sharply, outpacing the corresponding rate of increase in apartment rents. Spain’s traditional strong preference for home ownership provides noteworthy support for demand in this market segment. Favorable financing terms coupled with high demand led to an extraordinary run-up in prices. Price increases in the condominium segment outpaced the rate of increase for houses. However, yearly price increases started to slow in 2004, as affordability constraints emerged. After the housing market bubble burst in 2008, prices have fallen continuously. Only if massive oversupply on Madrid’s residential property purchase market can be reduced and disposable incomes are increasing again, prices should then 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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