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Why I have consistently backed the dollar
By Dr. Rainer Zitelmann
What follows is an unedited article which was published at the start of January 2015 in the IMMOBILIEN NEWS and in my FINANCE BLOG. In the article I outlined why I have been backing the dollar for many years.
As much as ever, I believe that short-term currency predictions are problematic, if not even impossible to make. In the long-run, however, it is perfectly possible to predict currency movements.
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.
In contrast to the many “finance experts” who constantly issue new recommendations, I have been the consistent proponent of the following three opinions and have made my own investments entirely in tune with these opinions:
More than 10 years ago I urged the following: Invest in apartments in Berlin. In my current book “Financial Freedom: How to Create Wealth and Hold onto It” (“Reich werden und bleiben“) I provide the example of an apartment building that I bought in Berlin in 2004 for €1 million and sold in 2015 for €4.2 million.
For the first time 10 years ago I also recommended buying gold. At the time, the gold price stood at around €11,000 per kilo: the price has since tripled.
Since 2012 my advice has been to invest in U.S. real estate and the dollar. In October 2012 the Euro was worth USD 1.30, in January 2015, as I reaffirmed my recommendation, it was at 1.20 USD, and now it is around USD 1.07.
No-one who has based their investment strategies on these three recommendations will have any regrets today. Here once more is the unedited article from January in which I explain why I back the dollar:
“The headline on the front page of the WALL STREET JOURNAL in its January edition: “Dollar Surges to 11-Year High Against Biggest Rivals.” The article continues: “Investors snapped up dollars pushing the greenback to its highest level against major currencies since September 2003.” The strength of the dollar has been making headlines in Germany too, rising to a four-and-a-half-year high against the Euro
On 22 October 2012 I published a substantive article with the following title: “The Euro Will Either Be Weak or It Will Not Be at All: The Future of the European Currency.”
I used the article to develop two scenarios:
“Scenario 1: European politicians will hang on to their political pet project of the euro “at any cost.”… The outcome will be a very weak euro.
Scenario 2: The centrifugal forces will be so powerful as to pull the monetary union apart despite any bailout attempt.…
Currency forecasts are always fraught with great uncertainty, especially short-term ones. And yet I would like to venture a prediction: The Euro is overvalued at the moment because financial markets always respond enthusiastically to short-term monetary policy measures from central banks, while ignoring long-term issues. This translates into opportunities for investors with a long-term investment horizon…” My recommendation to investors with a long-term horizon was to diversify their currency portfolios.
I have used this platform to repeatedly recommend investments in U.S. real estate. And I don’t just give advice, I live it. For some time now I have been investing more than a third of my own money in dollar investments.
Admittedly, the Euro’s downward spiral and the dollar’s strong upward march cannot continue unbroken forever. Nevertheless, I still view the USA as having much stronger fundamentals and better long-term prospects than Europe:
The banking crisis has been much more rigorously dealt with in the USA.
Unlike Europe and its Euro, the USA doesn’t have the stigma of an artificial currency.
The USA has demographics on its side and is growing, while Europe shrinks.
The USA continues to be more innovative: All of the most successful inventions over the last decade have emerged from the USA, not from Germany: iPhone, Amazon, Google, etc. As far as patents are concerned, it’s as if the rest of the world has fallen asleep.
Of course, the USA also has significant problems battling national debt and budget deficits, and they have a weak president. Nevertheless, I remain optimistic for the USA and restate my recommendation that you should invest a significant proportion of your money in the dollar.” That was my contribution from January 2015.
Read also Rainer Zitelmanns Finance Blog.
Refugee crisis exacerbates problems on the housing market
As DIE WELT reported on 10.11.2015, followed by the HANDELSBLATT on 11.11.2015, the IMMOBILIEN ZEITUNG on 12.11.2015 and the FAZ on 13.11.2015, municipalities will have to step up their investment in building new housing. A survey carried out by EY revealed that municipalities are short of accommodation for around 370,000 refugees. Existing housing shortages in urban centres have been exacerbated by the arrival of large numbers of refugees. Housing problems have been further compounded by the flight of young Germans from rural areas to urban centres. Berlin’s authorities have made €424 million available for the construction of modular housing for refugees. In addition, the stock of municipal housing is being expanded as state-owned land is released for development. These measures would enable accommodation for up to 30,000 refugees in Berlin by the end of 2016. The federal government is also making a contribution. They have quashed any plans to sell former administrative buildings, apartment blocks or barracks, and will instead convert such buildings to provide further accommodation for the refugee population. 300 contracts have already been signed to enable municipalities to use federally-owned properties, free-of-charge, as long as they are suitable for housing refugees. “New migration, demographics and real estate market forecasts”: These are the topics for a special Real Estate Roundtable in Berlin’s Maritim Hotel on 10th December 2015. Request your programme via email: info@immobilienrunde.de
36% of municipalities plan new housing for refugees
According to an EY Real Estate survey of 300 German towns and cities with populations over 10,000, authorities are soon going to run out of vacant apartments and former barracks in which to house refugees. This was reported by the IMMOBILIEN ZEITUNG on 19.11.2015. While 73% of the surveyed municipalities will primarily continue to make use of the existing stock of apartment buildings, 36% are also making plans to build new apartment buildings in order to accommodate refugees. 76% admit that they are having serious difficulties finding appropriate apartments. Objections from property owners were only mentioned by 13% municipalities as being the source of their problems. EY Real Estate has called for an extensive programme of new housing development: “It is clear that considerable investment is required over the next few months if sufficient housing is to be made available—irrespective of high vacancy rates in many locations,” said Dietmar Fischer of EY Real Estate. “New migration, demographics and real estate market forecasts”: These are the topics for a special Real Estate Roundtable in Berlin’s Maritim Hotel on 10th December 2015. Request your programme via email: info@immobilienrunde.de
New energy-efficiency standards inflate construction costs
The SÜDDEUTSCHE ZEITUNG announced on 13.11.2015 that from 01.01.2016 energy-efficiency standards for new buildings (EnEV 2016) will be even more demanding. The GdW has calculated that construction will become 7% more expensive as a result of the new standards. The energy performance of new buildings, that is the maximum amount of energy they are allowed to consume, has been reduced by a further 25%. The Federal Construction Minister, Barbara Hendricks, has said that she expects that the extra costs associated with the stricter energy performance standards will be amortised after roughly twenty years. At the same time, the Federation of Housing Construction Associations (BFW) has increased the volume of its demands to make construction less expensive. The cost of construction increased by 36% between 2000 and 2014, whereas the cost of living increased by just 25% over the same period. The federation believes that this is partly due to increased energy performance standards for new buildings. The SÜDDEUTSCHE ZEITUNG went on to report on BFW Bavaria’s Energy Conference. At the conference, the BFW’S Andreas Eisele called on politicians to stop introducing new and expensive regulations that dampen the real estate industry’s readiness to invest. After all, the housing industry is a key contributor to the energy transition. If sorely-needed housing is to be successfully delivered, the overall investment and construction climate needs to improve, remarked Eisele.
Shortage of apartments for seniors in Germany’s major cities
According to a report in the IMMOBILIEN ZEITUNG on 12.11.2015, there is a shortage of around 70,000 apartments in the sheltered housing sector in Germany’s 30 largest cities. The figures are the result of an analysis carried out by Terragon. Terragon based its findings on the number of care home places needed to serve the average of 7.1% of the population aged over 70 in these cities. For Dr. Michael Held of Terragon, this benchmark serves as a good indicator for the number of places required in sheltered and assisted living facilities, and outpatient care as a substitute for care homes. The analysis reveals that only Frankfurt and Leipzig have a surplus of such apartments for their senior citizens. Hamburg came third with 6.3 such apartments per 100 people over the age of 70. Berlin (4.6) made it well into the top half of the ranking, Duisburg (1.9), Gelsenkirchen (0.9) and Mönchengladbach (0.6) were at the other end of the table. In the 30 cities, Terragon reported a total of just under 119,000 sheltered apartments, which is equivalent to 4.5% of the population of 2.7 million over-70s. Terragon recommends that municipal housing associations should now only construct housing that complies with barrier-free standards. When land is sold to private developers, barrier-free construction should be a mandatory stipulation. It should also be a requirement of programmes that subsidise building and land development activities.
Germany’s luxury real estate popular among Middle Eastern buyers
As reported in the FAZ on 12.11.2015, there are an increasing number of Middle Eastern buyers among those interested in buying luxury real estate in Germany. This is the result of research carried out by the international property portal LuxuryEstate.com. The research reveals that 21% of the site’s Middle Eastern users are looking for luxury property in Germany. The average price of the properties that Arab buyers are most interested in is €2.2 million. For buyers from Saudi Arabia, the average price rises to €3.4 million. A majority of buyers from the United Arab Emirates are buying properties in Germany as capital investments and only a very small minority ever plan to actually move into their properties.
ZIA calls for changes to regulations that encourage mixed-use construction
The German Property Federation (ZIA) has called for changes to Federal Building Regulations (BauNVO), the Federal Emissions Control Act (BImSchG) and Technical Noise Reduction Guidelines. This was reported in DIE WELT on 18.11.2015. According to the results of a study of trends and user requirements in the residential, office and retail sectors in German cities commissioned by ZIA, it is entirely possible to develop taller and more dense real estate without sacrificing quality. Federal building regulations and emissions control legislation hinder new urban development concepts. Maximum limits for building footprints and gross floor areas should be reviewed, particularly given the desperate need for affordable housing, work and living space in Germany’s major cities. According to Andreas Mattner of ZIA, construction needs to become denser in regions with a shortage of space.
Rents in Berlin’s suburbs surge
The FAZ on 20.11.2015 reported that living in the suburbs and on the outskirts of Berlin is becoming more and more expensive. The latest market report from the Association of Berlin and Brandenburg Housing Companies (BBU) reveals that rents in traditionally cheaper suburbs such as Marzahn, Hellersdorf and Reinickendorf have been increasing at a faster rate than in any other parts of Berlin since 2014. Growth in Berlin, Potsdam and surrounding areas continues to surge. More than 300,000 new apartments are urgently required to meet this growing demand. However, there are currently 16,000 vacant apartments in towns and cities within 90 minutes of Berlin. These towns and cities could be made more attractive if efforts were made to ensure that all of Brandenburg’s 15,000-plus towns and cities could be reached from Berlin with 60 minutes. “Apartment construction in Berlin: The most interesting projects“: is the subject of a special REAL ESTATE ROUNDTABLE in Berlin’s Maritim proArte Hotel on 27th January 2016. Request your programme via email: info@immobilienrunde.de
Munich: Not enough new-build apartments to satisfy demand
As reported in the IMMOBILIEN ZEITUNG on 19.11.2015, the construction of new apartments in Bavaria’s capital continues to trail behind concrete demand for additional housing. Despite ongoing construction and a steady flow of pipeline projects, developers are not in a position to satisfy the city’s demand for 11,700 new apartments per year through to 2030, a figure determined before the massive recent influx of refugees. Anyway, currently designated development land would only provide enough space for 56,000 apartments. Competition from commercial real estate developers and home-builders is fierce, and it takes years to secure planning and building permission – factors that only exacerbate the problem. According to figures reported by bulwiengesa, roughly 2.7 million square metres of the total of 4 million square metres of development land have been allocated to the housing sector. In contrast, office projects account for 20% of the total land volume. The only sector to record falling development space was the retail sector. “New migration, demographics and real estate market forecasts”: These are the topics for a special Real Estate Roundtable in Berlin’s Maritim Hotel on 10th December 2015. Request your programme via email: info@immobilienrunde.de
Rising prices and rents in Schleswig-Holstein’s inner-cities
In addition to the towns and cities around Hamburg, the North Sea and Baltic coastal regions, it is Kiel, Lübeck and Flensburg that have seen the largest price rises, revealed the IMMOBILIEN ZEITUNG on 19.11.2015. Above-average price rises have been recorded for almost all housing types in these cities, although demand has been particularly strong in central and waterfront locations. However, some momentum has been lost in comparison with 2014. Prices are also rising in rural regions, although at a slower pace than during 2014, said Björn Petersen from the IVD Nord.
Consolidation of the commercial real estate market accelerates
According to an article in the HANDELSBLATT on 21.11.2015, the consolidation of Germany’s commercial real estate market is picking up speed. Mergers and acquisitions are identified as the most important share-price drivers for the country’s listed real estate companies over the next 12-36 months. The proportion of German companies is however very small, at 2.8%, as is the proportion of commercial real estate companies. Alstria has become the largest listed office real estate company in Germany with the acquisition of Deutsche Office. As long as the price is right, Alstria has now set its sights on IVG. DEMIRE AG and Faire Value are also getting in on the action, merging to create a company with a market capitalisation of €330 million.
Sales revenues from owner-occupied commercial real estate on the rise
Sales of owner-occupied commercial real estate (OOCRE) have risen again and look set to generate €20 billion in revenues for Europe’s businesses by the end of the year. This was revealed in the IMMOBILIEN ZEITUNG on 12.11.2015, highlighting a recent CBRE report. Far and away the most significant markets are Great Britain and Germany, responsible for 28% and 22% of total sales volumes. Trailing some distance behind is Holland at 9%, with France and Spain locked at 7% each. Office space was the most traded asset class in H1 2015, representing 38% of the total, and there was a strong focus on company-owned retail space, which accounted for revenues of €2.2 billion. Industrial real estate took a larger share of the market than its long-term average, making up 14% of sales. Sales volumes for mixed-use real estate also picked up, rising from €100 million in H1 2014 to €442 million during the first half of 2015.
Retail: Space take-up declines as peak rents stabilise and even rise
The IMMOBILIEN ZEITUNG reported on 12.11.2015 that the take-up of retail space during Q1-Q3 2015 was down by 11%, to 375,000 square metres, in comparison with the same period during 2014. JLL recorded 312 new leases in for retail space in Germany’s inner-cities in Q3. A total of 124,000 square metres was let. Peak rents in Berlin, Düsseldorf, Frankfurt, Hamburg, Hannover and Cologne rose by 2-7%. In the remaining “Top 10” cities (Leipzig, Munich, Nuremberg and Stuttgart) peak rents were solid and remain at high levels.
Comfort Study: Medium-sized cities vary wildly in attractiveness for retailers
The IMMOBILIEN ZEITUNG reported on Comfort’s new “The Future of Retail – What are the Trends in Medium-sized Cities?” study on 12.11.2015. According to Comfort, there are huge differences in the attractiveness of individual medium-sized cities to retailers. Medium-sized cities with lower levels of retail centrality, typically located close to other, larger cities, scored particularly poorly, whereas stand-alone medium-sized cities with large retail catchment areas scored more highly.
1.2 million square metres of new space for logistics
On 19.11.2015, the IMMOBILIEN ZEITUNG revealed that construction work on 50 new logistics buildings got underway during Q3 2015. An analysis by Logivest and the Fraunhofer Working Group showed that 43% of the space is for retailers and 33% is for logistics providers. The three regions with the highest levels of new-build activity are the Lower Rhine, the Rhine-Main area and the Danube region. On the same day, the IMMOBILIEN ZEITUNG also reported that North Rhine-Westphalia retains its position as a leading region for logistic real estate. During the first three quarters of 2015, CBRE recorded completion of 1.1 million square metres of new logistics space in the state. NRW scores highly with its established infrastructure and sizeable population. “Retailers and logistics companies want to be closer to end-consumers,” explains Josip Perkovic of CBRE. The fact that demand for new space is currently running so high is largely due to the impact of eCommerce on the logistics chain, combined with ongoing positive economic development in Germany.
Launch of IPH Centermanagement
The IMMOBILIEN ZEITUNG reported that IPH Handelsimmobilien and the IC Immobilien Group have merged their centre management businesses in an article on 19.11.2015. A joint venture, IPH Centermanagement, based in Munich, has been set up by the two companies. The new company launches with a team of around 60 employees and responsibility for the management of 25 shopping centres and retail parks across Germany. Peter Glöckner, previously IPH’s Head of Centre Management, is the new company’s Managing Director.
GERMAN REAL ESTATE NEWS
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Feri Real Estate Market Rating
The Feri Real Estate Market Rating provides a forward-looking assessment of potentials and risks for investment return on regional real estate markets. Ratings are based on detailed econometric forecasts of regional real estate markets including regional economic development. The rating currently includes more than 150 cities in Europe, in the United States and in Asia.
In this issue:
Real Estate Market Rating for Duesseldorf
Duesseldorf, the capital of the federal state of North Rhine-Westphalia, is located in one of the most economically important and dynamic regions of Germany. The city enjoys particular recognition as an international center for trade, services and fairs. The trade, transport and communication sectors’ aggregate share in regional production is well above German average. Duesseldorf’s very good connections to the European transport network – including an international airport ranked third in Germany – provide further key advantages. The service sector specializes in the fields of media, advertising, legal advice and consulting. Banking and insurance comprise yet another focal point of the economy. While the manufacturing output share for Duesseldorf is below the German average, the region’s manufacturing base, because of its modern, growth-intensive structure, is a positive factor in the local economic configuration. Yet Duesseldorf’s regional production, based on a diversified business mix, does not depend on any one sector.
Feri rates Duesseldorf as a business location “B+”, which is unchanged compared to the 3rd quarter 2014. It translates into “Above average potential, below average risk”. With this rating result the city ranks 22th in the comparison of European Metropolises.
Office Real Estate
Regarding office real estate Feri rates Duesseldorf “C”, which is unchanged compared to the 3rd quarter 2014. The city ranks 16th among office locations of European Metropolises. Feri awards the office top locations “C” and the side locations “C”
With total office stock volume of approx. 7.7 million sq m, Duesseldorf is one of Germany’s top 5 office real estate markets. In a national comparison, Duesseldorf’s level of economic activity in the sectors of trade, transport and telecommunication is above average, and this configuration influences the structure of demand for office space. Still, the greatest determinant of demand is activity in business-related services, media and advertising, followed by legal advisory services and business consulting. Since Duesseldorf is a regional capital, public administration constitutes an additional source of demand. A well-diversified industrial structure and a growing service sector will be key drivers for future growth in office employment.
With a rental turnover of about 89,000 sqm during the first quarter of 2015, Duesseldorf’s office market shows only weak market activity compared to the long term average. The tenants were quite loyal in terms of keeping the location and renewing leases. In addition to that, the absence of large-scale letting contracts is seen as a reason that has reduced market activity. The low level of new office development has helped to reduce vacancy rates. Indeed Duesseldorf’s well-diversified industrial structure and ongoing growth of the region’s service sector will contribute to an increasing number of office employees in the long term. This should contribute to rental growth for prime offices.
With a transaction volume for commercial property of 180 Million €, the turnover for office real estates in Duesseldorf decreased in the first quarter 2015 (minus 75% compared to last year’s result according to JLL). The limited supply in this market segment is the consequence of low building activity over the last two years. As a result, transactions of objects in secondary locations dominate the market. In general yields are under pressure, due to the high demand for office investments. Nonetheless, we expect the phase of yield compression to be in an advanced stage. In the recent property market cycle the development of rents will become the main driver of capital values in the future.
After the boom years 2006 and 2007 Duesseldorf’s investment market underwent a price correction, as both the likely potential, and the degree of risk, came under renewed scrutiny in the asset class of office properties. Lately, investors’ interest in office real estate has increased noticeable. A lack of alternative investment possibilities and the emergence of a more appropriate yield/risk profile on Duesseldorf’s office market support this development. The fair rental yield for Duesseldorf’s prime office properties is judged to be 5.4%. At present, we view prices to be above its fair value.
Retail Real Estate
In the comparison of European Metropolises regarding retail real estate Duesseldorf placed 4th 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”.
Duesseldorf is one of Germany’s top shopping cities, an internationally important retail center for fashion and highvalue consumption goods. Purchasing power is well above German average, near the top for the country. Yet, only prime locations have gained from this elite status in terms of rising retail space rents. The Königsallee is one of the top locations in Germany. In contrast, Duesseldorf’s secondary retail locations registered sharp rent declines due to shopping centers in surrounding areas. Duesseldorf will remain one of Germany’s leading retail venues. Due to continuously low retail space supply, rising retail rents are expected in the future.
Residential Real Estate
When it comes to residential real estate, Duesseldorf placed 12th among European Metropolises with a rating result of “B+”, unchanged compared to the 3rd quarter 2014.
Long-term low building activity and the rising population have led to a shortage of rental apartments. The ongoing trend towards smaller household size (i.e., rising numbers of one- and two-person households) has contributed to this as well. City planning now faces the challenge of mobilizing building lands, as well as planning alternatives such as the conversion of commercially used space to living space. Building permits increased since 2012. During 2015 rising rents can be expected on Duesseldorf’s apartment market This is caused by low market vacancy rates and the rising number of households.
Due to a stable demographic outlook and fairly favorable projections for incomes and overall economic activity, a continuous increase of demand for property ownership is expected on Duesseldorf’s residential purchase market. This is heavily supported by
the current low mortgage interest rate. After housing activity has reached the lowest point since 20 years in 2011, building activity has risen in 2012 and will further rise in 2013 based on the building permits of January to September 2013.
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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