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The Sorcerer’s Apprentice Draghi and the Future of the Euro
By Dr. Rainer Zitelmann
“Great is my dismay!
Spirits raised by me
Vainly would I lay!”
I was reminded of these words from Johann Wolfgang von Goethe’s “The Sorcerer’s Apprentice” as I listened to Mario Draghi’s announcement on Thursday and watched the euro being driven higher as the DAX collapsed. I expect that the strength of the capital markets’ reactions to his speech surprised even Draghi himself. He will probably think he has “learned” from this, and it likely won’t be too long before he backtracks and announces a further escalation of the ECB’s quantitative easing programme.
The madness of Draghi’s monetary policy, a policy he is widely celebrated for, is a one-way street that leads to a dead end. The markets react to the ECB’s cheap money like drug addicts chasing an ever-stronger fix. The fact that Draghi has left the monetary floodgates wide open is no longer enough to satisfy the markets. Even confirmation that his insane policies are to be extended for a further six months – until at least March 2017 – was not enough for the markets. The market had been expecting a massively expanded quantitative easing programme from Draghi, potentially up from €60 to €70 billion per month.
The disappointed reactions show that it will simply not be possible to return to normal monetary policy any time soon. One can only imagine what would happen if the ECB implied that it was thinking about slightly reducing its bond buying programme, or, heaven forbid, bringing it to a close. When the markets reacted with such bitter disappointment as Draghi failed to deliver the expansion and extension they had hoped for, the insanity of the central bank’s policy was clear for all to see. So, there’s to be no substantial change to monetary policy, and meaningful interest rates remain a thing of the past in Europe. A situation which will only serve to add further fuel to the real estate boom.
The euro rose more on this single day than it had on any other day over the previous six-and-a-half-years. Despite this, I don’t see any prospect of a long-term comeback for the currency. In the long-run, the euro is going to become even more irrelevant. The events of Thursday pale in comparison with what happened two days earlier when the International Monetary Fund reviewed the composition of its XDR currency basket, the weighted basket of the world’s most prominent currencies. The Renminbi (Chinese Yuan (¥)) is being added and will make up 10.9% of the basket, while the euro is being reduced from 37.4% to 30.9%.
The long-term decline in the euro’s importance is also evident when one looks at the proportion of euros held in central banks’ currency reserves – the euro has fallen from 28% at the end of 2009 to as low as 20% today. The euro’s share of international remittances is a further indication that the single currency’s significance is slipping, having fallen from 44% in 2012 to a new low of 28% today. At the same time, the dollar’s share has risen from 29% to 44%.
I think that these developments will continue, despite the considerable short-term gains made by the euro as a direct reaction to Draghi’s words. Draghi will “learn” from his speech: He will accelerate his ultra-loose monetary policy and make sure to signal this fact to the markets at the earliest possible opportunity. And what about me? I’ll be sticking with the dollar.
Read also Rainer Zitelmanns Finance Blog.
Planned Tenancy Act Reforms and Special Tax Write-Downs for New-Build Rental Apartments
The FAZ, HANDELSBLATT, SÜDDEUTSCHE ZEITUNG and DIE WELT all reported on the Federal Justice Minister’s plans for further reforms to Germany’s tenancy laws on 27.11.2015. According to the plans, the share of modernisation costs that can be passed on to tenants in the form of rent increases is to be further tightened and will only apply to modernisation measures deemed as “necessary.” An internal ministry paper proposes that landlords should only be able to pass 8% of modernisation costs on to tenants instead of the current 11%. The coalition agreement between CDU, CSU and SPD only referred to a reduction to 10%. In addition, a cap has been proposed that would allow rents to rise by no more than a maximum of 50%, or four euros per square metre, over an eight year period after modernisation measures. The plans also aim to soften the financial impact of modernisations on tenants. One idea floated in the paper is to impose a limit on gross cold rents to ensure that they do not exceed 40% of a household’s net income. The CDU and CSU, Angela Merkel’s parliamentary grouping, has already said that they view the plans as going too far. “The new regulations should not be allowed to eradicate investment in Germany’s housing stock,” said Jan-Marco Luczak of the CDU. “Combined with the Mietpreisbremse rental brake, this would be another massive disincentive and would rob the new-build housing market of its momentum.” The ministry also proposes extending the reference period used to determine local benchmark rents in the country’s rent indexes from four to ten years in order to include more leases in the official indexes.
At the same time, according to the FAZ and thee BÖRSEN ZEITUNG on 27.11.2015, the German government is also evaluating tax incentives to give the construction of rental housing a boost. Wolfgang Schäuble, Germany’s Finance Minister, and Barbara Hendricks, the Construction Minister, have recommended special tax write-downs for the years 2016-2018. If enacted, these will apply in areas identified as having “overheated” housing markets. The plans would allow a write-down of 10% in the first and second years after construction is completed, with 9% allowed in the third calendar year. A number of conditions have been attached if the federal government is to go ahead with the plans: Germany’s state governments would have to bear a share of the shortfall in tax receipts and also agree to suspend any plans to increase property transfer taxes for the duration.
Eurostat: Germany has the Lowest Levels of Home-Ownership in Europe
As the FAZ revealed on 24.11.2015, only 52.5% of the German population was living in their own home in 2014, whereas the average home-ownership rate across Europe stood at 70.1%. These facts were contained in figures released by the European Union’s statistics office, Eurostat. When measured against the total number of households in the country, Germany’s home-ownership rate falls further, to below 50%. According to Eurostat, the situation in Germany has historical roots and is strongly connected to post-World War Two reconstruction, which was only possible because it focussed almost exclusively on the construction of large apartment blocks and multi-family housing. Eurostat’s ranking also revealed that the countries with the highest home-ownership rates are the continent’s poorer countries. Romania has the highest home-ownership rate (96.1%). The EU’s richer nations all have lower rates. Eurostat also investigated the affordability of housing. 11.4% of the population of the EU spend more than 40% of their disposable household income on housing. Anything above 40% is classed by Eurostat as a “housing cost overburden.” 40.7% of Greeks are overburdened by their housing costs, followed by the Germans (15.9%) and the Danes (15.6%). In contrast, housing costs are especially affordable in France (only 5.1% are overburdened), Cyprus (4,0%) and Malta (1.6%).
Share of owner-occupied households across the EU in (2014)
from: “People in the EU in 2014. 7 out of 10 people in the EU live in owner-occupied housing”, Eurostat press release 204/2015 – 23 November, 2015.
High Prices Mean Attractive Sales
Market researchers from Empirica have warned that the risks of a real estate bubble have grown. Their warnings were picked up by the HANDELSBLATT on 26.11.2015. Price rises for real estate, in particular condominiums, are identified as inflating the bubble. In 110 regional and urban municipalities, buyers are now paying more than tenants. The discrepancy is most extreme in the larger cities. Asking prices in Q3 2015 in Hamburg reached an average of 29.3 times net annual rental income (up from 28.5 times the previous year). Rental yields were down from 3.88% to 3.41%. The Berlin broker Jürgen Michael Schick recommends: “From a portfolio comprising a number of apartment buildings it certainly can make sense to sell individual objects where they offer the potential of releasing capital gains.”
German Hotel Market Surges
The German hotel market is reaping the benefits of soaring numbers of holidaymakers, reported the FAZ on 23.11.2015. Next year should see 193 new hotels opening their doors, offering an additional 23,300 beds in the two-star and above hotel categories. These developments were revealed in new figures published by Tophotelprojects, the Rotenburg-based market observers and commentators. Demand for beds is not just being driven by increasing numbers of German overnight guests, but also by growing numbers of foreign holidaymakers. In comparison with the rest of Europe, prices remain low. The trend is towards larger hotels. While the number of beds rose by 0.5% in 2014, the number of operating hotels fell by 2%.
Investments in Care Homes Offer Opportunities for Investors
According to CBRE, there are currently a number of sizeable care home portfolios on the market, promising transactions in the many hundreds of millions. This was reported on by the IMMOBILIEN ZEITUNG and HANDELSBLATT on 26.11.2015. Germany’s population is ageing and investment of between €54 and €73 billion is required in care home places by the year 2030. “Institutional investors in particular are planning more acquisitions,” said Jan Linsin from CBRE. “We expect interest in this asset class to increase continuously, especially as German institutional investors have now joined foreign institutional investors in recognising the chances within the sector and are ready to exploit the opportunity to achieve attractive yields,” said Dirk Richolt from CBRE. Jan-Hendrik Jessen believes that annual returns of 6.5% (using the Association for Investment Fund Management Companies and Investment Funds (BVI) definition) are sustainable and realistic. By 2017, he wants to have increased the volume of Patrizia’s LB-Pflege-Invest Deutschland I care home special fund to €500 million. Hemsö also intends to increase its stock of German care homes to at least €450 million by 2019. The Swedish company currently manages a portfolio of 26 care homes worth €275 million.
Real Estate Financing via Crowd-Investing
As the IMMOBILIEN ZEITUNG reported on 03.12.2015, the idea of using crowdfunding to finance real estate is becoming more and more appealing to private investors and a growing number of institutional investors such as family offices. However, the suitability and success of this type of financing has been questioned. Within the banking sector, perceptions of crowdfunding platforms ranges from scepticism to acceptance. Providers of classical real estate financing have repeatedly criticised a fundamental lack of transparency and weaknesses in project planning, both of which mean that the potential for risky and dubious investments is high. Nevertheless, it is definitely worth examining the various platforms. For example, Mezzany, operated by Jürgen Kelber and Gunnar Sauer, has already established itself with a strong reputation and unconventional financing structure. Kelber’s project financing company covers all of the costs until the final building permit ha sbeen issued. Only then is the crowdsourced equity used.
High Demand from Seniors for Housing in Germany’s Cities
According to a new study published by the IW Cologne, almost 80% of Germany’s seniors intend to continue living in a large city once they retire, reported DIE WELT on 01.12.2015. Despite the fact that housing construction has picked up in Germany’s major cities, this extra demand will only serve to aggravate existing housing shortages, particularly as more and more young people are also moving to the biggest cities. In addition, demand for space per capita is also set to increase from 46 square metres now to 52 square metres by 2030. The shortage of housing has already been exacerbated by the recent influx of large numbers of refugees. The GdW estimates that Germany is lacking 800,000 residential units.
Criticism of Tax Advantages for Apartment Construction
On 03.12.2015, the HANDELSBLATT reported on arguments triggered by proposals from Germany’s Finance Minister, Wolfgang Schäuble (CDU), to raise tax write-downs for housing construction to 10%. Germany’s federal states are so far divided on whether they can support (and bear some of the costs of) Schäuble’s proposals. In particular, Berlin’s state authorities could have serious problems with financing the subsidies, as it would mean that they are unable to produce a balanced budget in keeping with federal legislation. There is general agreement that any subsidies would need to be repaid if the real estate is sold, and that rent caps would also need to be introduced. “Apartment Construction in Berlin: The most interesting Projects”: This is the topic of a special BERLIN REAL ESTATE ROUNDTABLE on 27th January, 2016 in the Maritim proArte Hotel Berlin. Request your programme via email to: info@immobilienrunde.de
More Restrictive Tenancy Laws Unleash Criticism
In an article on 03.12.2015, the IMMOBILIEN ZEITUNG reported on a new, more restrictive, draft of Germany’s tenancy laws. The draft legislation would restrict the proportion of modernisation costs that a landlord can pass on to tenants to just 8%, down from 11% under current legislation. A second proposal would mean that landlords would not be allowed to increase rents by more than 50% over an eight-year period. In addition, where tenants can demonstrate that they are having financial difficulties, it would be easier for them to block modernisation measures. The proposals were met by criticism from a wide range of sources. Jürgen Michael Schick of the IVD described the draft legislation as a “frontal attack on the economic viability of investing in, and modernising, the country’s housing stock.” The Federal Minister of Justice has unveiled “a master plan to scare off private landlords and investors,” commented Schick.
Controversy Surrounds Energy-Efficiency Regulations in Construction Ministry’s “10 Point Programme”
The “10 Point Programme” issued by Germany’s Federal Construction Ministry contains overly vague definitions of energy-efficiency targets, reported the SÜDDEUTSCHE ZEITUNG on 04.12.2015. In response, Jürgen Michael Schick, President of the IVD, demanded a “practical reboot of energy saving requirements.” The paper also reports that Germany’s Energy Saving Ordinance (EnEV) and Renewable Energy Heat Act need a “fresh conceptional and structural start.” A further problem surrounds attempts to determine responsibility for enforcement of the regulations as construction typically falls under the remit of municipalities and regional authorities.
Investors Keen on Serviced Apartments
In its edition on 03.12.2015, the IMMOBILIENZEITUNG reported that there is set to be a 20% increase in serviced apartments. Both investors and project developers are keen and are entering the sector in ever increasing numbers. Following the completion of around 1,000 new apartments this year, a minimum of 2,500 are due to enter the market in 2016, with a further 1,700 arriving in 2017. There are currently about 23,000 serviced apartments in Germany. The market remains attractive, as demonstrated by figures published by STR Global, the hotel sector data and benchmarking company: In Q1-Q3 2015, average occupancy in Berlin stood at 81% (+4.7% year-on-year), in Hamburg at 84.9% (+5.1%) and in Frankfurt at 68.4%. An apartment in Berlin costs an average of €100.70 per night (+4%), in Hamburg €116.60 (-6.8%) and in Frankfurt €119.20. According to Spitra, the reason for Hamburg’s price drop was that a number of cheaper operators entered the market.
Vacancy Rates in Growth Regions Continue to Fall
According to a study carried out by Empirica on behalf of CBRE, the vacancy rate for above-ground-floor apartments was down to 3% at the end of 2014, representing 20,000 less vacant apartments than in 2013. The study was picked up on by the SÜDDEUTSCHE ZEITUNG on 04.12.2015. The study’s results highlighted major differences between regions with growing populations and regions that have been losing inhabitants, said Michael Schlatterer from CBRE. Vacancy rates have been stagnant for years in declining regions, whereas vacancies in growth regions have fallen for eight years in a row.
Frankfurt’s Condominium Market in Good Health
According to a study published by bulwiengesa, Frankfurt’s central and Sachsenhausen districts are among the city’s most expensive, whereas the city’s eastern districts remain comparatively cheap, reported the IMMOBILIEN ZEITUNG on 03.12.2015. The price for new-build condominiums varied between €2,600 and €16,000 per square metre. Last year, prices for condominiums in Frankfurt’s central districts rose by 7.2% to €5,375 per square metre. Further price increases are predicted over the next few years. The study’s figures are based on an analysis of 86 project developments comprising a total of 3,887 units. Furthermore, the population of Frankfurt is expected to grow by almost 100,000 by the year 2030.
German Office Market: Rents up, Yields down
As reported by the BÖRSEN ZEITUNG on 02.12.2015 and the IMMOBILIEN ZEITUNG on 03.12.2015, office rents in Germany are increasing in both prime and secondary locations. The IVD’s “Commercial Property Index” reveals that particularly strong increases have been recorded for standard-quality offices in Germany’s biggest cities, as well as for general office rents in towns and cities with populations of between one- to two-hundred thousand. At the same time, vacancies have fallen even further. Construction in 2016 will also be insufficient to maintain supply at current levels. The articles went on to report on a survey of real estate companies such as Patrizia, which revealed that peak office rents in Germany’s major office centres are expected to fall significantly. The survey’s respondents had not only revised their yield forecasts for 2015 downwards, but are also factoring in a decline of 10 basis points for 2016. Prime yields in Hamburg, Berlin and Frankfurt are predicted to stand at between 4.0% and 4.4% by the end of 2016. strong>”2016 Kick-off Event: Institutional Investors’ Real Estate Strategies”: is the topic of our special event on 24th February 2016 in the Steigenberger Hotel in Berlin. Request your programme by email to: info@immobilienrunde.de
Gastronomy Plays a Crucial Role in Shopping Centres
A study published by CBRE shows that almost one-third of shopping centre visitors go to a shopping centre in order to eat and drink. The SÜDDEUTSCHE ZEITUNG highlighted the study in its 04.12.2015 edition. A total of 22,000 people from 22 different countries were surveyed. Modern shopping centres are much more than simply retail temples, said Jan Linsin from CBRE. In order to satisfy the rising demands of consumers, shopping centre operators need to ensure that they offer a wide range of high-quality food. In doing so, operators need to be creative, particularly when it comes to factors such as implementing new technologies.
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 Innsbruck
Innsbruck is an important trade and transport center. Together, these two sectors contribute a very significant share of regional production. The transport links are very good – a location on a major north-south axis, one of the main routes through the Alps, will enable Innsbruck will profit from growing trade between the industrial zones of northern Italy and southern Germany. Traditionally, Innsbruck has been one of the Alps’ main tourist areas, so tourist services also feature notably in the region’s economy. The research infrastructure is very good: Innsbruck is the site of a university, a medical center, and several colleges and research institutes. Cooperative programs linking scientific research establishments with business enterprise provide a framework for innovation-driven growth. But Innsbruck, like most of Austria, will suffer rather appreciably from the current economic slump. In the short term, key indicators of the real estate market will exhibit a negative tendency.
Feri rates Innsbruck 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 8th in the comparison of European Centers.
Office Real Estate
Regarding office real estate Feri rates Innsbruck “B”, which is unchanged compared to the 3rd quarter 2014. The city ranks 6th among office locations of European Centers. Feri awards the office top locations “B” and the side locations “C”
After a major expansion of Innsbruck’s stock of office space during the mid-1990s, office rents in the region fell significantly. However, by 2003 the loose supply showed initial signs of finally being absorbed, and in 2005 both inner city and suburban office space registered substantial rent increases. The central city office segment, in particular, posted a remarkably strong rent increase that year. But then the market performance turned lackluster once more, and during the current recession, relatively moderate rent declines will be unavoidable. Once the expected economic recovery sets in, though, rents should rise again in the coming years. Increasingly, potential tenants are seeking superior modern facilities, advantageously located with good transport connections. Offices that meet these criteria are the objects most likely to show a decisively positive rent performance.
Retail Real Estate
In the comparison of European Centers regarding retail real estate Innsbruck placed 17th with a rating result of “D”, which is downgraded to the 3rd quarter 2014. Feri awards the retail top locations “D” and the side locations “C”.
Innsbruck is a supra-regional retail center. In the mid-1990s retail rents dropped significantly in line with declining tourism. Additional competitive pressure from shopping centers in surrounding areas tends to siphon off purchasing power from Innsbruck’s city center. In the middle years of the present decade, rents for retail space in Innsbruck stabilized, even posting some hefty increases for shops in the best locations. In the course of the recent economic downturn, this trend was interrupted. Retail rents are forecast to increase just moderate in top locations and in secondary locations.
Residential Real Estate
When it comes to residential real estate, Innbsruck placed 17th among European Centers with a rating result of “C”, unchanged compared to the 3rd quarter 2014.
For well over a decade, the rent performance on Innsbruck’s apartment market has been highly variable – the trend has frequently shifted from negative to positive or vice versa, and many of the rent increases and decreases have been of high magnitude. In Innsbruck, as in other parts of Austria, federal programs that promoted residential building projects contributed to these unstable market conditions. Rent decreases have usually been steepest for plain, small, mostly older apartments. Conversely, well-equipped apartments in preferred locations post rent increases fairly consistently. In coming years, new building activity of rental housing units is expected to be low. Once an economic recovery takes hold, rents for both existing and new apartments are expected to rise steadily for the rest of the forecast period.
Federal programs to promote residential building have had an even more pronounced effect on Innsbruck’s market for the purchase of housing property than on its rental market. Prices fell for a number of years, and an oversupply of ordinary, average dwellings has not yet been absorbed. By contrast, the supply of homes in good and top-quality locations is already short, so such properties meet with strong demand, and higher-quality properties fetch high prices. Due to Innsbruck’s constricted topography, people looking for family homes tend to buy elsewhere, in neighboring communities, where houses in this segment are more available. Ongoing reduction of the region’s oversupply of houses and condominiums, in line with an expected trend of steadily but moderately rising demand, will enable prices to rise, though only after this year. Residences in the inner city area are likely to show the biggest price increases.
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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