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Power to the (Tenant) Councils!
Berlin Contemplating Law to Deny Public Housing Companies Credit Checks and Evictions over Arrears
by Dr. Rainer Zitelmann
“All power to the soviets!” ran the slogan touted by the Bolsheviks during the October Revolution in Russia. And since the days of the Paris Commune that Karl Marx admired, Germany’s left, socialists and Greens have been intrigued by the idea of a democracy based on the council system.
Lately, that fascination has inspired the idea to more or less turn control of the municipal housing companies over to so-called tenant councils. At least that is what a referendum initiative intends to accomplish. Berlin’s Senator for Urban Development Andreas Geisel already praised the proposal, while admitting to misgivings about the massive inroads the scheme would make on the state coffers. He let it be known that the Senate of Berlin is already working on many of the proposals included in the draft bill. The Greens and The Left are in favour of the scheme anyway.
In a first step, the required 20,000 signatures for a referendum application will be collected. There is not a doubt in my mind that they will get enough people to sign up, not least because they have the backing of Berlin’s tenant associations with their 100,000 members. And I am sure that the referendum has every chance of success. As a reminder: Roughly a year ago, Berlin’s residents voted against the development of the periphery of the former airport grounds in Tempelhof – willfully exacerbating the housing shortage in Berlin by doing so.
A 53-page draft bill for a “Berlin Housing Supply Act” is already on the table. It proposes that the municipal housing companies degewo, Gesobau, Howoge, Stadt und Land, WBM, and Gewobag be turned into statutory corporations.
The State of Berlin would be liable for all debts of these corporations. This means: Tenants and employees of the public housing companies will get to say whether and when to raise rents or to modernise, while the State of Berlin will shoulder the entire risk. Ultimately, tenants will treat themselves to a low rent (it is supposed to be as low as 5 euros per square metre) at the expense of the state budget.
A board of directors is to play a key role in these statutory corporations. Half of the board members are to be policymakers, the other half will be council members:
Four members will be representatives of the general tenants’ council.
Two members will be representatives of the advisory board composed of tenant initiatives and interest groups representing social services and welfare organisations.
Two members will be employee representatives from the housing companies.
Naturally, the scheme will have strictly regulated quotas. The legislation will define how many council members will have to be German citizens, how many of them should have a migrant background, how many should be disabled, and so on. And yes, of course, the council members will be obliged to act along the lines of feminist gender ideology. The corporation will agree pursuant to Art. 28, Sec. 2, “to apply the gender mainstreaming strategy to all measures and on all levels,” and will have to file reports on the matter, too.
Business acumen, by contrast, is not required and probably not desired either, even though the councils will have to approve every measure taken (such as sales, maintenance, modernisations, rent increases, etc.). None of the measures will go ahead without the express approval by the “general tenants’ council” (Art. 22, Sec. 2). Implementing the law would quickly get the housing companies into serious financial trouble. Art. 13, Sec. 5 of the draft bill stipulates a de-facto right of rent-free residence for all because it says that tenants not paying their rents will not have to worry about consequences. That will naturally make it superfluous (or even illegal) to run credit checks on tenant leads before signing lease agreements. It says verbatim: “Requesting evidence of creditworthiness from a private credit reference agency as precondition for signing a lease is not permitted… Households receiving benefits under the German Social Security Codes II or XII, the Asylum Seekers’ Benefit Act, or basic subsistence income for the elderly are exempt from forced evictions for rent arrears.”
An acquaintance of mine who owns several residential properties in Berlin commented on the proposal by saying, “If a referendum is held, I will vote in favour of it. Because if it is adopted, the municipal housing companies will take all the troubled tenants off my hands, and make my life as private landlord easier.” While I appreciated the argument, I had to contradict him: That is not the way I see things. Not least because the taxpayer will have to foot the bill when everything is said and done. Moreover, I’ll bet you that the bill is only paving the way for the next demand, to wit, that such rules (ban on credit checks and on the eviction of defaulting tenants) not be limited to municipal housing companies but be expanded to include private property companies as well.
Read also Rainer Zitelmanns Finance Blog.
Cordea Savills Acquires SEB Fund: New Asset Manager with EUR 17bn in AUM
As DIE WELT (21 March), the HANDELSBLATT and the BÖRSEN ZEITUNG (20 March) as well as the IMMOBILIEN ZEITUNG (online, 19 March) reported, Savills acquired SEB Asset Management from its Swedish parent SEB for 21.5 million euros, and will merge the company with its investment subsidiary Cordea Savills. The merger will create a real estate asset manager with approximately 17 billion euros under management. Thomas Gütle, Managing Director of Cordea Savills, intends to focus on and expand the institutional sector in the wake of the acquisition, the papers said. The merged company has approximately eleven billion euros under management in this segment, economies of scale being one of the reasons he quoted for the takeover. In the context of the sector’s ongoing consolidation, he said that property service providers without a certain size, regional reach and specialisation are no longer even being considered by institutional investors. Secondly, Cordea Savills wants to expand its expertise in the office sector. “SET Asset Management invested about 80% of its fund volume in offices.” Thirdly, Cordea Savills is interested in the Asia platform of the SEB subsidiary. “It nicely complements our acquisition in Japan last year.” The supervisory authorities have yet to approve the takeover. Once the deal is approved, Savills intends to present its new management team. The German monopolies and mergers commission and the BaFin supervisory authority for financial services are expected to consent to the deal. The private investor fund SEB ImmoInvest is being wound up, and will have to have sold off its 112 buildings by spring 2017.
Survey by the IW Institute: Real Estate Indices are Soaring
The HANDELSBLATT wrote on 20 March that German real estate companies take a brighter view of their situation in Q1 2015 than they did the previous quarter. This is the upshot of the most recent survey conducted by the IW Economic Institute among 123 real estate industry players regarding their situation, expectations and business sentiment. The scores for current situation (81.5 points) and business sentiment (53.6 points) were said to have climbed to the second-highest level in the index’s history. Michael Voigtländer of IW observed: “The ECB’s recently launched bond buying scheme will put additional downward pressure on bond interest – making real estate yet more attractive in the process.” As it were, the rate of return for ten-year Bunds dropped to 0.2% recently, widening the yield gap between real estate and government bonds even further.
Number of Planning Permissions Declined
As the SÜDDEUTSCHE ZEITUNG reported on 20 March, the number of planning permissions issued last year, while rising for the fifth time in as many years according to the Federal Statistical Office (Destatis), clearly show a slowing momentum. According to Destatis, a total of 284,900 apartments were approved last year, which implies a one-year increase by 5.4%. In 2013, however, the growth had been as high as 13%. The steepest growth was reportedly registered for rest homes and student halls of residence in 2014. Permits for multi-family residential buildings also experienced robust growth (+8.8%). Inversely, the number of planning permissions for detached and semi-detached homes declined.
Hotel Estrel in Berlin the most Profitable Hotel in Germany
Ekkehard Streletzki, proprietor of the Estrel Hotel in Berlin-Neukölln has for the first time disclosed financials, according to an item the IMMOBILIEN ZEITUNG carried on 19 March. The average capacity utilisation at the Estrel rose to 68.2% last year (2013: 62.5%), according to Streletzki. He added that the mean room rate in 2014 equalled 88.50 euros/sqm. Revenues generated by the Estrel hotel and convention centre in 2014 totalled 59.5 million euros. The gross operating profit (GOP) in 2014 equalled 17.2 million euros, and is expected to be boosted further by the new event section. The development plan will probably be completed this fall, so that construction of the 175 m hotel tower with more than 800 new rooms can kick off. Streletzki anticipates an annual GOP between 25 million and 27 million euros. He estimates that the revenue per available room (RevPAR) will be 80% by then. The Estrel turns a profit as soon as the average RevPAR ratio exceeds 35%. On top of everything else, Streletzki was able to pay the expansion of the event section, which had a price tag of 30 million euros, without increasing the total debt.
Upbeat Sentiment at MIPIM 2015
This year’s MIPIM real estate trade fair in Cannes was covered by the IMMOBILIEN ZEITUNG (19 March) and the SÜDDEUTSCHE ZEITUNG (20 March). The papers reported that the sentiment had been excellent, as business is booming for most of the companies that attended. Last year, the market insiders had been hesitant to put their faith in the boom because they found it hard to believe that the tremendous appetite for real estate among investors would last. It is only now beginning to sink in that this is a sustained boom cycle. The articles suggest that the buoyant situation is unlikely to change over the next two years. Another aspect the trade event benefited from was that MIPIM is primarily a European trade fair. After all, Europe in general and Germany in particular are decidedly popular investment destinations. Richard Barkham of CBRE was quoted to have said: “Never mind that core prices have soared in recent years – compared to other regions in the world, European real estate still offers the best cost/performance ratio.” Despite the mainly upbeat mood, the event was not entirely without critical voices. Dr. Stephan Bone-Winkel of Beos commented: “Everyone want to buy, but no one wants to sell. So the market has become completely unbalanced.”
Huge Differences on the Housing Markets in Northern Germany
The latest market report on housing in northern Germany (“Wohnen in Norddeutschland 2015″) compiled by Westgrund and JLL is supposed to draw the attention of institutional investors to cities for which few surveys exist. The survey findings were discussed in the 19 March issue of the IMMOBILIEN ZEITUNG. Hamburg appears to take the top spot with asking rents of 10.80 euros/sqm. Next in line are Wolfsburg with 8.85 euros/sqm, and the counties of Stormarn (8.25 euros/sqm), Pinneberg (8.00 euros/sqm) and Harburg (7.85 euros/sqm) in the greater Hamburg metro area. On average, asking rents in the analysed states (Schleswig-Holstein, Hamburg, Bremen, and Lower Saxony) equalled 6.30 euros/sqm, with Lower-Saxony returning an average of 6.10 euros/sqm and lagging far behind Hamburg, Bremen (6.95 euros/sqm) and Schleswig-Holstein (6.85 euros/sqm). Hamburg also takes the lead in condominium prices among the four states with 3,720 euros/sqm, followed by Schleswig-Holstein with 2,060 euros/sqm, Lower Saxony with 1,550 euros/sqm and Bremen with 1,430 euros/sqm. Between 2006 and 2014, purchase prices for condominiums in the larger states and the city state of Bremen grew at a pace between 30% and 35%, while soaring by 86% in Hamburg. The rental growth was much slower. In Schleswig-Holstein, rents rose by merely 12% between 2006 and 2014, by 15% in Lower Saxony, by 26% in Bremen, and by 42% in Hamburg. The largest residential portfolio deals of 2014 were signed outside the fast-growing regions though. The largest transactions was the “WoBau Jade” acquisition in Wilhelmshaven by Adler Real Estate for 235 million euros, followed by the purchase of the “Berlinovo” portfolio by Westgrund for 200 million euros. “Our ambition is to shop for yield wherever purchase prices are based on price-to-rent multipliers of ten,” stated Arndt Krienen of Westgrund.
High Rates of Return for Holiday Properties on German Seaboard
As the HANDELSBLATT reported on 20 March, private investors are increasingly committing themselves in holiday properties on German seashores. Buying a holiday cottage with the idea of letting it is a paying proposition. According to Tobias Wann of the German holiday home letting portal Fewo-direkt, it is reasonable to expect yield rates between 6% and 8%. The highest gross yield rates are achieved on the North Sea shore at 8.7%. Gross yields are also quite significant on the Baltic seaboard with an average of 7.5%. All things considered, the residential property market in sought seaside resorts has calmed down, though, in recent years. For instance, prices in coveted holiday resorts in Mecklenburg-Western Pomerania increased at rates between 1% and 10% only on 2014. Price hikes by more than 10%, which were still registered in 2012 and 2013, are rarely seen anymore, according to Tom Hübner of the IVD Federal Investment and Asset Management Association.
Berlin’s Land Valuation Committee: Rising Prises, Declining Revenues
On 19 March, the IMMOBILIEN ZEITUNG covered the preliminary figures released by Berlin’s Land Valuation Committee. In 2014, the turnover on Berlin’s real estate market totalled 12.6 billion euros, implying a year-on-year decline by 9% (13.86 billion euros). At the same time, the number of acquisitions dropped by 12%, from 31,925 to 28,176. Condominium prices, by contrast, registered a one-year growth by 10% on average in 2014. Prices for detached homes and combination residential/commercial buildings also perked up by around 10%. Prices for undeveloped plots have skyrocketed. The benchmark land values for standalone office accommodation inside the rapid transit circle line appear to have gained by 50% year on year. The turnover, by contrast was said to have declined by 36% year on year in 2014, and the number of sales by 25%. In addition, DIE WELT wrote in its 20 March issue about the portfolio expansions of the state-owned housing associations of Berlin. The latter reportedly spent 781 million euros on 10,300 flats in 2014. The largest share thereof (2,664) was acquired in Marzahn-Hellersdorf, followed by the boroughs of Mitte (1,970) and Tempelhof-Schöneberg (1,764). The lowest number of residential units were bought in Friedrichshain-Kreuzberg (9) and Pankow (56). While the buy-up of apartments is making good progress, the pace of public housing construction remains sluggish. Just 112 publicly owned apartments were completed last year, although the Senate’s stated goal is to raise the city’s proprietary stock from currently 260,000 to 300,000 units.
Munich’s Residential Property Market: Short Supply Puts Damper on Sales
As the SÜDDEUTSCHE ZEITUNG reported on 20 March, the number of apartments sold in Munich experienced another year-on-year dip in 2014. According to the city’s property valuation committee, only 13,000 deed were registered, which is roughly 4,000 less than the total number sold in 2011. The paper quoted Prof. Stephan Kippes of the IVD Institute with the assessment, that sales revenues would be markedly higher if there were more apartments in the market. It went on to report that next to no existing properties is coming onto the market because owners have little interest in selling despite the high price level. However, things are picking up in the area of new development. The number of residential planning permissions approved rose from 7,200 apartments in 2013 to 8,500 in 2014. While the price growth slowed last year, prices did make substantial gains. According to the IVD Residential Price Index, the average price for an existing flat in Munich is 4,750 euros/sqm, the price tag for a new condo being 6,350 euros/sqm. Rents for existing flats top 14.30 euros/sqm, according to the IVD Institute. As the IMMOBILIEN ZEITUNG reported on 20 March, demographic growth in Munich will put the housing market under further strain. The city’s population is expected to grow from 1.49 million today to 1.72 million by 2030.
Record Sales on Munich’s Hotel Investment Market
Munich’s hospitality market reported a record sales volume last year, as the IMMOBILIEN ZEITUNG wrote on 19 March. Out of approximately 5.15 billion euros that were invested in commercial real estate in Munich in 2014, hotel transactions accounted for approximately 600 million euros, according to figures released by BNPP RE. This is twice the volume of the previous year. With 13.4 million overnight stays, the city also registered its twelfth consecutive annual record in visitor figures. However, the increasing interest that investors are taking in this asset class is causing the yield advantage that hotels used to have over offices to melt away.
Major German Cities are Preparing for the Rent Freeze
As the DIE WELT (26 March) and the FRANKFURTER ALLGEMEINE ZEITUNG (27 March) reported, most of Germany’s ten largest cities have already made specific plans for implementing the rent freeze. Berlin, for one, is definitely planning to introduce the rent freeze citywide. Calculations by the Berlin tenant association suggest that roughly two in three new leases could become subject to rent control. Hamburg’s Lord Mayor Olaf Scholz also intends to introduce the rent freeze for the entire city state. Whether the rent freeze will be introduced in Munich, too, remains to be seen. At the moment, the State of Bavaria is still reviewing the situation and has yet to decide in which cities or district locations to apply the rent control measure. While Frankfurt would also like to introduce it throughout the city limits, the Urban Development Ministry of Hesse has not yet identified the cities and district locations to be included. The expert opinion for Cologne has yet to be completed, but the tenant association assumes that the scheme will be introduced for the entire city. The cities of Düsseldorf and Stuttgart reportedly filed applications to be considered for the rent freeze, and the city state of Bremen is planning to introduce it as well. This makes Essen and Dortmund the only cities among the top ten that are unlikely to adopt the rent control scheme.
Recommended Reading – by Dr. Rainer Zitelmann
An American Success Story
Tony Hsieh, Delivering Happiness. A Path to Profits, Passion and Purpose, New York, Boston: Business Plus, 2010, 272 pages.
In late July 2009, Internet trader Amazon.com announced the takeover of Zappos.com, an online shop for shoes and clothes. The volume of the deal was valued at 1.2 billion US dollars on the day of closing. Thirty-five years old at the time, the company’s CEO, Tony Hsieh (pronounced “Shay”), made at least 214 million dollars from this deal alone, not counting the money that his former investment firm Venture Frogs made through the deal. Born in 1973 to a family of Taiwanese immigrants, Hsieh describes in his autobiography how he came to be so successful.
After graduating from Harvard with a degree in computer science, Hsieh went to work for the software company Oracle in 1995. He was well paid, but felt bored all day because he had nothing truly challenging to do. One weekend, he and a friend had an idea that they turned into the company LinkExchange shortly after. “If you ran a Web site, then you could sign up for our service for free. Upon signing up, you would insert some special code into your Web pages, which could cause banner ads to start showing up on your Web automatically. Every time a visitor came to your Web site and saw one of the banner ads, you would earn half a credit.” So if 1000 people visited your website you would get 500 credits. These 500 credits meant that your own website would be advertised 500 times for free through the LinkExchange network. “The extra five hundred advertising impressions left over would be for us to keep. The idea was that we would grow the LinkExchange network over time and eventually have enough advertising inventory to hopefully sell to large corporations.”
They mailed the idea to 50 websites and were surprised when half of them responded positively within 24 hours. It soon turned out that they had discovered a gold mine with their idea. Within months after starting LinkExchange, a person called Lenny called from New York and stated he was looking into a possible acquisition of the company. They met with Lenny, and much to their amazement he offered to pay them a million dollars for a company just months old that had yet to turn a profit. Hsieh declined, but the offer showed him that he was on the right track. In December of that year, he received another call, this time by famous Yahoo! co-founder Jerry Yang. Yang had collected a billion dollars through the IPO of Yahoo! that year, and was offering Hsieh to buy his company for 20 million dollars. “The first thought that came to my mind was Wow. The second thought that came to my mind was I’m so glad we didn’t sell the company to Lenny five months ago.” To Hsieh, the situation felt like a déjà vu, except the sum offered was much higher – a lot higher. Hsieh again turned the offer down, though.
He prepared for taking the company to the stock market, when the Russian Rouble crisis and the collapse of the Long Term Capital Fund struck – causing the IPO plans to be shelved. Yet since the company had high expenses and next to no revenues, it urgently needed fresh cash. They asked the companies Netscape and Microsoft whether they were interested in investing, and both of them were not only interested in investing but wanted to buy the company outright. Microsoft offered 265 million dollars – and Hsieh sold the company.
Hsieh and his friends decided to set up an investment fund that would invest in other promising Internet companies. He collected 27 million dollars among former LinkExchange employees. One of those who applied for financing through the fund was a young man named Nick Swinmum who had started a website for selling footwear – shoesite.com.
Initially, Hsieh thought the idea absurd – as did most people. Who would want to buy shoes without trying them on first? He quickly learned, though, that the US shoe market had an annual turnover of 40 billion dollars, and that no less than five percent of it represented mail order sales. Moreover, mail order sales were the fastest growing segment in the shoe business.
Nick did admit, however, that he knew nothing about the shoe business, so Hsieh made it a primary condition for investing that Nick find someone who did. Once Nick had met this condition, a new business idea was born. The Internet portal, now renamed Zappos.com, would partner with hundreds of shoe brands and forward incoming purchase orders directly to the shoe companies, which would deliver the shoes in their own right. First talks to footwear manufacturers, however, were less than encouraging, most of them had misgivings. Hsieh’s fund did not have a lot of money left for new commitments because it had already invested in another 27 promising Internet companies.
Over the next two years, Zappos struggled to stay alive, repeatedly on the brink of bankruptcy. Every few months, Hsieh would contribute cash from his private bank account. He remained convinced that the idea underlying Zappos was sound, but he was not sure whether he would manage to keep the company alive long enough, given the high monthly losses. Jobs were cut, and the salaries of the remaining staff were cut, too. Yet he realised that cuts alone will not suffice to turn a company around.
Hsieh and his staff tried to think of ways to do things differently than before in order to make the company a successful business. The problem with Zappos was above all that the company was unable to collaborate with many popular shoe brands because these could not deliver shoes directly to the end customer. Hsieh therefore decided to build up his own inventory of shoes, doing which would require another two million dollars in investments. He was prepared to stake everything on one card. “This was a ‘bet the company’ plan… Continuing with the drop-ship-only route that we had been on and dying a slow death didn’t sound like very much fun. It would just be delaying the inevitable.”
Since most footwear manufacturers would not deliver to online shops but to “proper” traditional shoe stores only, they improvised a shoe store in their own office rooms and in addition acquired a small shoe store in a small town. Sales did go up, from 1.6 million dollars in 2000 to 8.6 million dollars in 2001, yet the company kept losing money month after month. More than once, it nearly folded.
In this situation, Hsieh decided to sell all his entire property in order to keep the company alive – along with a party loft he had become particularly fond of. However, nobody wanted to buy the property at its cost price, and so he finally had to settle for a “fire sale” that netted but 60 percent of the cost price.
Sales continued to rise, totalling 32 million dollars in 2002. It appeared the company was headed in the right direction. It was in this situation that Hsieh defined a much bigger goal for the company, a simply unbelievable goal for most employees. He wanted sales to top one billion dollars by 2010 at the latest. It was surely an important decision, and the right one to make, because difficult situations more so than others, call for lofty goals in order to provide motivation and the energy to keep going. If your goals are too modest, they will not give you the power you need.
The next setback occurred in 2008, when the financial crisis got all US companies in trouble. As a precautionary measure, Zappos let eight percent of its workforce go. Yet the company’s strategy kept paying off, and in July 2009 it was taken over by Amazon, known mostly as an online book seller. Amazon paid the owners of Zappos 1.2 billion dollars worth of Amazon stock, and made Zappos a wholly-owned subsidiary.
For more reviews of interesting business books, see Zitelmanns Book Reviews
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