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German Property Index DIX Climbs to Record Level in 2014
Germany’s property index DIX, compiled by the IPD Investment Property Database, registered a total return of 6% for portfolio property held by professional investors in 2014, as the IMMOBILIEN ZEITUNG wrote on 02 April. The paper identified it as the highest score in 15 years, the annual average having been 3.7%. The previous high-water marks from the years 2000 and 2001 were 5.4% each, the paper added. In terms of use types, the highest total returns were reported for logistics (12.2%), residential (7.9%) and retail (7.2%). The score for office property was a mere 4.2%.
Total return,
in %
Net cashflow
yield, in %
Capital growth,
in %
Annualised total return, in %
3 yrs
5 yrs
10 yrs
All property types
6.0
5.3
0.7
5.2
5.0
3.7
Retail
7.2
5.5
1.6
6.4
6.1
5.1
Office
4.2
4.8
-0.6
3.7
3.7
2.4
Industrial
12.2
7.3
4.6
7.4
6.5
4.8
Residential
7.9
4.9
2.9
7.8
7.3
6.0
Miscellaneous
5.0
6.1
-1.0
4.3
4.2
3.4
Source: IPD
Commentary – by Dr. Rainer Zitelmann
DIX Index at All-time High
Six percent – it is the finest result shown by the DIX German Property Index during the past 15 years. What surprises me, though, is that the average capital growth (across property types) was so modest at just 0.7 percent. Even the capital growth for residential real estate came to 2.9 percent only.
Nonetheless, the subject of a looming real estate bubble keeps being raised. Compare this, for instance, to the rate of return for fixed-interest securities, which was close to 13 percent (!) in 2014. You have to bear in mind, however, that the performance of bonds resulted almost entirely from changes in value (meaning price gains due to regressive yield rates), with virtually no gains on cash flow. With real estate it was just the other way around. The income return in 2014 equalled no less than 5.3 percent.
Why then is so little being said about the threat of a bond bubble? Go ahead and run a Google search on the terms “stock bubble,” “bond bubble,” and “real estate bubble,” and this is what you will find:
about 168,000 hits for “bond bubble,”
about 167,000 hits for “stock bubble,”
about 447,000 hits for “real estate bubble”.
To me, these counts read like contrary indicators. Everybody is talking about a real estate bubble, and nobody about a bond bubble. So there is reason to conclude: The biggest threat is arguably that of a bond bubble, whereas the real estate bubble constitutes the smallest threat.
To be sure, prices have soared everywhere – prices for property, bond prices, stock prices, all. For stocks, 2014 was admittedly a bad year, but the German stock market index DAX grew by 25 percent in 2013 and by more than 20 percent this year.
If you take a more differentiated look at the real estate returns, you will realise that offices are making a slow recovery. While the total return for offices averaged a rather modest 2.4 percent (!) over the past ten years, it ascended to a respectable 4.2 percent in 2014. Nonetheless, the capital growth for offices remained negative at -0.6 percent, which makes actually no sense.
I believe that it is explained not least by the relatively large share that the portfolios of open-ended property funds have in the DIX index constituency. Since the portfolios of open-ended funds consist to two thirds of office real estate that were systematically overvalued for many years, we are now seeing the final throes of a long-term process of successive devaluations.
However, the net cashflow yield for offices is actually but 0.1 percent lower than that for residential real estate. My feeling is that office property is being underestimated at the moment because of its poor historic performance. The other day, one of Germany’s biggest institutional investors told me that he would not invest in office property at all for a few years (!) because he has yet to get on top of past issues. For the time being, he will limit his commitments to residential and retail real estate. If this is the way many market players feel, it will soon be a good time to enter the market for office investments.
Read also Rainer Zitelmanns Finance Blog.
Dr. ZitelmannPB. Real Estate Stock Barometer – Q1 2015: Analysts Regain their Confidence in Real Estate Stocks
On 31 March, the BÖRSEN ZEITUNG discussed the latest Dr. ZitelmannPB. Real Estate Stock Barometer. The paper suggests that sentiment in regard to real estate stock has noticeably rallied since the previous survey. Admittedly, the analysts’ enthusiasm for residential real estate stock remains subdued because the short- and medium-term outlook appears to promise only a modest share price upside. But the sentiment regarding the stock of companies committed in commercial real estate has clearly brightened.
Anticipated share price performance
Real estate stock in general
Real estate stock commercial
Real estate stock residential
Over the next 3 months
0.5
1.3
0.1
Over the next 12 months
0.9
1.3
0.1
In the short-term outlook, the score of the sentiment indicator was said to have clearly improved from +0.1 to +0.5 points. An index score of +2 would suggest that analysts expect to see price increases in excess of 15% during the next three months (short-term view) or twelve months (medium-term view). Inversely, a score of -2 would represent markdowns anticipated at a rate exceeding 15%.
Six of the analysts polled expect prices to rise by 5% to 15% as early as the next three months, whereas two analysts took a cautious short-term approach, predicting price drops on the same scale. During the previous survey, more than half of the experts still assumed that prices would stagnate in the near term.
Sentiment concerning commercial real estate stock experienced an unambiguous turnaround: In the course of last year, the indicator score for the three-month outlook had steadily declined, flatlining lately. According to the article, the forecast has suddenly perked up. Half of the respondents now predict price gains by more than 15%, while one quarter puts the gains between 5% and 15%. Only two analysts believe that prices are likely to stagnate in the near term. The optimists also carried the day with the medium-term outlook, the paper added. Seven out of eight analysts expect prices to go up over the coming twelve months, four of them predicting a growth between 5% and 15%, three of them anticipating prices hikes by more than 15%. Just one analyst was said to believe that the present price level will remain stable. Despite the positive outcome, Helmut Kurz of Ellwanger & Geiger was quoted with a word of caution: “The acceleration of the upward trend shows signs of a nascent phase of exaggeration.”
At the same time, sentiment vis-à-vis residential real estate stock brightened after a recently subdued outlook. Both in regard to the short- and medium-term prospects, optimists were in the majority, if by a narrow margin. The Barometer score reportedly climbed from -0.1 up to +0.1 sqm. Three analysts assume that prices will see moderate growth, three foresee stagnation, and two expect prices to soften slightly over the next three months.
In the 12-month outlook, the Barometer score, which had been stable for three consecutive quarters, dropped from +0.3 to +0.1 points. Five out of eight analysts foresee no price changes over the next twelve months, while two expect a slightly higher level. Only one out of eight interviewed experts predicted a slight softening of share prices. The paper added that the indicator score is back where it was a year ago.
Dr. Lübke & Kelber: Residential Investment Market Heading for Banner Year
According to the latest transaction analysis for Q1 2015 by Dr. Lübke & Kelber, the transaction volume on the German residential investment markets totalled 10.6 billion euros, which is a one-year increase by 80% and puts this year on course for a new all-time high. This was reported by the BÖRSEN ZEITUNG on 02 April. The analysis identified 129 transactions in Q1, involving around 183,500 residential units. The acquisition of Gagfah by Deutsche Annington alone accounted for about 144,000 residential units with a fair value of 7.98 billion euros and thus 78% of all apartments sold. However, the sum total of the prior-year quarter is explained by the big-ticket acquisitions of DeWAG and Vitus (also by Deutsche Annington). German investors spent 9.96 billion euros and thus accounted for 94% of the total turnover, while public property companies accounted for 81% (8.6 billion euros). The average volume per transaction approximated 82.2 million euros and 1,422 residential units (not including the Gagfah takeover: 20.5 million euros and 308 residential units). The price realised per residential unit sold was approximately 57,800 euros (66,500 euros when taking the Gagfah takeover out of the equation). 76% of the residential units sold were reportedly located in Class B cities, 24% in the “Big Six” cities, whose share in the total turnover was disproportionately high at 26%. “If this opening quarter on the residential investment market is any indication, then 2015 is poised to top the banner year of 2007 by a wide margin. “What supports my assessment is the favourable interest environment for investors, the high price level to be realised by sellers, and the upcoming mergers,” said Ulrich Jacke of Dr. Lübke & Kelber. In 2007, the transaction volume had totalled 15 billion euros, he added. The analysis of Q1 2015 did not include planned acquisitions such as that of Berliner Westgrund by Adler Real Estate or the takeover of Conwert by Deutsche Wohnen.
Dynamic Retail Property Market
Investments in German retail property in the ongoing year mark show a substantial year-on-year increase, and are likely to climb to somewhere between ten and twelve billion euros by the end of the year. This was reported by the FRANKFURTER ALLGEMEINE ZEITUNG on 02 April. Demand is sky-high and far exceeds the available supply, as Jan Dirk Poppinga of CBRE was quoted to have said. He went on to say that the market for retail real estate is outperforming the commercial real estate market as a whole, for which CBRE predicts an increase in transaction volume from 40 to 45 billion euros. Oliver Herrmann of Redos was quoted with the observation that retail property yields in prime high-street pitches are now down to four percent, on a level with prime office property. Especially retail warehouse parks represent attractive investment products because the planning permits for new schemes that would compete with these are often withheld. As far as Herrmann can see, the purely purpose-built legacy parks no longer meet the expectations of today’s shoppers, and need to be revitalised as a result. This is therefore where Herrmann sees grand opportunities for investors because revitalisations would entitle them to higher rents on new leases. Standing at 50% now, the share of foreign investors in the retail real estate transaction total has nearly doubled and is likely to keep rising in 2015. The notion that the enormous demand has caused an unhealthy situation on the market for retail real estate is rejected by both Poppinga and Herrmann. Poppinga emphasized that the transaction volume will fall short of the sum of 18.1 billion euros registered at the outset of the finance and economic crisis even if it was to match the most optimistic forecast for 2015. And there are other differences to pre-crisis times that Herrmann pointed out. While he does expect to see price growth, he also believes that the market will level out in the coming 18 months.
German Housing Coveted by International Investors
On 09 April, the HANDELSBLATT wrote that Germany’s residential property market was off to a spectacular start into 2015. Quoting an analysis of Q1 by CBRE, approximately 10.6 billion euros worth of housing packages and housing estates changed hands during the first three months of the year. Even without the biggest deal of them all, which was the acquisition of Gagfah by Deutsche Annington, the transaction total of well over 2.6 billion euros exceeded the average quarterly result of the past four years. The sum total of around 172,000 residential units traded breaks down into 57 recorded portfolio transactions of 50 units or more. This implies an increase of 70% year on year. The average price per residential unit was said to have increased by 10% to 61,100 euros. “Right from the start of the year, German residential real estate has set a record-breaking pace that might well outperform the previous boom of 2015,” said Konstantin Lüttger of CBRE Germany. He went on to say that the German residential property market is attracting an increasing number of foreign buyers. There are various reasons to explain this: Some of them are looking for safe ways to invest their money, whereas others are looking at apartments for the purpose of owner-occupation. Axel Winckler of the realbest.de portal was quoted with this interpretation: “Germany’s economic clout, its superbly developed infrastructure, and thus its high degree of livability offer foreign investors a stable and secure investment environment.” As it were, German real estate offers either attractive rates of return or the potential of keeping holiday home. Manfred Binsfeld of FERI EuroRating was quoted with an affirmation of the argument that many foreign players come to German looking for security: “International investors are quite right to consider Germany a safe haven because the German housing market proved extremely crisis-resistant during the financial crisis and the euro crisis due to its stable legal and economic parameters.” He added that German property sellers are already selling up to 40% of their condominiums to private investors abroad. A research team conducted a survey on behalf of the realbest.de portal to find out which German property types are offered to foreign buyers on the internet and where the prospective buyers hail from. It turned out that investors from Poland top the list of foreigners seeking to buy property in Germany. Investors from France made second place, followed by the United States and Brazil in ranks 3 and 4, respectively. Most of the prospective buyers are looking for property in Berlin. Winckler was quoted with the words: “Anyone looking at German property on the Internet abroad will find that 85% of the offers are from Germany’s first city.” The experts assume that the boom on the country’s residential property market will continue for a while yet. According to Lüttger, the momentum on the German investment market for residential portfolios is as high as ever. He added that the supply available on the market continues to fall short of the demand generated by major housing companies and by increasingly active institutional investors.
Two German States to Shelve Rent Freeze
The German states of Saarland and Saxony-Anhalt see no need to introduce the rent freeze at this time, as the IMMOBILIEN ZEITUNG reported on 09 April. Lower Saxony and Saxony have not finalised their decision whether or not to adopt the new rent control scheme. Their state governments are still in the process of reviewing the situation in depth. Another state still studying the market is Thuringia, where the city most likely to adopt a rent freeze would be Jena. The state government in Mecklenburg-Western Pomerania appears hesitant or even disinclined, the paper said. The other ten states of Germany have been emphatically affirmative about the introduction of the rent control legislation.
Residential Real Estate: Steep Pricing Differentials among Germany’s Regions
DIE WELT carried an item on the great regional price differences for residential real estate in its 08 April issue. Home builders in Leipzig pay only around one tenth of the land prices they would have to pay in Munich, for instance. Aside from the job supply, there is another reason for the price divide in Germany. “The demand dynamic in Germany is fuelled primarily by the strong inflow from other EU member state, essentially in southern and eastern Europe,” said Christian Schulz-Wulkow of EY Real Estate. New arrivals prefer to move to the major metropolises, driving up rents and condominium prices in those cities in the process. Berlin benefits from the intra-European immigration more than any other German city, the paper added. According to a survey conducted among major investors by the Urban Land Institute, the German capital is now the real estate location that promises the highest earnings in Europe in 2015. “Special Event: Berlin’s Residential Property Market – which Locations Present Opportunities, and which are Overpriced?” This will be the subject of a special event hosted by the BERLINER IMMOBILIENRUNDE panel at the Maritim proArte Hotel in Berlin on 6 May. Request your copy of the program e-mailing us at: info@immobilienrunde.de.
Recommended Reading – by Dr. Rainer Zitelmann
Freedom from Speech
Greg Lukianoff, Freedom from Speech, New York: Encounter Books, 2014, 61 pages
The author of this so-called broadside is regular columnist for the Huffington Post, but also writes for the New York Times, the Washington Post, and the Wall Street Journal. He critically discusses a trend in the United States to undermine the “freedom of speech” protected by the First Amendment. He focuses particularly on US campuses because these should be models of tolerance and unfettered intellectual debate.
A recent phenomenon he cites – and this may still be more or less alien to European readers – involves so-called “trigger warnings.” What does that mean? There appears to be a nascent tendency among student to demand from professors to issue express warnings ahead of any lecture or class that could contain emotionally upsetting discourse. Such contents ought to be labelled in analogy to the warnings commonly found on cigarette packs.
The background is this: Originally, the idea was to protect people suffering from post-traumatic stress disorder (PSTD). This sort of syndrome is experienced by individuals in the wake of traumatising events, such as war or rape. However, the term became subject to inflationary use, and things have now come to the point where anyone confronted with opinions that seem political incorrect may feel traumatised. University professors are expected to realise “that sexual misconduct is inextricably tied to issues of privilege and oppression,” which in turn brings in “racism, classism, sexism, heterosexism, cissexism, ableism, and other issues of privilege and oppression” (p. 42).
One example for something that upset students was the statue of a sleepwalking man in underwear that had been set up on a certain campus. Students saw the statue as “a source of apprehension, fear, and triggering thoughts regarding sexual assault for many members of our campus community.” They petitioned that the statue be removed, arguing: “We really feel that if a piece of art makes students feel unsafe, that steps over a line” (p. 46). How exactly your personal sense of safety is compromised by the statue of a somnambulist remains anybody’s guess.
The author’s critique goes like this: “To those who value intellectual freedom, however, trigger warnings are yet another manifestation of the attitude that society must protect every individual from emotionally difficult speech. It is impossible to live up to this expectation, and in the course of trying to do so, we risk devastating freedom of speech and the open exchange of ideas… When students take advantage of a psychological term developed to help those traumatized in the ghastly trenches of World War I justify being protected from The Great Gatsby, sleepwalker statues, and, as the Oberlin policy specified, Chinua Achebe, it becomes clear that there is virtually no limit to the demands that will be made if we universalize an expectation of intellectual comfort” (p. 57).
Generally speaking, Lukianoff has diagnosed a trend toward intolerance at American universities. He mentions the rising number of instances in which dissenting speakers who have been invited for talks are “dis-invited” again. He counted 257 incidents (and this is surely not a complete list) of speaker invitations that were revoked as a result of student or faculty pressure. The trend has been particularly hard on conservative voices, with 118 of them dis-invited whereas left-leaning speakers were dis-invited only 61 times (p. 32). The ratio is all the more remarkable because campus invitations to conservative speakers are less frequent anyway. In the years 2013 and 2014, for example, not a single Republican speaker was invited to speak at one of the top 30 university or at the 30 leading liberal arts schools – whereas 25 Democrats were invited during the same period of time (p. 32).
Lukianoff goes on to show that intolerance is hardly limited to campuses. Scandals are constantly cooked up in the media because someone made a joke and a remark that was less than politically correct. The person at the centre of the scandal will invariably have to apologize to those he or she upset, no matter whether the remark was made in private or in a state of inebriation. It is not infrequent that such persons end up losing their jobs. “Admittedly, many of the offending comments were not particularly sympathetic, but the public’s appetite for punishing attempts at candor gone wrong, drunken rants, or even private statements made in anger or frustration seems to be growing at an alarming rate” (p. 2). The movement to enforce a “zero tolerance” policy in regard for anything anyone could deem offensive is gaining momentum (p. 3).
While Lukianoff concedes that these attempts to curb the freedom of speech tend to come from the political left, he emphasises that conservatives are no strangers to the phenomenon. Accordingly, his broadside aims not just at the left: “If we characterize the push toward censorship as a phenomenon that comes from only the left, we automatically let half the population off the hook and demonize the other half, many of whom may potentially be allies in the fight for free speech” (p. 24).
For more reviews of interesting business books, see Zitelmanns Book Reviews
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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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 Potsdam
Potsdam is the state capital of Brandenburg and a university town. Therefore, the public sector accounts for an above average share of regional production. The importance of the region’s manufacturing sector has been diminishing for many years. The industrial sector was specialized on the printing and food industry. Now the focus lies on industries with strong growth potential like electrics and optics. Conversely, since the beginning of the nineties Potsdam’s service sector has advanced appreciably, accounting for a continuously increasing share of total regional production. The prospects for service sector expansion are enhanced by the area’s close proximity to Berlin and a serviceably good infrastructure.
Feri rates Potsdam as a business location “A”, which is unchanged compared to the 4th quarter 2013. It translates into “high potential, low risk”. With this rating result the city ranks 1st in the comparison of German B-Centers.
Office Real Estate
Regarding office real estate Feri rates Potsdam “C”, which is downgraded to the 4th quarter 2013. The city ranks 13th among office locations of German B-Centers. Feri awards the office top locations “C” and the side locations “B”
Excess supply put in place at the beginning of the nineties induced significant decreases in rents for office space. Nevertheless, rents eventually stabilized, supported by solid enough demand for office space that a trend of positive net absorption was able to develop. The inner city area and Babelsberg are the most sought-after office locations. During weak economic conditions at present office rents in Potsdam are stagnating at best. But, after an expected recovery of demand materializes, rents are projected to increase moderately for the remainder of the forecast period.
Retail Real Estate
In the comparison of German B-Centers regarding retail real estate Potsdam placed 3rd with a rating result of “B+”, which is unchanged compared to the 4th quarter 2013. Feri awards the retail top locations “A” and the side locations “B+”.
Potsdam’s central city – especially the main shopping street, Brandenburger Strasse – is at some disadvantage as a retail area due to strong competition from big shopping centers in the surrounding area, and from stores in nearby Berlin. Moreover, the city itself suffers from poor planning. Several retail properties in the city are vacant, because many smaller shops proved unable to compete with large shopping centers in the periphery. In particular, the “Stern-Center” and the “Potsdam-Center” siphon off purchasing power from the inner city. The historic buildings of the inner city are unsuitable for larger stores. Retail rents in Potsdam dropped for many years, although the market seems to have stabilized in the last few years.
Residential Real Estate
When it comes to residential real estate, Potsdam placed 15th among German B-Centers with a rating result of “C”, unchanged compared to the 4th quarter 2013.
A big surge of new building activity in the beginning of the 90s significantly expanded the supply on Potsdam’s rental housing market. For example, the new “Kirchsteigfeld” district was built in the southeast part of the city. On top of this new construction, a renovation boom added further to an excess supply of apartments. However, Potsdam, unlike most of Eastern Germany, experiences relatively strong demand conditions since it is able to capture spillover demand from Berlin. Most such demand is from persons who work in Berlin, but prefer to live in Potsdam. The liveliest demand is for existing apartments in Potsdam’s top locations; rents for such dwellings have risen continuously in recent years. In coming years, stable demand and rising rents are expected. But old dwellings that are hardly marketable anymore will continue to burden the market.
Potsdam’s market for the purchase of residential real estate was hit by a large supply expansion during the nineties, and as a consequence sale prices declined. Yet, due to the region’s relatively good income performance and its proximity to Berlin, this decline was not severe compared to that seen across most of Eastern Germany. Great variations in quality and prices characterize Potsdam’s condominium market. Recently – but only with respect to legitimately marketable units – the excess supply has abated considerably. Hence, purchase prices are projected to increase rather robustly, but not until the general economy recovers from the current cyclical downswing.
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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