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Is now a good time to buy residential property?
Or: The better the backstory, the worse the investment
By Dr. Rainer Zitelmann
Property prices are spiralling upwards. Is it still sensible, against such a backdrop, to buy? An investor friend of mine recently told me that he has just sold an apartment building in Berlin for 50% more than he paid for it just a year earlier, at a price-to-rent ratio of 37. And this wasn’t a luxury property he was talking about; neither was it in excellent condition or in a prime location, it was nothing more than a decidedly average, 1970s apartment building.
Prices are riding high, but there are still enough investors out there looking to buy. This is just as true during a stock market boom as it is when euphoria engulfs the real estate market. So what are the arguments put forward by these buyers?
Argument No. 1: Real estate is cheap in comparison to “risk-free” investments in government bonds.
They are right. The yield spread between real estate and ten-year German government bonds is wider than ever. On this measure, real estate currently offers extremely good value. But is this still the right measure to use? Bond prices are only partially determined by the market, and the current bond bubble owes far more to central banks’ quantitive easing (QE) experiments than anything else. It is for this very reason that I am steering clear of long-dated bonds and am only using short-dated bonds, which do not present any significant price risks, to park my money. Anyone out there who still believes that the spread between German government bonds and real estate is the correct measure to apply can happily buy real estate at 50-times annual rental incomes. After all, the spread then rises to more than 200 basis points, which just goes to show the absurdity of this measure.
Argument No. 2: Interest rates are so low that buying still makes sense.
Yes, you can arrange long-term financing at interest rates of just over 1 %. This is one of the main reasons that real estate prices have gone crazy. With rates so low, almost every investment seems worthwhile. With this argument you can justify buying almost any property, no matter how expensive it may be. However, if you do not plan on repaying your loan by the end of the fixed interest period (and almost no investor does), you are storing up extremely high levels of risk for any subsequent refinancing. I do not believe that interest rates are going to rise again anytime soon. But no one can seriously forecast what interest rates will be like ten years from now. Even if your calculations assume a rate of 5 % rather than the current 1 %, you still risk being way off beam.
Argument No. 3: It is still possible to find cities and locations (e.g. B and C-rated cities) where real estate offers comparatively good value.
Whenever the prices for real estate in “good locations” sky-rocket, investors diversify and look for alternatives. In lots of towns and cities in eastern Germany and North-Rhine Westphalia, you can still buy properties at price-to-rent ratios of 13 or 14. Of course, in comparison to prices in Munich, Hamburg and Berlin, these look like bargains. But are they really bargains? If they are, it must mean that other investors have been systematically misjudging these markets. Of course, this is always possible, but only in the short-term. Experience teaches us that investors turn to so-called B and C cities, or B and C locations, when they can’t find what they are looking for in the cities where they have traditionally invested (or when prices have climbed too high). This leads to price hikes in these alternative investment locations. This is exactly the same development we have seen with government bonds: Prices for investment-grade treasury bonds are the first to rise. This is followed by investors flocking to investment-grade corporate bonds. Once the prices for these shoot up (and yields fall), investors start snapping up junk bonds, which in turn pushes their prices up dramatically. It is possible to be successful with this kind of strategy, but only if you get in on the action before other investors adopt the same strategy, and only if you get out before it is too late. Getting this kind of market timing right is, however, extremely risky.
Argument No. 4: The fundamental drivers are still there: High demand and a scarcity of supply.
This argument is also correct, but I am always skeptical of arguments that involve “fundamentals”, as these have almost always already been priced in. When you hear a “good backstory”, the kind that justifies your investment but contains very few figures, you should always be wary. My experience: The better the backstory, the worse the investment. Cast your mind back to the times that you have most frequently heard or read that stock market or real estate market “fundamentals” are strong: It is always when prices are at their highest.
Argument No. 5: It’s not about the current yield, it’s all about value appreciation.
Whenever I hear this argument, it sets my internal alarm bells ringing. This is the standard argument when an investment makes little or no sense. Vague hopes that the underlying value of an asset will increase at some point in the future are put forward as substitutes for real cash flows.
What are the strongest arguments against investing in residential real estate, aside from the fact that prices are too high?
Here you have to identify the factors that will be influenced, at least in part, by the markets, but which a majority of investors are currently either ignoring or overlooking. One such factor is legislation. Germany’s Mietpreisbremse rent control doesn’t work, because it is being largely ignored. This is obvious when you look at prices for newly built apartments (e.g. forward deals), which are exempt from the Mietpreisbremse and, relatively speaking (i.e. in comparison to existing housing stock), remain moderate. Prices for existing housing do not yet reflect the eventual impact of the Mietpreisbremse.
But this won’t be the case for ever. It is naive to think that politicians will stand by and watch as rents continue to climb, shrug their shoulders and carry on with business as usual. No: Plans for a drastic tightening of the Mietpreisbremse via new rent index legislation (along with a raft of other measures) are already being made. As far as the Mietpreisbremse is concerned, market participants have buried their heads in the sand. They believe that their approach has been confirmed as the legislation isn’t working. Are they serious? Do they really think that politicians will respond by saying: “Okay, the Mietpreisbremse doesn’t work, we screwed up. No problem.” That is totally naive.
I am 100% certain that Mietpreisbremse legislation will undergo serious revision, and that this will have a massive impact on future real estate investment cash flows. Politicians will increasingly intervene in the housing market – despite the fact that it is irrational and counter-productive to do so. After all, politicians are well-known for doing irrational and counter-productive things. At some point in the future, real estate market participants will no longer be able to ignore politicians’ interventions.
I write all of this as an investor with an extremely long-term investment horizon. I fully accept that it is possible to earn a greta deal of money by buying real estate right now – and selling it at the right moment. The example I gave in my opening paragraph, of the investor who bought a property one year ago and sold it within twelve months for a 50% profit, is proof of this. It’s just like the stock markets – there are two types of buyer: The first is the speculator, the second is the investor. Speculators buy stocks because they believe that they will be able to find a buyer willing to pay an even higher price, thereby making a short-term profit. Of course, this can work, but the stakes are high and if it doesn’t work out, it can go badly wrong. Investors buy stocks because they believe they are buying a stake in a company’s future cash flow at an attractive price. Most investor-buyers follow a long-term, buy-and-hold strategy and/or they are determined contrarians who buy when a stock is low and sell when it is riding high. An investor would never buy a stock simply because they anticipate making a quick buck by selling it to another investor at a higher price. I belong to the second group.
Read also Rainer Zitelmanns Finance Blog.
Germany’s real estate industry keeps its cool after Brexit
Having raised the possibility that Frankfurt might now become the most important financial centre in Europe, the UK’s Brexit vote has not only stoked feelings of uncertainty within Germany’s real estate industry, it has also awakened hopes. As the IMMOBILIEN ZEITUNG revealed on 30.06.2016, and within a few hours of the Brexit vote, Ulrich Jacke of Dr. Lübke & Kelber had announced the sale of a vacant office property in Frankfurt for around EUR 10 million. The buyer explicitly stated that they expect demand for office space in Frankfurt to surge as a direct result of the UK’s decision to leave the European Union. Jacke reckons that more and more international capital will now seek a safe haven in Germany. In contrast, CBRE’s Carsten Ape had not registered any concrete inquiries from would-be tenants exploring their options in the wake of the Brexit vote. He believes that key decision makers are willing to wait until the consequences of Brexit become clearer. DIE WELT on 29.06.2016 and the FAZ on 30.06.2016 also reported on the likely exodus of financial services companies from London and the opportunities this will create for Frankfurt. According to the BÖRSEN ZEITUNG on 28.06.2016, Colliers International has calculated that the relocation of just 2% of London’s financial services employees would increase the workforce in Frankfurt’s financial sector by a massive 11%. If between 5% and 10% of employees switch from London to Frankfurt, the workforce in continental Europe’s biggest financial hub would swell by between 27% and 54%, respectively. Assuming that each new employee will require ten square metres of office space, which is a very conservative estimate, the first scenario would cut the office vacancy rate in Frankfurt’s central business district by 20%. The third scenario would lead to vacancies in Frankfurt’s office market being completely eliminated. Above all, large, contiguous spaces in modern office schemes will bear the brunt of demand and become increasingly scarce. Forecasts of the impact this would have on Frankfurt’s residential market are even more dramatic, and residential property markets across the rest of Germany should suffer no loss of attractiveness. Wertgrund Immobilien’s Thomas Meyer is dismissive of fears that British investors will start to unwind their German investments: “The investments they have already made in Germany are, if anything, more valuable than ever in portfolio and currency diversification terms.” In the IMMOBILIEN ZEITUNG on 30.06.2016, bulwiengesa issued an even more striking assessment of Europe’s new economic and political landscape: “As far as investors are concerned, this transitional phase is creating a new Greece in the northwestern corner of Europe.” Every single positive or negative piece of news has an immediate impact on the value of the British Pound and the stock markets. bulwiengesa expects Brexit to have a far more subdued impact on Germany’s real estate markets, especially in the banking capital, Frankfurt. As far as Frankfurt is concerned, bulwiengesa points to the fact that there is a large enough reserve of office space to accommodate the relocation of thousands of London’s bankers at fairly short notice. On 30.06.2016, the IMMOBILIEN ZEITUNG continued its Brexit coverage by reporting that Germany’s real estate financiers do not believe they will be directly affected by the British referendum. They expect there to be a temporary slowdown in new lending, but London will still be an interesting city for mortgage banks. In the medium-term, there could even be new opportunities if London’s property prices undergo some form of correction. The high property prices in London were, after all, one of the major reasons for banks’ cautious approach to lending in London. The banks want to see planning and investment certainty. For this reason, it is important that economic relations between the United Kingdom and Europe are clarified without undue delay.
Germany’s real estate market could well profit from Brexit
Now that a number of British open-ended real estate funds have, at least temporarily, suspended investor redemptions, and fears for the UK’s real estate market have begun to crystallise (as reported by the FAZ on 06.07.2016 and the BÖRSEN ZEITUNG, FAZ, SÜDDEUTSCHE ZEITUNG and the HANDELSBLATT on 07.07.2016), expectations are growing that the German real estate market, and in particular Frankfurt, are well-positioned to reap the benefits. This was the assessment delivered by the BÖRSEN ZEITUNG on 08.07.2016. Market players are now waiting for Britain’s parliament to initiate formal Brexit proceedings, but Frankfurt is already poised to welcome 10,000 to 20,000 bankers, and the home city of the European Central Bank boasts well-equipped offices at a fraction of London’s rental prices. Cautious confidence is also the order of the day in Germany’s residential real estate market. According to the IMMOBILIEN ZEITUNG on 07.07.2016, a new survey of 500 IVD members has revealed that German brokers and property managers expect demand from international investors to increase in the wake of the UK’s referendum decision. Some 60% of the survey’s participants expect those international investors who have traditionally invested in Great Britain to step up their engagements in Germany, and 47% assume that British investors will put more of their money into German real estate. “The survey clearly shows that the importance of Germany’s real estate market in its function as a safe haven for investors has been given another significant boost,” said the IVD’s Sun Jensch. 13% of the would-be buyers approaching the survey’s participants hail from outside Germany. An average of 7% of all property transactions are concluded with foreign buyers. Of these, one in twenty buyers are British. International investors are most interested in multi-family houses, apartment buildings and commercial properties. There is also healthy demand for condominiums. Alongside international investors’ confidence in Germany’s legal framework, they are also attracted by property prices that remain relatively low in international comparison. Zabel Property is another real estate company predicting a surge in demand for German property, reported both DIE IMMOBILIE and DAS INVESTMENT.COM online on 05.07.2016. The company expects that Germany will continue to enhance its reputation as a safe haven and will become even more attractive to international investors, especially in its metropolitan centres. Zabel Property believes that the international middle-class will increasingly invest in Germany, which will, in turn, add to demand for condominiums in the EUR 200,000 to EUR 700,000 price category. Although the weakened Pound Sterling makes property in Great Britain more affordable right now, there are plenty of warnings that investors should exercise caution, particularly as it is expected that the negative trends of the last couple of months will continue. Zabel reckons that 10,000 jobs will move from London to continental Europe, which could give a significant boost to property markets in Frankfurt, Munich and Berlin. There has already been a noticeable spike in interest from foreign investors in German real estate, and a number of investors have openly admitted that their decisions are directly connected to the UK’s Brexit vote. As a result, Zabel’s analysts forecast that this trend will gather momentum over the next few months.
Not enough new and affordable apartments
According to the IMMOBILIEN ZEITUNG on 30.06.2016, empirica-systeme’s property listings database shows that 95.3% of privately-built rental apartments in Germany’s 20 biggest cities are beyond the financial reach of average households. This means that net cold rents are more than twice the level at which local housing benefits are assessed. Only 8.2% of the newly-built private apartments in Munich are classed as affordable, in Cologne the figure is 5.7%, in Hamburg it is 5.1%, in Frankfurt it is 2.6%, in Berlin it is 2.5% and in Düsseldorf it is just 2%. On average, across all of the localities analysed by empirica, 16.5% of newbuild rental apartments qualify as affordable. In contrast, the figure was 27.4% in 2014.
New study names Germany’s hottest metropolitan quarters
Based on an analysis of apartment rentals and the prices for condominiums and single-family houses in 20 German cities, VDP Research Institute has announced the hottest residential quarters in Germany in 2016, reported the HANDELSBLATT on 01.07.2016. These are the city districts in Germany’s 15 most important cities and metropolitan areas where price growth is more extreme than in each of the city’s remaining districts. The study shows that the most accelerated price growth is no longer restricted to districts traditionally viewed as fashionable. As far as property developers are concerned, this trend is largely being driven by the scarcity and increased cost of development land. Frank Wojtalewicz of d.i.i. predicts, “even higher levels of demand from institutional investors and owners of residential real estate portfolios.” Germany’s major metropolitan cities are becoming increasingly popular, observes Thomas Zabel from Zabel Property AG: “International investors have a strong focus on Berlin, Frankfurt and Germany’s other metropolises.” Berlin’s most popular quarters, such as Prenzlauer Berg, Friedrichshain, Kreuzberg and Neukölln, have been joined by what used to be mid-ranking districts such as Moabit and Gesundbrunnen, both of which have developed strongly over the past couple of years. With its Carré Voltaire project, the developer Diamona & Harnisch is currently building a total of 127 apartments in what has so far been an overlooked part of Berlin, the Lützow-Viertel. The average sale price for the project’s condominiums is EUR 5,500/sqm. Sales started in December, and 60% of the apartments have already either been sold or reserved.
Germany’s real estate market is highly transparent
As revealed by the IMMOBILIEN ZEITUNG on 07.07.2016, this year’s JLL Transparency Index rates Germany’s real estate market as highly transparent. The ranking is led by the anglo-saxon dominated markets in Great Britain (1), Australia (2), Canada (3), the USA (4), New Zealand (6) and Ireland (8). Overall, real estate markets around the world have become more accessible and transparent for international investors. As a result, the ten countries with the best transparency scores attracted three-quarters of the capital invested by institutional investors. Effective corporate leadership, a wide range of market data, and the consistent adherence to contractual terms and government regulations were all shown to have a positive impact on investors’ decision-making.
Germany’s real estate companies have sound financial foundations
According to DSGV-Branchendienst, 45,000 balance sheets analysed by the company reveal that Germany’s real estate companies have more solid financial foundations than they did just five years ago. This was reported by the IMMOBILIEN ZEITUNG on 07.07.2016. The companies’ indebtedness ratios have been substantially cut in the period between 2010 and 2015. In parallel, the companies have reduced their debt capacities to well below 100%, an indication that they retain the ability to take on increased levels of debt capital. The report identified no current risks of over-indebtedness and dismissed suggestions of an over-heated market, dismissing these arguments as unfounded in relation to real estate companies.
Special tax write-downs are off the table
As reported by the FAZ on 06.07.2016, and the IMMOBILIEN ZEITUNG on 07.07.2016, compromise talks on special depreciation allowances to encourage the development of new apartments have broken down between the German government’s two coalition partners, the CDU/CSU and the SPD. Despite a series of briefings signalling that a breakthrough was close, the two political factions were ultimately unable to reach an agreement and are therefore no longer pursuing the legislation. At the same time, the number of new apartments being constructed is nowhere near enough to satisfy current demand, reported DIE WELT on 05.07.2016. The DIE WELT report referred to annual statistics recently published by GdW. Axel Gedaschko from GdW warned that the number of building permits issued is not the key benchmark, but the number of apartments that are actually being built. He identified the weaker-than-hoped-for economic recovery since the great financial crisis, and the corresponding delays in zoning land for development, as the major reasons for the underwhelming construction of new apartments in Germany. Gedaschko believes this largely explains why 37,000 fewer apartments were built in Germany each year between 2009 and 2015 than were actually needed. During the same period, Germany was insufficiently prepared for the arrival of 2.75 million immigrants, which further exacerbated pressures on the country’s housing market. The GdW pulled no punches in its criticism of the coalition government’s handling of talks on the proposed special tax write-downs, reported the FAZ and the HANDELSBLATT on 05.07.2016. As far as the real estate industry is concerned, the government has wasted valuable time in its battle against the current housing shortage. According to the GdW, the government should have legislated on special tax allowances months ago. “Interest rates have never been lower and we are still not building enough apartments,” the GdW’s president, Gedaschko, told the HANDELSBLATT. In addition to the scarcity of supply and inflated cost of development land, other hurdles include overly stringent construction standards, excessive taxes and other charges. These are long-standing problems, but, so far, nothing has been done to tackle them. On 01.07.2016, Christoph Gröner from CG Gruppe appeared in IMMOBILIEN&FINANZEN and called for municipal authorities to finally do something to promote housing construction, including selling municipal land. In his opinion, this is the only approach that would allow developers to turn their plans into a reality and deliver the housing that is so desperately needed.
Shortage of real estate coming to market
As the SÜDDEUTSCHE ZEITUNG revealed on 06.07.2016, the amount of real estate bought and sold in Germany in H1 2016 was substantially lower than in the corresponding period in 2015. According to figures released by JLL and the real estate subsidiary of BNP Paribas, deals involving commercial properties totalled just under EUR 18 billion between January and the end of June, a year-on-year decline of 25%. The decline in the volume of residential real estate transactions was even greater, revealed Dr. Lübke & Kelber, who highlighted an absence of large-scale portfolio deals in the residential sector. The volume of real estate transactions may have fallen, but this in no way reflects any drop in demand for property. Instead, the lack of alternative investment opportunities for real estate owners means that they have little incentive to sell. As this situation doesn’t look like it will change in the near future, analysts are forecasting that property prices will continue to rise.
High prices give housing construction industry a boost
With 12% more housing than in the year 2000, Münster and Potsdam occupy the top two spots in the latest Postbank German Housing Atlas, reported the SÜDDEUTSCHE ZEITUNG on 08.07.2016. Postbank analysed the housing markets in 36 of Germany’s biggest cities and revealed that the highest levels of housing construction activity were reported in the cities with the highest housing prices. Nevertheless, the amount of housing being constructed in Germany’s big cities will not be anywhere near sufficient if population forecasts prove correct.
Rising property prices in Cologne
Cologne’s property prices are still rising, reported the HANDELSBLATT on 06.07.2016. A survey by VDP Research shows that prices for single-family homes in Cologne rose by 5%, and condominium prices by 4%, in 2015. Rental prices for new tenancies were 4.7% higher than at the same time one year earlier. The disparity between purchase prices and rents has widened. Haus & Grund interprets these accelerated price rises as a natural consequence of the “search for security.” Provided they have sufficient equity capital available, large numbers of buyers are willing to accept a long search and rising prices as they look to buy a home. Sales are often concluded before ground is even broken. Preliminary findings indicate that 4,000 apartments were completed in Cologne in 2015, which will be a new record once confirmed. However, even this is not enough to meet demand. 6,000 new apartments are needed each year. CG Gruppe is currently making final preparations to build the first 500 of 3,500 apartments as part of its Cologneo I project. Construction is scheduled to begin this summer.
Prices gather further momentum in Stuttgart
As revealed by the IMMOBILIEN ZEITUNG on 07.07.2016, figures from Stuttgart’s Committee of Appraisers show that transactions in the city’s real estate market climbed to a new peak in 2015, and the rate at which purchase prices are increasing has accelerated. Existing apartments added around 15% to their value and prices for newly built condominiums in the mid-market segment added about 4% (reaching EUR 5,074/sqm). The top price paid for a condominium rose to EUR 15,425/sqm and the price for a high-standard, detached single-family house climbed above EUR 1 million for the first time. Prices for apartment buildings surged by between 8% and 11% as the number of transactions remained fairly stable. These 2015 trends continued into Q1 2016. The number of transactions, which totalled 842 in Q1 2016, is almost identical to the first quarter of 2015, although there have been considerable changes in the volume of transactions per property type. In the case of detached, single-family houses, sales were down by -5%, semi-detached house sales fell by -6% and multi-family house purchases declined by -2%. There was a moderate increase in the number of deals involving residential development land, which were up by 17 to 118. Such a small increase reflects the shortage of available residential development land in and around Stuttgart. The number of building permits issued rose from 1,340 in 2014 to 1,677 in 2015, and 1,837 new residential properties were completed last year. The gap between supply and demand continues to widen. The main reason that housing prices are increasing at an ever-faster rate in the Stuttgart area is the reluctance of municipal authorities to approve new development land. The Committee of Appraisers has suggested that new sites for high-rise residential towers should be considered, as denser housing construction is the only way to redress the city’s deficit of affordable housing.
Demand for office real estate remains high
Demand for German office real estate remains high, reported the SÜDDEUTSCHE ZEITUNG on 08.07.2016. In H1 2016, office rentals in Berlin, Düsseldorf, Frankfurt, Hamburg and Munich were up, and vacancy rates were down. “The lettings market is in excellent health, especially in our five key office centres,” said Fabian Klein from CBRE. Demand continues to outpace supply, which has pushed prices higher and squeezed yields ever lower. Since the financial crisis, CBRE calculates that Berlin and Munich have each seen EUR 27 billion of office property transactions. The significant reduction in vacancy rates owes a great deal to the repurposing of older office space, primarily into residential apartments.
Demand surges in Frankfurt’s office market
The 212,000 sqm of office lettings in Frankfurt during H1 2016 represents a 20% increase in comparison with the previous year, revealed the BÖRSEN-ZEITUNG on 08.07.2016. This is the best half-year figure in the last four years. The project development market remains relatively small, and a majority of investors continue to concentrate on pre-lettings. For this reason, investment volumes are expected to be EUR 1 billion lower in 2016 than 2015, totalling around EUR 5 billion.
Record prices on Germany’s hotel market
Germany has further improved its standing among investors as a lucrative hotel property market. This was reported by the FAZ on 08.07.2016. In a survey carried out by CBRE at this year’s Hotel Congress in Berlin, 58% of those surveyed said that engagements in Germany’s hotel sector are especially attractive, and significantly more appealing than similar investments in Great Britain. Nevertheless, in terms of transaction volume, Britain’s hotel market attracted EUR 9.3 billion of investment, more than double Germany’s EUR 4.4 billion. But Britain’s position as the leading hotel investment market in Europe could soon be a thing of the past. As revealed by the IMMOBILIEN ZEITUNG on 07.07.2016, JLL registered a 26% increase in hotel transactions in Germany during H1 2016, with the volume of deals climbing to EUR 1.9 billion. This has pushed yields lower, and a yield cut has been noticeable since late summer/early autumn 2015. The average price per room climbed to a new record of EUR 157,000 in 2015, representing a 40% increase since 2010. This has dropped back slightly in the first half of 2016, and now stands at EUR 153,000. The transaction volume for the full twelve months of 2016 is not expected to top the record set the previous year, especially as the supply of hotel properties has more or less been exhausted. As a result, developers have become more active in the sector, accounting for 46% of all hotel sales last year as the largest seller group. The sector’s senior managers and the German Hotel Association (IHA) have complained about the cost of leases, and have expressed concerns about the way in which prices are developing. Contrary to expectations, Asian investors have so far been somewhat reluctant to invest in Germany’s hotel market and only accounted for 1% of overall investment. They are apparently interested, but often have unrealistically high yield expectations. Some adjustment is required before Asian investors align themselves with the realities of the German market.
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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 Rotterdam
Rotterdam, like Amsterdam, is an international center of trade, transport and services, and its geographical location offers an exceptional advantage – it has the biggest harbor in Europe. Due to its harbor, its airport, and also its proximity to the international airport in Amsterdam, Rotterdam’s transport links are outstanding. The industrial sector, which is significantly influenced by the harbor, mainly specializes in shipbuilding, oil refineries, and the chemical as well as metal industries. In addition, during recent years, the service sector has become much better established. In particular, the share of financial and business services has increased and is nowadays above the Dutch average.
Feri rates Rotterdam as a business location “A”, which is upgraded to the 1st quarter 2015. It translates into “high potential, low risk”. With this rating result the city ranks 4th in the comparison of European Centers.
Office Real Estate
Regarding office real estate Feri rates Rotterdam “C”, which is upgraded to the 1st quarter 2015. The city ranks 111th among office locations of European Centers. Feri awards the office top locations “B” and the side locations “C”
Demand in Rotterdam’s office market is largely defined by a competitive and well diversified service sector. Designated international companies appreciate the lower level of office rents in Rotterdam compared to Amsterdam. Since 2009 the vacancy rate increased significantly due to the recessionary development. Different than Germany, the Randstad regions experienced a strong recession in 2012/13 after the economic crisis of 2008. Since 2014 the economy is recovering again and demand for office space is intensifying, especially due to an increase in office jobs. Vacant office space is being absorbed increasingly. Due to the increasing service sector, we expect office rents to rise moderately during the forecast period.
Retail Real Estate
In the comparison of European Centers regarding retail real estate Rotterdam placed 1st with a rating result of “A”, which is unchanged compared to the 1st quarter 2015. Feri awards the retail top locations “A” and the side locations “A”.
The famous seaport is the second largest city of the Netherlands. The excellent infrastructure and the modern architecture attract a high number of tourists which bring additional purchasing power to the region. The highstreets in the city centre are Lijnbaan, Beurstraverse, Korte Lijnbaan and Hoogstraat. The short supply and the high demand for quality retail space in these locations led to slight rent increases. Secondary locations have also benefited from attractive building measures. Nevertheless the positive rental development in this area is expected to stay behind the rent increases in primary locations. The supply – especially for top retail space – will continue to be limited, notwithstanding several building projects which are already in the pipeline. Rents will continue to increase.
Residential Real Estate
When it comes to residential real estate, Rotterdam placed 6th among European Centers with a rating result of “B+”, upgraded to the 1st quarter 2015.
On Rotterdam’s apartment market rents have risen only very moderate in the aftermath of the financial crisis. Even compensation of inflation was partly not possible. Two factors have mitigated the negative development on the apartment market: First of all, the positive population development, which stabilized demand. Secondly, the relative weakness of the ownership market. In the years to come supply of new apartments will slightly grow due to the new housing policy, which is intended to liberalize the regulated rental market. Nevertheless, despite the expected increase of new supply, apartment rents in Rotterdam will continue to rise, due to stable demand. We expect rents to rise at around 2% p.a. during the forecast period.
Since 2008, in the wake of the financial crisis and an ongoing weak economy, the Netherland’s housing market has shown significant price adjustments. However, the Randstad regions compare slightly better to the rest of the country.
Due to high household debt, weak development of incomes, and low affordability, demand for property ownership decreased significantly.Thus, building activity decreased in turn. The balance between demand and supply will consequently be restored over the medium term. From 2014 on the economy and development of incomes will stimulate demand again. The population is also expected to increase above the overall average for the Netherlands. These conditions will then support slightly rising prices.
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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