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Real Estate Industry Confident for the Year Ahead
As reported in the FAZ on 22.01.2016, the real estate industry expects that further growth will be seen in 2016, on the back of a record year in 2015. The positive sentiment was recorded by PWC in a survey they carried out and published leading up to the World Economic Forum in Davos. The survey’s participants did mention a number of uncertainties, including potential geopolitical crises, increased political interference and regulation, and oil price instability. Many experts are predicting an escalation in worldwide crises and expect this to lead to even more international capital flowing into the German real estate market, especially as Germany has such an established reputation as a safe haven.
While it may be true that housing and taking care of the large numbers of refugees arriving in Germany has become a divisive political issue, it is also likely that the effects will be positive for the real estate industry as there will be a corresponding increase in demand for housing, retail and warehouse space. In addition, interest rates are set to remain at their historically low levels, with no increases expected for the foreseeable future. So, there appear to be plenty of good reasons to assume that the upswing in the German real estate sector will continue. Nevertheless, the higher the industry rises, the further it will eventually have to fall.
The Transaction Market has Peaked
On 14.01.2016 there were reports in the BÖRSEN ZEITUNG, FAZ, DIE WELT and the HANDELSBLATT, joined by the FAZ on 15.01.2016, about a survey of 150 professional real estate professionals carried out by EY Real Estate. According to the survey, the value of commercial and residential real estate transactions in Germany is set for a substantial fall this year, down from EUR 79 billion (2015) to between EUR 62 billion to EUR 65, primarily as a direct result of the limited availability of first-class objects in prime locations. “We think that the apex of the transaction cycle has just about been reached,” said Christian Schulz-Wulkow of EY Real Estate. The market remains highly contested and the number of objects coming to market is extremely low. Residential is the most sought-after asset class. EUR 23.5 billion of the EUR 79 billion total was attributable to this asset class. In independent studies carried out by CBRE and Dr. Lübke & Kelber, both arrived at almost identical figures. Alongside the takeover of Gagfah by Deutsche Annington (now Vonovia), Dr. Lübke & Kelber recorded a further 14 large-scale transactions in 2015.
As reported by the IMMOBILIEN ZEITUNG on 14.01.2016, CBRE has pointed out that net initial yields of 4% are no longer the exception, rather they have become the rule. In Berlin, for example, yields at this level were recorded for the Quartier Potsdamer Platz, sold to Brookfield Property Partners for a reported EUR 1.3 billion in a deal organised by CBRE in 2015. The price is pretty much the same as the price paid by the SEB Immoinvest mutual fund at the peak of the last cycle in 2007 (EUR 1.38 billion). And that is despite the fact that the buildings at Potsdamer Platz are starting to show their age and occupancy rates are lower now than 8 years ago. “The price owes a lot to overall trends in Berlin,” explained Fabian Klein of CBRE. Almost 1 million square metres of office space were newly let in Germany’s capital in 2015. The speed at which real estate changes hands is also something that will pick up in future, hopes Klein: “Ultimately, our greatest problem is a shortage of product. The only thing way to compensate for this shortage is for properties to change hands more quickly.” “2016 Kick Off Event: The Investment Strategies of Institutional Investors”: This is the topic for a special event on February 24 at the Steigenberger Hotel in Berlin. Request your programme today: info@immobilienrunde.de
Record Investment in Residential Real Estate
In its edition on 21.01.2016, the IMMOBILIEN ZEITUNG reported that Germany’s residential real estate market enjoyed a record year in 2015. CBRE recorded EUR 23.3 billion of investment and Savills placed the figure at EUR 22.5 billion. Investment rose by between 68% and 82% year-on-year. Transactions involved between 320,000 and 360,000 individual residential units. The average price achieved per unit was up by 17% to EUR 68,770 over the last twelve months, with the average price per square metre up by 13% to EUR 1,100. Even when the largest transactions, such as the Gagfah deal or Adler Real Estate’s takeover of Westgrund are excluded, investment totalled EUR 12.5 billion, which is still well above the five-year average, according to CBRE. “Over the next twelve months we expect that investors will continue to focus on streamlining their portfolios,” forecast Konstantin Lüttger from CBRE. Germany’s “Top 7″ real estate centres, home to 29% of the residential units according to Savills, have again been the main drivers of recent developments. “Housing Construction in Berlin: The Most Interesting Projects.” This is the topic for a special edition of the BERLIN REAL ESTATE ROUNDTABLE on January 27, 2016 at the Maritim proArte Hotel Berlin. Request your programme today: info@immobilienrunde.de
Property Tax Reforms
As the FAZ reported on 11.01.2016, Germany’s federal states are clamouring for property tax reform. The taxes are based on out-of-date property values and are therefore seen as ripe for reform. In Germany’s western states, property values from 1964 are used, in eastern states the figures hark back to 1935. The current procedure for calculating property taxes is already being examined by Germany’s Constitutional Court. Any reform would probably not be finalised before the end of the decade. The proposed reforms are something of a political hot potato as they envision not only property owners, but also tenants, would be required to pay the taxes in future. According to Hessen’s Finance Minister, Thomas Schäfer, 5% of taxpayers could end up paying much more than is currently the case. Residents in towns and cities which have seen their property prices shoot up over the last 50 years should prepare themselves for a higher tax burden.
Empirica: Condominium Prices Set for Further Rises
The SÜDDEUTSCHE ZEITUNG on 15.01.2016 referred to a report from Empirica suggesting that asking prices for condominiums in Germany’s seven largest cities rose by an average of 14.5% in 2015. The increase is the largest recorded for any twelve-month period this century. Rental prices also rose more strongly in 2015 than they had in the previous year, although the largest increases were mostly seen in the first quarter of the year. The combined effect of the “rural exodus” and increased migration from abroad on the demand side, and unsatisfactory yields and low interest rates on the supply side, are delaying the “normal” cyclical development of the housing market, explains Empirica analyst Reiner Braun. “Exaggerated projections for new construction for refugees and a shift in demand toward owner-occupied housing as a result of the rent price brake could add additional fuel to the fire,” he said.
Rising Revenues in the Condominium Conversion Sector
As reported by the IMMOBILIEN ZEITUNG on 21.01.2016, the condominium conversion business is enjoying something of a boom. Large-scale property owners are taking advantage of high levels of demand to extract profits and expand their portfolios. In December 2015 alone, Accentro Real Estate added five multi-family houses with 75 residential units in sought-after locations in Berlin to its stock. “We will sell approximately 90% of the apartments to capital investors,” said Jacopo Mingazzini. Einar Skjerven of the Skjerven Group reported: “A quarter of our buyers are existing tenants, a quarter are owner-occupiers and the remaining fifty percent are investors.” 50% of the private investors buying condominiums from the Skjerven Group are from overseas. In any case, supply continues to lag behind demand. “As I see it, sales would definitely increase if there were more properties on offer,” said Mingazzini. In 2014, a total of 128,600 condominiums were sold in Germany’s 82 biggest cities, 3.3% less than during the preceding year. Nevertheless, revenues were up by 3.6% and hit a record EUR 24.9 billion. The average price for a condominium climbed to EUR 193,628, which represents an increase of 7.2%. “Second Tenancy Act Reform and the Rent Freeze.” This is the topic for a special edition of the BERLIN REAL ESTATE ROUNDTABLE on February 22, 2016 at the Steigenberger Hotel in Berlin. Request your programme today: info@immobilienrunde.de
Nursing Homes: Up to EUR 80 billion of Investment Required in the Next Fifteen Years
The IMMOBILIEN ZEITUNG on 14.01.2016 highlighted the need for an additional 321,000 residential nursing home spaces in Germany by 2030. According to RWI (Rhine-Westphalia Institute for Economic Research), investment of up to EUR 80 billion is required for the construction and modernisation of nursing homes over the next fifteen years. In 2013 there were around 2.6 million people in need of long-term residential care in Germany. By 2030, this figure is set to rise by a third to 3.5 million. In addition, facilities for a further 124,000 outpatients need to be created during the same period.
Office Space Take-up Increased in 2015
A year-on-year increase in office space take-up was recorded in all of Germany’s major office centres in 2015. This was the subject of a report in the IMMOBILIEN ZEITUNG on 14.01.2016. Leasing activity in Berlin, Munich, Hamburg, Frankfurt and Düsseldorf managed to edge close to the heights last seen at the peak of the previous cycle in 2007. According to CBRE, office space take-up in the “Top 5″ office centres rose by 23% to around 3 million square metres. CBRE recorded a record take-up of 881,800 square metres in Berlin. This topped the previous record from 2014 by more than 45%. Office space take-up in Düsseldorf was similarly higher, increasing by 40% over the last twelve months to reach 440,100 square metres. Munich took second place in the overall ranking with take-up of 758,700 square metres, followed by Hamburg with 535,000 square metres. In Frankfurt, take-up rose by almost 8% year-on-year, totalling 401,100 square metres. “Record leasing activity in the biggest five office centres is a clear reflection of the excellent economic conditions here in Germany – the labour market is in an extremely robust state, employment is up again, more people are working in offices than ever before and sentiment within the German economy remains positive. The leasing market may very well mirror the considerable momentum we’ve seen in the investment market, which could mean that we avoid any decoupling of the occupier and capital markets, which has been causing concerns,” said Carsten Ape of CBRE.
Vacancies were once again significantly lower in all of the major office centres, with the exception of Frankfurt. Whereas vacancy rates in Düsseldorf, Berlin, Hamburg and Munich were down by up to 28% over the last twelve months, Frankfurt saw an increase of 3.7%.
Long-term achievable prime rents were up in almost all of the major centres over the last twelve months. Düsseldorf was alone in seeing rents stuck at around EUR 26.00 per square metre. Growth was particularly strong in Berlin, with prime rents up by 4.4% to EUR 23.50 per square metre. Prime rents in Munich were also significantly higher. Compared with the figures from a year earlier, rents increased by 3% to reach EUR 34.00 per square metre. In Hamburg they were 2% higher, at EUR 25.00 per square metre, with Frankfurt recording a rise of 1.3%, with prime rents of EUR 39.50 per square metre. As far as weighted average rents are concerned, the figures for Berlin saw the most significant jump, ending the year 12% higher at EUR 15.06 per square metre. “The German economy, buoyed up by healthy fundamentals, will gain momentum in 2016 and continue to grow,” according to Jan Linsin of CBRE. “Our forecast for the German office leasing market is correspondingly optimistic.”
Highest Investment in Hamburg’s Office Market Since 2007
On 21.01.2016, the IMMOBILIEN ZEITUNG reported that investment of over EUR 4 billion in Hamburg’s office market during 2015 was the highest seen since 2007. Yields for office space in the city have now dipped below the 4% threshold, largely due to increased involvement from international investors and a number of portfolio sales. Declining yields throughout 2015 have led to a number of investors taking evasive action to broaden their portfolios from core to core plus. “As yield compression has driven returns down, a growing number of investors have been searching for alternatives in more peripheral locations outside the centre,” observed Michael Mikulicz of CBRE, who reports peak yields for real estate just outside central districts at 5.1%. In Mikulicz’s view, a yield spread of 110 basis points between offices in the CBD and offices just outside means that there is “further potential in locations outside the city’s centre.”
Frankfurt Office Leasing Market: More Leases, Less Take-up
On 21.01.2016, the IMMOBILIEN ZEITUNG also reported on Frankfurt’s office market. JLL registered over 580 new leases in 2015, more than in any of the previous ten years. The deals were for space totalling between 387,000 square metres (according to BNPPRE) and 414,200 square metres (according to blackolive). These figures fall short of both the five- and ten-year averages, by 12% and 19% respectively. According to NAI, 1.251 million square metres of office space stood vacant, which represents an overall decline in unoccupied office space. BNPPRE classes 68% of Frankfurt’s office space as “modern,” which is another reason for tenants to take their time picking and choosing. While the banking sector was responsible for just 18% of take-up, high-standard office space was drawing increasing interest from companies in the financial technology (FinTech) sector. These companies have already conquered Berlin’s office market and can see clear benefits in taking up space in close proximity to Frankfurt’s banking district. Increased demand for office space in the €10 to €20 per square metre range has also been reported. However, rents already average €19 per square metre. It is expected that 2016’s office space take-up will remain stable at 2014/2015 levels.
Record Year for Düsseldorf’s Office Market
The IMMOBILIEN ZEITUNG went on to report that 2015 was a record year in Düsseldorf’s office investment market. The year got off to an extremely weak start and the figures for Q1 and Q2 were so poor they set alarm bells ringing. Thankfully the second half of the year saw activity surge as the pent up demand for office space made itself felt. CBRE reported that 440,100 square metres of office space was let during the year as a whole. The vacancy rate dropped to 8.8% by the end of the year, a considerable fall from the heights of 13% just five years ago, at which point Düsseldorf had the second highest vacancy rate in Germany after Frankfurt.
CBRE Reports Record Year for Retail Real Estate
The IMMOBILIEN ZEITUNG on 21.01.2016 also reported on figures released by CBRE detailing investment of around EUR 18.1 billion in German retail real estate during 2015, slightly higher than the previous record of EUR 18 billion set in 2006. In comparison with 2014 (EUR 9.2 billion), investment nearly doubled. The contribution made to this extraordinary result by international investors should not be understated. At around EUR 10.1 billion, 56% of the year’s investment in German retail real estate was attributable to international investors. In comparison, the same group of investors accounted for EUR 4.5 billion of investment in this asset class in 2014. At EUR 6.1 billion, or 34% of the total, a majority of the investment during 2015 flowed into retail warehouses, retail parks, supermarkets and discounters. High-street commercial properties were the next most popular category, with a total of EUR 6 billion (33%), a category which for CBRE’s figures also includes department stores. Shopping centres accounted for EUR 5.4 billion, or 30%. EUR 10.4 billion, representing 58% of overall investment volumes, was attributed to portfolio deals. In comparison to 2014, destination shopping centres in prime locations became slightly more expensive, with net initial yields trending downwards from 4.3% to 4.1%. The same trend was recorded for regional shopping centres in prosperous areas (down to 4.8% from 5%). Prime yields for modern retail parks were also down, from 5.4% to 5.25%. Prices for specialist stores and supermarkets, along with those for department stores, held steady with yields of 6.25% and 5.7% respectively. Average yields for retail real estate in the best inner-city locations in Germany’s top six cities currently stand at 3.87%. Jan Dirk Poppinga from CBRE expects “investment activity in the German retail property market to remain brisk in 2016.” He expects that, “the investment volume during the full year will remain around the level seen in 2015″.
Supermarkets and Shopping Centres Key Drivers of Retail Real Estate Investment Market
As reported in the IMMOBILIEN ZEITUNG on 14.01.2016, in terms of purchase price, seven of the twenty biggest real estate transactions of last year involved retail properties within the grocery and supermarket sector. The largest investment in the grocery segment was made jointly by Rockspring, PGGM and AG Real Estate, with the purchase of 23 specialist centres at a combined value of EUR 350 million. The year’s biggest transaction in the retail sector was the takeover of the Kaufhof department store group by the Canadian retail and real estate corporation, Hudson’s Bay, for EUR 2.825 billion. A further eight of the top 20 transactions involved shopping centres. The most expensive deal involving a centre that opened in 2015 was the acquisition of the Glacis-Galerie in Neu-Ulm by CBRE Global Investors for EUR 145 million.
Frankfurt’s Retailers Become More Selective
The demands of retailers in Frankfurt are becoming more precise when it comes to choosing retail space in the city, reported the IMMOBILIEN ZEITUNG on 14.01.2016. CBRE registered more than 500 active search requests. Chain store operators are increasingly sensitive to price, layout and location, explained Jarko Stilp of CBRE. Secondary locations off the major high streets have come to the fore as many retailers broaden their search for space that fits their more exacting criteria.
Shortage of Warehouse Space for Online Retailers
DIE WELT (on 13.01.2016) and the IMMOBILIEN ZEITUNG (on 14.01.2016) both reported on rocketing demand for logistic properties. New construction and pipeline projects will fail to satisfy this accelerated demand. Warehouses and distribution centres, in particular in Germany, are on many international investors’ shopping lists. “After the traditionally strong office and retail asset classes, and the up-and-coming hotel segment, logistic properties are one of the most sough-after investment objects in Germany’s commercial real estate market,” said Kai F. Oulds of CBRE. And it is exactly this type of space that online retailers need. CBRE reported that transaction volumes in this segment reached EUR 3.9 billion during 2015 (2014: EUR 3.3 billion).
High Average Rents and Prices for Industrial and Logistic Space in Stuttgart
On 21.01.2016, the IMMOBILIEN ZEITUNG contained a report on an analysis of logistic and industrial space take-up in the Stuttgart region published by Realogis. According to the study, 2015 saw take-up of logistic and industrial space reach a five-year high, increasing by 45% in relation to the previous year’s figures. A total of 240,000 square metres of space was taken up in and around Stuttgart (including space built by companies to meet their own needs). If this owner-occupied space is excluded, the take-up of purely leased space stood at around 180,000 square metres. Rents were stable, although they remain high in comparison to national levels. Tenants paid an average of EUR 4.80 per square metre, with prime rents in Böblingen at EUR 5.80 per square metre.
Record Investment in the German Hotel Market
The FAZ on 15.01.2016 reported on the fact that investment in Germany’s hotel market set a new record last year. According to CBRE, transaction volumes rose by almost 45% to approximately EUR 4.4 billion. The increase was largely due to the growth in overnight stays, which was particularly strong in Germany’s largest cities, as well as to an increase in the number of hotels coming to market and an expanding group of interested investors. Yields for hotels are typically higher than for more traditional asset classes such as residential, office and retail. Higher levels of investment were also fuelled by the ready availability of financing at attractive conditions. CBRE expects that 2016 will prove to be another good year for the hotel investment market. “2016 Kick Off Event: The Investment Strategies of Institutional Investors” This is the topic for a special event on February 24 at the Steigenberger Hotel in Berlin. Request your programme today: info@immobilienrunde.de
GERMAN REAL ESTATE NEWS
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Feri Real Estate Market Rating
The Feri Real Estate Market Rating provides a forward-looking assessment of potentials and risks for investment return on regional real estate markets. Ratings are based on detailed econometric forecasts of regional real estate markets including regional economic development. The rating currently includes more than 150 cities in Europe, in the United States and in Asia.
In this issue:
Real Estate Market Rating for Brussels
Brussels is Belgium’s largest center for trade and services. It is also the country’s capital and main administrative center, as well as Belgium’s financial heart. Besides that, several international and European institutions, especially bodies of the European Union, have their seat here. This institutional configuration makes the size of the public sector in proportion to the region’s total economy quite large. Brussels is also an important location for international conferences and summits, and a center for international tourism. The service sector accounts for the largest share of Brussels’ regional output, and it should continue to rise in importance during the years to come, at the disadvantage to the industrial sector. Food processing and the manufacture of machinery, chemicals and textiles are the leading activities in the region’s relatively small industrial sector. In upcoming years, Brussels’ rate of regional production growth is projected at below the average for European cities.
Feri rates Brussels as a business location “A”, which is unchanged compared to the 4th quarter 2014. It translates into “high potential, low risk”. With this rating result the city ranks 17th in the comparison of European Metropolises.
Office Real Estate
Regarding office real estate Feri rates Brussels “B”, which is downgraded to the 4th quarter 2014. The city ranks 3rd among office locations of European Metropolises. Feri awards the office top locations “B” and the side locations “B+”
Brussels is one of Europe’s larger office markets with around 13 million square meters of space. The Leopold district, where the EU commission and the European Parliament are seated, is an absolutely prime location. Other prime locations are City Center and Avenue Louise. The greatest demand in Brussels comes from the public sector, followed by the financial sector and business services. The Brussels investment market is quite transparent and has sufficient liquidity. The large public sector has a stabilizing effect on the development of rents and rental yields; the risk of volatility is thus comparatively low.
Average and top rents have risen again since the middle of 2009. Since 2011 rents have been stagnating. This development is expected to continue over the next two years. A sustained trend of noteworthy rent increases will not become well established until the vacancy rate declines again and approaches or goes below the long-term average. This presumably will occur at the end of the forecast period. The current project pipeline indicates that more office space will enter the market in the next two years. Over the forecast period, we estimate the annual rate of rent increases at 1 percent.
When the last investment cycle reached its peak in the middle of 2007, initial yields in the prime segment of Brussels’ office space market fell clearly below the justifiable long-term average. The correction that followed led to an increase of about 100 basis points by the middle of 2009. The anticipated rate of rent increases and foreseeable risks are again being priced more realistically. Since 2012 yields have been rising slightly again – due to revised expectations in terms rent increases and the ongoing euro zone crisis as well. During the current year, rental yields are expected to increase. Stabilization might be possible by 2014.
The level of initial yields in Brussels’ office market is currently 40 basis points from Feri’s assessment of fair value. The current price level thus offers opportunities to enter the market, especially since rents have stabilized. However, the supply of high-quality core properties is now increasingly limited in Brussels. Nonetheless, as rents increase in line with consolidation of the recovery, objects of good and average quality are going to find a market again. At present, rental yields are significantly above their long-term fair value.
Retail Real Estate
In the comparison of European Metropolises regarding retail real estate Brussels placed 10th with a rating result of “A”, which is unchanged compared to the 4th quarter 2014. Feri awards the retail top locations “A” and the side locations “AA”.
Since Belgium imposes stern restrictions on the planning and construction of shopping malls, shopping centers are a comparatively unimportant factor in retail competition. In Brussels, inner city shops, rather than stores in secondary locations, dominate the region’s retail activity. In recent years, a pattern of recurring major economic downturns restrained consumption and impeded total retail turnover. Reflecting this weakened situation, the rent performance for retail space, especially for space in the best locations, has been virtually stagnant. However, rents for retail space in secondary locations have managed to post some recent rises. In the years to come, inner city retail rents will resume a pattern of stronger increases, if only because Brussels’ strict planning restrictions will keep a lid on supply.
Residential Real Estate
When it comes to residential real estate, Brussels placed 11th among European Metropolises with a rating result of “A”, unchanged compared to the 4th quarter 2014.
On Brussels’ rental housing market, demand from employees of the European Union and other institutions have become notable since the end of the last decade. Nevertheless, the market has not exhibited any remarkable tightness in supply. Thus, drastic leaps in the rent level didn’t occur, although rents for both existing and new apartments have posted continuous increases for a considerable number of years. In the upcoming years the positive rent performance for both existing and new apartments will continue. In the wake of the European Union’s eastward expansion, demand from employees affiliated with EU institutions provided further impetus for the market.
On the residential property market, prices have shown a strong tendency to increase over the last years. The segment of detached single-family houses displayed the most robust price increases, while condominium prices have performed weaker. In contrast to other European cities, Brussels’ price level for residential property is still moderate. In the years to come, one can expect the market for purchase of residential property in Brussels to register further price increases. However, the current economic downturn will delay this development. Eventually, prices will rise in all segments of the market, although prices for condominiums will not begin to accelerate until the medium term.
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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