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What next after Super Tuesday: Trump, Cruz or Clinton?
By Dr. Rainer Zitelmann
Following Super Tuesday, I think it is extremely likely that the next President of the United States of America will be Hillary Clinton, Donald Trump or Ted Cruz.
I was in the United States last week and spoke to lots of people about the elections, as well as watching a range of extensive interviews with Cruz, Rubio and the other candidates on Fox TV. My impressions:
Trump is ahead for many reasons. US Americans have a tendency to elect a president who represents the total opposite of his or her predecessor: They elected Obama because he is totally unlike George W. Bush. Trump is held up as the “anti-Obama” by his supporters. Without a doubt, Obama was one of the weakest US Presidents in foreign policy terms, a fact that Trump has not been slow to point out in a series of brash remarks. Obama stands for “political correctness,” Trump stands for the exact opposite.
As far as the Democrats are concerned, Hillary Clinton has built up a substantial lead with a series of Super Tuesday wins and is now way ahead of her left-wing socialist rival, Bernie Sanders. The relative success of the leftist outsider Sanders has, however, forced Clinton to take up an evermore left-leaning position. There is a real danger that Clinton would continue with Obama’s strategy of steering America in the direction of a European-style welfare state.
As things stand right now, a majority of observers are predicting that it will be Trump against Clinton for the presidency – with Clinton expected to come out on top in a direct race. How do I see things developing from here on out?
The Democrats are keeping their powder dry and will only wheel out their heavy artillery once Trump is confirmed as the Republican presidential candidate. Things could then quickly get dangerous for Trump. He has certainly been able to brush off every hint of scandal or damaging revelation thrown at him so far. At the moment he seems to be immune from attack – whatever he says and whatever is said about him, nothing seems to put his voters off in the slightest. But all of this could easily change once he is in a real presidential race and has to start winning over undecided, floating and centrist voters.
On the one hand, Trump is successful in mobilising voters who previously supported the Democrats, or identified as independents, especially those from the working classes. On the other hand, Trump polarises the electorate to such an extent that his candidature could result in an unprecedented mobilisation within the Democrat’s ranks. To some extent the situation reminds of when Franz-Josef Strauß campaigned to become Chancellor of Germany and unwittingly triggered a left-wing mobilisation the likes of which had never been seen in the country before. It should therefore come as no surprise that quite a few Democrats are secretly hoping that Trump ends up as the Republican’s candidate for exactly this reason. This is why they are currently holding back until the Republican’s have decided on their candidate. As soon as Trump receives his party’s official nomination, the situation will change completely.
A nomination for Cruz, widely regarded as on the “right” of the political spectrum, would also lead to an increase in support for the other side, but not to the same extent as with Trump. Cruz has the advantage that he is not viewed as unpredictable, unlike Trump. I happen to like the economic policies put forward by Cruz – he supports radical tax cuts and is a passionate proponent of free market economics. At the same time he is endorsed by the conservative evangelical Christian groups that form a powerful block within the Tea Party movement. Their support poses a number of problems for Cruz, and is viewed with suspicion by a large swathe of voters. However, the big advantage that Cruz has: Voters know what they will get from him, unlike wild-card Donald Trump. Cruz will argue throughout the upcoming primaries that he has already beaten Trump a number of times – and that it is he, not Trump, who has the best chance of beating Hillary Clinton.
Trump is going to have to pull off a difficult balancing act: Firstly, he will have to put distance between himself and his image as a wild card candidate who severely polarises the electorate. In attracting the support of a number of major mainstream Republican figures he has already started this process. His biggest win so far has been in gaining the endorsement of the well-known Governor of New Jersey, Chris Christie. The balancing act for Trump: In becoming a little more “mainstream” he has to be careful not to tarnish his “anti-Washington” and “anti-establishment” image.
Read also Rainer Zitelmanns Finance Blog.
2016 to be another record year
As reported by the IMMOBILIEN ZEITUNG on 25.02.2016, the Council of Real Estate Experts’ Spring Report points to new records being set in 2016, following a record-breaking 2015. According to council member Andreas Schulten of bulwiengesa, Berlin will benefit the most from future developments. Figures released by empirica show that prices for condominiums in the German capital rose by 15.6% last year, in Munich by 13.5% and in Stuttgart by 19.4%. Advertised prices in Germany’s western states increased by 7.9%, in the eastern states (excluding Berlin) by 6.9%. This means that prices went up more strongly than rents (3.7% and 1.2%). The Council of Real Estate Experts viewed this as “a decoupling of the investment and rental markets.” The council made it clear that they are not speaking of a bubble, highlighting the facts that no excess living space is being built and that banks remain cautious as far as their lending practises are concerned.
Rents in big cities rise sharply
Rents for apartments in Germany’s biggest cities rose sharply in 2015, revealed the FAZ on 26.02.2016. Based on figures published by the German Property Federation ZIA, Munich’s increase of 7.4% put it ahead of all other major cities in Germany, followed by Stuttgart at 6.8%, Berlin at 4.4% and Frankfurt at 3.8%. In Cologne and Düsseldorf, rental price increases of 3% were recorded. ZIA identified low interest rates, rising wages and the restructuring of investment portfolios as the major factors behind the increases. ZIA also pointed to a growing migration from rural to urban areas, along with higher building costs as a result of political decisions and the general population’s resistance to newbuild projects.
German cities offer a high quality of life
Seven of Germany’s cities have been included in the top 30 of a global Quality of Living ranking, revealed DIE WELT on 24.02.2016. The German city with the highest quality of life according to the index published by the global consulting company Mercer is Munich, which was ranked fourth overall. The top-ranked city was the Austrian capital, Vienna. Berlin managed to improve on its 14th place in the previous year’s index, rising one spot to 13th. Frankfurt occupied seventh place. A total of 230 major cities were analysed according to a range of factors including medical and health services, public transportation and traffic congestion, air pollution, safety and political stability.
Rent index reform
Proposals made by Heiko Maas (SPD), Federal Justice Minister, to reform the methodology for producing the country’s rent indexes have not found favour with Barbara Hendricks, Federal Construction Minister, claimed the IMMOBILIEN ZEITUNG on 25.02.2016. Hendricks believes that there is a real danger that extending the reference period for local comparable rents from four years to ten will lead to the devaluation of real estate portfolios. IVD president Jürgen Michael Schick welcomed Hendricks’ contribution to the debate. Schick does not now believe that a draft law will be presented to parliament during the first half of this year. He has however warned that the four year reference period’s days are likely numbered, even if the ten-year extension is not eventually introduced. There are indications that the tax benefits designed to support investment in construction of new rental housing could be extended before the legislation is finally introduced. The Construction Minister has revealed that she is receptive to the idea of including subsidies for extensions to existing buildings and the conversion of commercial buildings into housing.
Real estate transactions hit a new high
As DIE WELT reported on 26.02.2016, more money was spent on real estate in Berlin last year than in any previous year in history. A total of €16.8 billion changed hands in deals involving land, houses and apartments. Preliminary figures released by the State Land Valuation Committee indicate that transaction volumes were up by a third over the previous year. The fact that the number of individual transactions only rose by 15%, to around 32,400, shows that the supply of land and properties is running short. In central districts, i.e. within the S-Bahn Ring, standard land values have added roughly 50%, while multi-family housebuilders developing land outside the S-Bahn Ring face price increases of 30%.
Study: The home ownership retirement debt trap
A quarter of homeowners over the age of 69 have not yet paid off the mortgage on their homes, reported DIE WELT on 23.02.2016. This was revealed in a study published by the pension annuity company Deutsche Leibrente AG in collaboration with the University of Cologne’s Institute for Insurance Science. While the proportion of indebted homeowners in the 69 to 79-year age group is 22%, in the group from 80 to 92 it is even higher, at 24%.
Shortage of housing for the elderly
There is a shortage of almost three million apartments for the elderly and those in need of care through to 2030, wrote both the SÜDDEUTSCHE ZEITUNG and the IMMOBILIEN ZEITUNG on 25.02.2016. The costs for redeveloping and remodelling existing apartments have been estimated at €50 billion. So far, the federal government has allocated around €50 million per year to the KfW bank’s support programmes, but this will need to be increased. Charitable trusts and foundations could also be in a position to contribute. According the Federal Office for Statistics, there will be more than 24 million people over the age of 65 living in Germany in 2035.
Economics of passive energy houses disputed
Doubts have been raised about the economic efficiency of passive energy houses, i.e. houses with heating requirements of just 15 kWh/m² thanks to advanced insulation, specially-constructed windows and modern ventilation systems, wrote the IMMOBILIEN ZEITUNG on 25.02.2016. When the electricity used to operate these systems is included in energy-efficiency calculations, passive energy houses actually use more energy than houses complying with the KfW-55 standard as specified in Germany’s 2009 energy-efficiency regulations. Thick layers of insulation and bulky ventilation systems also reduce the living space available to occupants. In addition, real-life energy consumption often deviates significantly from forecast values. This is partly due to the fact that occupants often have problems using the heating and ventilation systems correctly. Given the comparatively high costs of the equipment and materials, houses will also be significantly more expensive to build after 2020, should energy-efficiency standards be tightened once again to only allow the construction of low-energy houses. Requirements to retrofit energy-efficient equipment would pose a considerable financial burden on private homeowners who have bought their property as a retirement investment.
States collect more real estate transfer tax than ever
The SÜDDEUTSCHE ZEITUNG reported on 25.02.2016 that estimates released by the Federal Finance Ministry indicate that Germany’s federal states collected a record €11.2 billion of real estate transfer tax last year. This is more than double the receipts from 2010. The states benefited in three ways: from higher tax rates, from higher property prices and from the boom in real estate transactions. At the same time, authorities have increased the costs of buying property. This is a particularly sensitive topic in relation to the crucial role of homeownership should play in retirement planning. As the tax payment cannot normally be included in mortgage loans, it acts as a serious hurdle for first-time buyers and young families as they consider buying a newbuild home or apartment. Furthermore, the tax can be levied on multiple occasions on a single property or piece of land, for example when a project developer first acquires a plot of land from the authorities, and again when the developer sells the completed property. Even though it would probably be more appropriate to lower real estate transfer tax rates during a period of housing shortage, Germany’s federal states have chosen to do exactly the opposite, mainly as this is the only tax they have full control over, setting the rates and collecting the receipts themselves. Nevertheless, the higher the rate, the greater the temptation to avoid the tax. Large-scale investors acquiring large portfolios of apartment buildings use share deals rather than direct acquisitions, thereby avoiding a tax liability as they acquire shares in the company owning the property, rather than the minimum of 95% of the property itself that would incur real estate transfer tax. Avoiding the tax is possible in a scenario whereby two companies simultaneously take over a third property-owning company. Family-run trade and industry companies benefit also from the 95% rule when transferring shares to the next generation of owners.
New commercial real estate record
As reported by the IMMOBILIEN ZEITUNG on 25.02.2016, low interest rates, strong economic growth, stable prices and the robust labour market have all had a positive impact on the commercial real estate market. Almost as many commercial properties were traded in 2015 as in the record-setting year 2007. The volume of transactions rose for the sixth year in a row, from €40.5 billion to €55.5 billion. Office was the most popular investment category (€26.1 billion, +51%), followed by retail (€18.1 billion, +88%). Investment also hit record levels for company property, logistic real estate and hotels. 60% of investment was attributable to single deals. A majority of acquisitions were once again made by institutional funds and asset managers. International investors accounted for more than half of the investment total. €31.3 billion was invested in Germany’s seven A-cities, a 38% increase on the previous year, and a new transaction record. Investment in B-cities was up by two-thirds, reaching €6.75 billion. C- and D-cities attracted real estate investment of €17.6 billion.
Berlin’s hotels more popular than ever
The number of overnight stays in Berlin broke through the 30 million barrier for the first time ever in 2015, reported the IMMOBILIEN ZEITUNG on 25.02.2016. Within the last five years the number of overnight stays has risen from 20.8 million a year to 30.25 million. Almost 55%, or 12.36 million, of Berlin’s guests were domestic visitors. They booked a total of 16.6 million overnight stays, an increase of 2.5% over the previous year’s figures. An even greater increase was recorded among international guests. The total of 4.9 million overseas’ visitors represented an increase of 4.2%, and their 13.5 million overnight stays was a rise of 9.2%, in comparison to 2014’s figures.
Council of Real Estate Experts’ Spring Report highlights rent increases in residential and retail sectors and shortage of office space
On 03.03.2016, the IMMOBILIEN ZEITUNG reported on the latest figures published in the Council of Real Estate Experts’ Spring Report. The report reveals that the gap between apartment prices and rental prices in Hamburg has widened substantially and that the growth in real estate transactions in the city was slower than in other A-cities. While prices in Stuttgart rose in Q1-Q3 2015 by 18.8% in comparison to Q1-Q3 2014, climbing to €3,074 per square metre, and in Berlin prices were 14.4% higher at €2,482 per square metre, the increase recorded in Hamburg was just 9.4% (€3,171 per square metre). Asking prices for condominiums in Hamburg rose by 53.5% between 2010 and 2015, whereas rental prices have only increased by 8.3%. Prices in Munich have increased by almost 90%, but even here, rents have increased more slowly, by 30% over the same period. In Berlin, condominiums have become 62% more expensive over the same five-year period, while rents are 32% higher. The gulf between the development of prices and rents was therefore most extreme in Hamburg. Rents continued to develop less dynamically than condominium prices throughout 2015. Rents in Munich may have added an average of 7.4%, and in Stuttgart they gained 6.4%, but in Hamburg the increase was a negligible 1% (2014: 1.1%). An increase of up to 3% is held as possible for 2016, especially due to increased demand for living space as a result of the continuing influx of refugees. There is a shortage of modern office space in all of Germany’s major cities. Vacancy rates fell by 40 basis points in 2015, sinking to 5.5%. Taking all A-cities into account, average vacancy rates dropped by 110 basis points, with Düsseldorf recording a 190 basis point drop. Given the fact that the 147,000 square metres of new office space completed in Hamburg last year was about 20% below the ten-year average, while the 520,000 square metres of take-up was about 18% above the ten-year average, it’s no surprise that the shortage of modern office space in the city has intensified. Inner-city peak rents in particular failed to gain further ground, remaining static at €24.50 per square metre. Berlin (+4.4% to €24.00 per square metre) and Munich (+1.8% to €34.10 per square metre) were the only two cities to record growth in the office sector. In contrast, the retail sector saw significant rental price increases. The net initial yield for properties on Hamburg’s high streets sank to 3.9%, the second lowest yield among Germany’s A-cities after Munich (3.5%). In parallel, rents for smaller shop premises (80 to 120 square metres) in these locations rose by 6.7% to €320 per square metre. Since 2008, this northern metropolis, which serves a regional population of 3.7 million, has experienced growth of 36%, matching Berlin (2015: €350.00 per square metre). Only Frankfurt has seen stronger growth, with rents up by 39% to €300 per square metre. As far as investment was concerned, Hamburg’s €4 billion may have been the second highest result since 2007, but it only represented a year-on-year increase of, 2.6%, putting Hamburg fourth in the ranking of the big cities, behind Berlin (+93% to €8.3 billion), Frankfurt (+13.2% to €6 billion) and Munich (+25% to €6 billion). The net initial yield in Hamburg has fallen by 40 basis points since 2009, a moderate decline to 4.2%. Yields have fallen across the A-cities by an average 130 basis points, in Berlin by 150.
Rising prices thanks to demographic developments
Demographics, according to a new Postbank study, is the major driver of property prices in Germany. The study’s results were picked up by DIE WELT on 03.03.2016 and the FAZ on 04.03.2016. The study shows how a 1% population increase pushes the prices for condominiums in the country’s cities up by 3.5% and makes detached houses 1.9% more expensive. The results do not, however, apply to all of the 36 cities included in the analysis. Berlin’s population is set to grow be 4.7% larger by 2030 (Berlin’s Senate actually forecasts 9%) and prices for condominiums are predicted to add 14.49%, din Hamburg the population is set to grow by 4.4% with prices increasing by 13.86%. Postbank’s models suggest that Stuttgart’s population will grow by 3.19% and condominium prices will be 10.01% higher, Düsseldorf will have 2.18% more inhabitants and its condos will cost 6.74%. In contrast, Frankfurt will lose 2% of its inhabitants, resulting in prices falling by 8%. The impact on prices is not always direct, but rather the result of knock-on effects: The study anticipates that the German population will grow as the result of around one million migrants settling in the country between now and 2030, assuming that these migrants will be distributed fairly cross Germany, following the established Königsteiner formula. The tendency of refugees and migrants to initially rent low-cost apartments will have a ripple effect, increasing demand in more expensive neighbourhoods and pushing rents and property prices ever higher. Although two-thirds of the 36 cities included in the study experienced population growth over the last ten years, only 40% will record growth through to 2030. Without the projected influx of refugees, this would be the case for only one-third of Germany’s cities.
Support for social housing misses the mark
As DIE WELT reported on 02.03.2016, followed by the FAZ on 04.03.2016, the German Economic Institute (IDW) has spoken out against an expansion of social housing construction in Germany. The Federal Minister of Construction, Barbara Hendricks, announced that she intends to increase the number of apartments built per year in the social housing sector by 80,000 to 350,000 and has earmarked additional funding of €1.3 billion per year to do so. The IDW has warned that these measures fail to address the core of the problems in the housing market. Industry associations have assessed the requirement for new apartments at 400,000 residential units per year, as a direct result of the influx of refugees into the country. However, newbuild apartments are often too expensive for socially disadvantaged tenants. As a result, it would achieve more if conditions for investors were improved and tenants were supported via housing benefits. This would also go some way to addressing the fact that the misallocation of subsidised housing is, at 54%, extremely high. Only 46% of the households currently living in social housing have a household income of less than 60% of the national median income.
Equity in real estate investments has almost doubled since 2007
As reported by the IMMOBILIEN ZEITUNG on 03.03.2016, BNPP RE has revealed that the amount of equity capital employed for real estate investments in 2015 exceeded €29 billion, almost twice as much as the €16.5 billion invested in 2007. However, the record for investments in commercial real estate, also set in 2007, was not broken in 2015. In comparison to the gross investment value of €59 billion in 2007, the figure for 2015 stood at €56 billion. This is largely due to the very different fundamentals for banks and an increase in activity from equity-oriented investors, who have other targets than maximising leverage. As a result, equity ratios for real estate investments in 2015 averaged 50%, compared with just under 30% in 2007. The highest equity ratios were recorded for investments in commercial real estate in Hamburg (57%), where last year saw particularly high levels of investment activity from mutual funds and insurance companies. Düsseldorf, with a high proportion of investments made by private equity and institutional funds who employ debt capital to optimise their returns on equity, recorded a lower share of equity (47%). These investors dominated investments in the logistics category in 2015. The equity ratio of 48% in this segment was therefore five to seven percentage points lower than the ratio in the office, retail and hotel segments.
Family offices taking greater risks
Private asset managers are becoming increasingly interested in stocks and riskier real estate investments, rather than playing it safe with bonds and classic real estate asset classes, reported DIE WELT on 04.03.2016. This was revealed by a survey carried out by the real estate company Famos of 30 German family offices. Four years ago, the proportion of bonds in family office investment portfolios was 24%, today this is down to 18%. The proportion of stocks on the other hand has risen from 18% to 23%. Real estate has remained stable at 35% and is still the largest asset class.
Real estate companies look to alternative sources of financing
As the BÖRSEN ZEITUNG revealed on 04.03.2016, banks are surrendering market share to private equity, mezzanine capital and bonds when it comes to financing real estate investments. The first ever “Real Estate Capital Radar Deutschland” study carried out by EY Real Estate nevertheless confirms that classic senior and junior loans are widely expected to retain their dominant share, amounting to around €80 billion, or almost ten times the total for the alternatives. Even the bond market only accounts for about ten percent of the banks’ figure (€8.3 billion). The study is based on a survey of 151 decision makers who provide funding for commercial real estate in Germany. They expect that a growing reliance on alternative sources of financing will lead to higher loan-to-value ratios. Nico B. Rottke of EY Real Estate has seen peak LTV reach around 75% in the commercial real estate sector, while in the lower-risk residential sector peak LTV has moved above 85%. IPOs have primarily been used to facilitate companies’ growth, but have also become more popular as a financing alternative as they provide easier access to the capital markets. When it comes to share issues, investors expect issue volumes to average €300 million. “It’s clear that we are still going to see lots of smaller IPOs. These companies often list in Luxembourg or London”, said Rottke. This is due to the underlying interests of international investors who are keen to invest in real estate in Germany. Yield expectations are 4.5%. Share issue volumes doubled in comparison with the previous year, reaching €8.3 billion, with an average issue volume of €120 million. There were a large number of share issues in
the €10 million to €20 million range, even though the 8% average yield requirement is much higher than the cost of a bank loan. The extent of the pressure on classic bank loans is clearly demonstrated by an analysis of minimum and maximum conditions offered by banks in Germany. Senior loans offer an average return of 2% per year, junior loans offer between 3.8% and 5.5%. In comparison, expectations for mezzanine range from 7.2% to 11%, whereas yields of between 13.6% and 20.2% are realistic for private equity. 80% of those surveyed expect key interest rates to rise by 50 basis points during the course of this year. The most popular investment asset classes are office, retail and residential. These are followed at some distance by shopping centres, which were favoured by around two-thirds of respondents. Around 59% are interested in hotels, 55% in logistic real estate, 18% in energy and 13% in leisure facilities.
Number of forced sales drops
The IMMOBILIEN ZEITUNG reported on a further large fall in the number of forced sales in Germany on 03.03.2016. Calculations made by Argetra Verlag based on its own database of more than 700,000 auctions reveal that this trend applies almost equally to Germany’s eastern (-24%) and western (-19%) regions. The total number of forced sales fell from 57,000 to 37,881. Despite the fact that real estate market values have remained stable, the forced sales generated receipts of just €6 billion, which was €1 billion down on the previous year. A majority of the auctions were held in Leipzig and Berlin, and residential real estate was the most auctioned asset class, of which 40% were detached and semi-detached houses and 29% were condominiums. Forecasts for 2016 include a decrease in banks’ mortgage businesses and an increase in refinancing costs, which Argetra expects will lead to an increase in the number of forced sales, bucking the trend of fewer forced sales each year since 2008.
Growing number of high-rises
According to a report in the IMMOBILIEN ZEITUNG on 03.03.2016, an analysis by bulwiengesa has highlighted a growing number of high-rise projects in Germany. Construction is already underway on more than 3,100 units that are scheduled for completion between 2016 and 2018, with more than 4,100 currently in the pipeline and also scheduled for completion before the end of 2018. High-rises are defined as buildings in which at least 5% of the floor space is used for housing. 93% of the apartments, equivalent to 802,000 square metres of living space, will be delivered in A-cities, 7% (56,000 square metres) in the 13 B-cities included in the analysis. A majority of apartments, 2,700 units across 19 projects (completed, under construction and pipeline) are in Berlin. Frankfurt follows with 2,400 apartments across 16 projects. The most active high-rise developer is the CG-Group, which has 694 residential units either completed or in the pipeline. In its analysis of the high-rise market, bulwiengesa forecasts heated competition between developers as they fight to attract wealthy tenants to their residential high-rises in Berlin and Frankfurt.
Fewer care home places required
By 2030, Germany will require an additional 255,000 care home places. This was reported by the IMMOBILIEN ZEITUNG on 03.03.2016 in reference to forecasts made by consultants at Wüest & Partner and Volker Ottenströer, real estate and regional economist, whose forecasts are in the mid-range of other forecasts. Changes to factors such as care and home quotas mean that 20% less places will be required than the original 320,000 forecasts. More and more people are extending the time they stay in their own homes, and an increasing number of people are staying healthier for longer. Efforts to remodel apartments for seniors, along with a wider range of home services, also enable larger numbers of elderly residents to remain in their homes for longer. Last week the German Property Federation ZIA presented the German government with a paper proposing the construction of 2.9 million apartments for the elderly by 2030. The costs for the additional 255,000 additional care home places as forecast by W&P and Ottenströer amount to around €25 billion. Roughly 170,000 new care home beds are required per year. As occupancy rates in care homes over the last few years have reached an average of between 85% and 90%, current requirements for an additional 14,000 beds can be met. The greatest requirement for new care home beds is in Berlin (11,800 beds), Hamburg requires 4,105, Munich needs 2,089 and Cologne requires 2,015.
Prices for land in Berlin rise sharply
Preliminary figures released by the State Land Valuation Committee reveal that land and properties totalling €16.5 billion were traded in Berlin during 2015. This was picked up by the IMMOBILIEN ZEITUNG on 03.03.2016. Standard land values for building land were therefore corrected by 50% upwards. This was especially true for particularly sought after plots in the city’s southwestern districts that offer space for detached and semi-detached houses, as well as for undeveloped land in central locations within the S-Bahn ring that offer space for multi-storey apartment buildings. Deals involving developed land totalled €10.52 billion (+38%). The biggest increases were recorded in deals involving office buildings, commercial space and retail premises, with investment increasing from €1.94 billion in 2014 to €3.92 billion in 2015. There were 26,122 transactions in the condominium and part-ownership segments (2014: 22,468), with investment rising sharply to €5.26 billion, an increase of 31%. In order to restrict speculation with building land, Berlin’s Senate has announced that it will rezone land on a large scale to create new building plots. With this aim in mind, the Senate has launched consultation processes for four large development areas earmarked for the construction of a total of 6,700 new apartments, 5,000 of which will be built on the current site of Tegel airport.
Munich has the most productive retail space
As the IMMOBILIEN ZEITUNG reported in its 03.03.2016 edition, Munich is in an exceptional position among Germany’s leading cities when it comes to footfall, rents and prices in prime inner-city retail destinations. On a single Saturday during the Oktoberfest, retail real estate brokers counted 32,000 shoppers within an hour on Neuhauser Straße. Comfort has calculated total revenues of €10.3 billion for retailers in Munich in 2015. This may put Bavaria’s capital in third place overall, behind Berlin (€17.5 billion) and Hamburg (€10.7 billion), but in terms of space productivity, Munich leads. Based on shop-floor space totalling 486,000 square metres, the city’s retailers generated average annual revenues of €6,500 per square metre. This is almost twice the figure for Berlin and €900 per square metre more than in Hamburg. Across the whole of Munich, retailers generated revenues of around €5,700 per square metre. A major contributing factor has been the city authorities’ decision to restrict the amount of retail space in Munich. The city’s total of 1.8 million square metres is equivalent to 1.3 square metres per capita. Rents for retail space in Munich’s prime locations have remained constant at a high level. In locations such as Neuhauser Straße, rents for premises of between 80 and 120 square metres have hovered at the €370 per square metre level for years. Larger premises of up to 500 square metres are leased for up to €240 per square metre per month. Sendlinger Straße is the only central street in which rents for retail space were up last year, although the 2% increase to €210 per square metre was extremely small. A number of new projects in the pipeline will only serve to increase the attractiveness of Munich as a retail destination.
Stuttgart real estate market sets a new record
The IMMOBILIEN ZEITUNG on 03.03.2016 reported that the city’s Land Valuation Committee annual report reveals that a record amount was invested in real estate in Stuttgart last year. Thanks to large-scale disposals in the commercial sector and ever higher prices for residential real estate, a total of €3.7 billion was invested during 2015 (36% or €981 million more than in 2014). The biggest increases were recorded in the office and commercial sectors, with a plus of €706 million (+97%) to €1.433 billion. There were a total of 91 transactions, a year-on-year increase of 72%. In the housing market, condominium prices were up by 13%, detached houses cost on average 8% more, terraced, town and semi-detached houses added 11% and multi-family houses rose by 10%.
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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 Hamburg
Hamburg is Northern Germany’s trade, transport and service center, as one can verify by perusing the statistics on imports and exports moving through its port. Accordingly, the trade and transport sector is an element of above-average importance for the region’s economy. Despite a huge drop in exports during the 2009 economic downturn, overall export prospects remain good – trade and transportation can be expected to provide a positive economic stimulus in coming years. However, the service sector, which accounts for more than 50% of total output, is the single biggest contributor to economic activity in Hamburg. A new wave of multimedia and Internet-related businesses now complements Hamburg’s traditionally strong media and advertising activity. Financial services and insurance are also gaining importance as focal points of the economy.
Feri rates Hamburg 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 18th in the comparison of European Metropolises.
Office Real Estate
Regarding office real estate Feri rates Hamburg “C”, which is unchanged compared to the 4th quarter 2014. The city ranks 9th among office locations of European Metropolises. Feri awards the office top locations “C” and the side locations “B”.
Hamburg’s office market, comprising 14.1 million sqm of office stock, ranks second largest in Germany. During recent years, most market activity came from the sectors of consulting, media, advertising, and communication, along with trade and transport. Overall, the sources of demand for office space are well diversified, serving as a significant solidifying and stabilizing factor for the market. The development of new commercial districts – “Hafencity”, in the harbor area, is a notable example – has picked up considerably in recent years, pushing up the pace of building activity.
Hamburg´s office market has experienced a year end result of 540.000 sqm take-up (in accordance with JLL). This represents an increase of 3% compared to last year´s result. Office employment will continue to grow from 2015-2019, albeit less dynamically than in 2014. In the long term Hamburg´s office market benefits from well diversified economic structure of the Hanseatic City which compensated cyclical movements of the economy and various branches. The positive demand for prime office space and the low vacancy rate of currently 6% will support prime rents to rise further in the current rental cycle. Indeed building activity has recovered and approx. 300,000 m² new office space will enter the market in 2016.
Direct commercial investment volume* in Hamburg totaled 4.24 Billion € in 2015 (Source: JLL). Its turnover of the previous year was outreached strongly by 20%. Net initial yields have decreased since 2011 and the phase of yield compression seems to be wide advanced. At present, yields have fallen below the level of 2007 which marks an exceptional year of the German investment market. *Office/Retail/Hotel/Logistics and other commercial real estate without residential properties.
High demand from investors brought net initial yields for office properties in Hamburg down to a historic low in the years 2006 and 2007. Subsequently, the onset of the financial and economic crisis induced a major price correction in real estate. The downward re-pricing was reflected in a gain of approximately 30 basis points in net initial yields in 2008, in comparison to the recent historic low. Demand for core investment properties – in short supply in Hamburg – induced a new trend of decreasing net initial yields for top office properties. Currently, yields are below the level as in year 2007. We estimate the long-term fair rental yield at 5.2% for Hamburg’s top offices. Thus, recently an overvalued situation arises.
Retail Real Estate
In the comparison of European Metropolises regarding retail real estate Hamburg placed 8th with a rating result of “A”, which is unchanged compared to the 8th quarter 2014. Feri awards the retail top locations “A” and the side locations “A”.
Hamburg is Northern Germany’s top retail location and the main market for international retailers in Northern Germany. Nonetheless, since the mid-1990s retail space rents have mostly declined. Secondary locations, especially, are hurt by competition from peripheral shopping centers. Hamburg’s retail space market had seemed to be bottoming out. In the medium term, projected strong income growth and Hamburg’s status as the dominant retail center for a big geographic area should be reflected in rising shop rents, despite planned supply expansions such as the restructuring of the “Alte Post” and “Hafencity”. But it is necessary to find a good way for a connection between those new sales areas and the inner city to ensure the rising of Hamburg’s attractiveness as a retail store location.
Residential Real Estate
When it comes to residential real estate, Hamburg placed 13th among European Metropolises with a rating result of “B+”, downgraded to the 4th quarter 2014.
Residential completions in Hamburg have subsided in since the late 90s. While 1992-1999 8,200 apartments were completed, there were only 3,500 completed 2004 and 2011. Especially apartment complexes suffered from this. This development met a since 1990 rising population. The resulting supply shortage has led to a strong rent increase in Hamburg. In 2012 there was a turnaround in new building activity and permits increased. 2014 even shows higher figures of building permits (approx. 11.000). The city will continue to be the growth center of Northern Germany and will attract qualified workers and thus housing seekers. The region’s excellent forecast for disposable income growth undergirds our prediction for steadily and quite strongly rising rents in the years to come.
The condominium market, suffering from a large excess supply put in place in the 1990s, has fared poorly for many years. In the meanwhile market conditions have changed drastically. A long phase of low building activity and a rising population have led to shortage of supply and increasing prices for condominiums. Hamburg’s Senate thus encourages building activity. Their goal is to build 6,000 units annually. This goal has been reached in the last two years. The number of building permits in 2012 accounted to 8.700. In 2013 and 2014 even 10.300 resp. approx. 11.000 building permits were recorded.
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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