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How often do you reevaluate your investment doctrines? And how radically?

By Dr. Rainer Zitelmann

Do you know why a majority of investors fail with the investments they make? It’s because 99% of the time they spend thinking about investment-related subjects is spent on concrete investments and their performances, rather than considering the doctrines by which they invest in the first place. And this is despite the fact that a person’s investment doctrines are a crucial factor in the success or failure of their investments.

When did you last reflect upon your investment doctrines? Of course, by “reflect”, I mean reflect in writing. Private investors clearly have an advantage here, given the complete freedom they have in their investment-making decisions, in contrast to institutional investors who have to abide by a whole host of regulations. As a private investor, make the most of your freedom to reevaluate your investment doctrines! And as an institutional investor, take maximum advantage of any freedom you have within the limits of your role.

When reconsidering your investment doctrines, you need to be radical and totally unprejudiced. Question everything, and I really do mean everything. Above all: You need to first become aware of which investment doctrines you follow. Below, I outline a number of widely-propagated doctrines, both from the world of real estate and from other sectors. I will go on to show you why it is worth seriously questioning them.

It may well be that the doctrines I analyse here are not actually misplaced. Most of them even contain a grain of truth. Feel free to tear down my arguments against these doctrines – you may even be right to do so. All I want to do is show you what I mean by a “radical” reevaluation of your investment doctrines.

“I only make my investment decisions after thorough analysis.” Right? Who could possibly say anything against thorough analyses? I am currently writing my second PhD thesis, and on no less a subject than the personalities and behavioural patterns of high net worth individuals – i.e. self-made millionaires with net wealth in at least the tens and hundreds of millions. Just one third of the millionaires I have interviewed said that they predominantly take decisions “analytically.” A clear majority said that they decide with their “gut.” Personally, I have a tendency towards the analytical. But take some time to think about whether it wouldn’t be better to listen more to your “gut” from time to time. If you want to read more on this subject, Gigerenzer has written some very intelligent books that are a great place to start.

“We only buy core real estate in the best locations.”This was long the position of open-ended real estate funds. They happily acquired core office properties in prime locations. And everybody knows what happened next. Today’s core objects are tomorrow’s value-add objects. Doesn’t it make more sense to buy value-add real estate and turn it into core real estate, rather than watching your beautiful core investment turn into a value-add object and then, at some point in the future, an opportunistic investment? I have never bought core real estate. I am currently in the process of selling the properties I picked up from a near-bankrupt Berlin developer in 1999 – at a rent-to-price multiplier of 37. Back then, nobody else was interested. They’re just basic apartments that were built in 1959. Nothing special. But I have increased my invested capital eighteenfold. I’m pretty sure that’s not something that clever core investors manage to do all that often. And the best property I have ever bought was in the worst possible location – it generated limitless returns on my investment.

“Real estate is so cheap right now because the spread to risk-free interest rates has never been so wide.” That’s right, the spread between real estate yields and the “yields” on ten-year German government bonds is enticingly high. But does it help to look at a watch

if the watch is broken? Is the established and trusted benchmark still the right one to use?

“Nobody ever died from profit-taking.” This doctrine – pretty much the opposite of the one above – is particularly dumb. Maybe nobody has ever died from profit-taking, but people have certainly lost money because they sold too early or their follow-up investment turned out a lot worse. Studies have shown that shares sold by private investors typically go on to perform better than the shares the investors buy from the proceeds to replace them.

“We only buy at volumes above xxx million euro, otherwise due diligence simply isn’t worth the effort.” This was the explanation given to me recently by one of the largest institutional investors in Germany. Sure, even this argument has something to it. But who can afford to be so picky in such an expensive market and not even consider perhaps the last few investment opportunities, just because they are below an arbitrary volume threshold? Can you really afford such a luxury?

“High volatility equals high risk.” This is without a doubt one of the most widespread nonsense doctrines. It is nevertheless repeatedly used by most financial analysts and asset allocation advisors.

“As an investor, you should diversify as much as possible.” Warren Buffett has spent his life opposing this investment doctrine and stated: “Diversification is protection against ignorance. It makes little sense if you know what you are doing.”

“Think and grow rich” is the name of the classic book by Napoleon Hill. A great motto. Think more often, for longer and more radically about all of your investment doctrines. What will that achieve? Maybe you’ll realise that many of your doctrines are right after all? Who knows? Maybe you’ll actually realise that the exact opposite is the case.

Read also Rainer Zitelmanns Finance Blog.

Big jump in mortgage approvals

As reported in the FAZ on 22.03.2016, German banks approved €1.23 trillion of building and mortgage loans in 2015. According to the latest real estate research published by Deutsche Bank, mortgage interest rates fell below 2% during the summer of 2015. At the same time, banks’ new mortgage business grew by almost 50% compared with the same month in 2014, the first time such a strong jump has been recorded during the current housing price cycle. The €1.23 trillion of private building loans and mortgages approved by Germany’s retail and savings banks marked the highest figure for credit-financed building projects since the financial crisis. The growth rate for 2015 as a whole stood at 3.5%. Comparing 2015’s overall increase in mortgage and building loans with the results for previous years reveals that this is also the largest year-on-year increase since the financial crisis. There were quarters last year that recorded growth in the double-digit billion range, with Q3 2015’s figure setting a new record, with growth of € 13.6 billion. In contrast, Q4 was slightly weaker than the rest of the year, but still managed to deliver growth higher than in the corresponding quarter of 2014. According to German Central Bank statistics, the largest growth was recorded by savings and cooperative banks in lending for residential construction projects. Germany’s savings banks approved mortgage loans totalling €52.2 billion in 2015, a year-on-year increase of 23.3%. Deutsche Bank attributes these developments to further falls in mortgage interest rates. Compared with 2014, rates fell by more than half a percentage point across the board during 2015, finishing the year at just under 2% on average. At the same time, condominium prices in Germany’s 126 most important cities rose 6% faster than rents on an annualised basis. Price differentials between newbuild and existing properties remained marginal, and prices for terraced and townhouses increased at similar rates. Only detached houses bucked the trend and experienced slower rates of growth. Deutsch Bank forecasts overall property price growth of around 6% again in Germany’s largest cities in 2016, although there will be even more significant regional variations.

Germany in first place for logistic space take-up

According to a report in the IMMOBILIEN ZEITUNG on 24.03.2016, the take-up of logistic space in Germany last year totalled 5.2 million square metres, putting Germany in top spot across Europe. BNPPRE attributed record levels of take-up to further e-commerce growth, combined with strong demand for new space from within the automotive sector. France came second in the European rankings with take-up of 3.1 million square metres, followed by Great Britain in third place with just under 3 million square metres. A comparison of space take-up across the 22 cities included in BNPPRE’s analysis reveals that Frankfurt, despite being the strongest German city with 400,000 square metres of take-up, only places six in the Europe-wide rankings. A total of around €26.7 billion was invested in industrial, light industrial and logistic real estate across Europe last year. Of this, €4.65 billion (17%) was invested in Germany.

New EU regulations for mortgage loan approvals

DIE WELT on 21.03.2016 detailed new EU regulations that apply to banks from 21.03.2016, requiring them to carry out more extensive background checks into the credit-worthiness of new mortgage customers. In future, the value of a property will no longer be the only factor in determining the size of a mortgage loan, as banks will also have to take greater account of their customer’s liquidity. The changes are designed to protect consumers from potential mortgage arrears and forced sales. In addition, the new regulations require banks to provide their customers with the so-called European Standardised Information Sheet (ESIS). ESIS is designed to ensure that banks provide their mortgage customers with personalised information on their specific credit product, the customers rights and obligations, the costs and risks associated with the loan, and the name and details of a direct contact within the credit providing institution. From the same date, all mortgage loan advertising is also required to provide consumers with information relating to the interest rate applied to the advertised loan, the total amount of the loan, the annualised effective interest rate, the duration of the loan, the amount of the regular monthly payments, the total amount to be repaid and the impact of potential currency price movements on the value of the loan. The regulations also prohibit banks from combining credit agreements with one or more linked financial services or products. Exceptions to this prohibition apply to a small number of products, including “Riester” pension products and building society savings products.

Increasing demand for micro-apartments

As reported by DIE WELT on 23.03.2016, many Germans can only afford to buy micro-apartments. Following years of growth in living space per capita, the trend is set for a reversal. Until now, micro-apartments starting at 20 square metres have primarily been targeted at commuters, students and apprentices, because of their affordable rents. But this is now changing. The project developer Terragon has now built wheelchair-accessible micro-apartments in Berlin-Adlershof. A majority are one-room apartments, with sizes starting at 29 square metres. “They are aimed at households with a rental budget of between €400 to €450 per month”, said Tarragon’s Michael Held. The developer plans to let these unfurnished apartments on long-term leases and has prioritised households in higher age groups. A high-rise building offering micro-apartments is also being built in Berlin-Zehlendorf. The high-rise’s two-room apartments provide just under 40 square metres of living space – and even manage to find room for a balcony. “We need apartments that are affordable for a majority of the population, and without the need for state funds or direct or indirect subsidies”, said Jörn von der Lieth, Managing Director of the Hilfswerk-Siedlung, a housing company belonging to Germany’s Evangelical Churches whose customers are mainly tenants with low to average household incomes.

Dresden is the new favourite for developers and investors

Despite the recent damage done to its image by right-wing Pegida demonstrations, Dresden is enjoying increased interest from project developers and investors, revealed the FAZ on 24.03.2016. A range of large-scale projects are at the planning stages, including the construction of 2,500 to 3,000 apartments on the eastern edge of the city centre. A majority of these apartments are intended for sale to institutional investors, who won’t let anything put them off investing in Dresden. Christian Schulz-Wulkow of Ernst & Young Real Estate said that the Pegida demonstrations, “will only be indirectly relevant to the real estate sector, and only once with a delayed reaction.” Christoph Gröner from the CG Gruppe is also sure that the market will accept rents of between €11.00 and €12.00 per square metre per month at his company’s newbuild projects at Postplatz and in Friedrichstadt. Wertgrund’s Thomas Meyer does nothing to hide his pleasure at the fact that Wertgrund acquired its portfolio of residential properties in Dresden a number of years ago, before prices started rising, especially as, “tenant fluctuation has dropped from around 12% per year to between 6% and 7%.” Dresden is regarded as one of the most attractive cities in Germany.

An additional 3,000 residential units in Munich

In its edition on 24.03.2016, the IMMOBILIEN ZEITUNG reported that Munich’s City Council is beefing up its “Housing for Everyone” programme, adding an additional 3,000 apartments to the 8,500 target figure the council had previously announced. In order to ease construction of these residential units, which will be built by municipal housing associations and private developers, local authorities have announced that they are prepared to relax certain restrictions. Developers will not, for example, be required to equip the properties with cellars or guarantee wheelchair accessibility. The city council also wants to release land that has so far not been intended for housing construction, such as enabling apartments on wooden stilts to built over large car parking spaces. The first 1,000 apartments should be ready for their tenants by the end of 2017. The council’s plans envision that private investors will build half of the 3,000 apartments. Munich’s authorities are providing a total of around €188 million of funding in the

form of loans, in addition to funds already provided by the state of Bavaria’s “Housing Pact.” Around €135 million has been earmarked for private sector developers and investors.

Retailers in central Hamburg losing out to the Überseequartier

The IMMOBILIEN ZEITUNG on 24.03.2016 revealed that, according to a study carried out by bulwiengesa, as well as suffering from the growth of online shopping and neighbourhood shopping centres, retailers in central Hamburg are losing customers and sales to the Überseequartier shopping centre. With its results, bulwiengesa casts doubt on an upcoming GfK study. The study’s major criticism is that Unibail-Rodamco increased Überseequartier’s sales-floor space by 70%, to 68,000 square metres, during development of the €977-million project, tripling the amount of space devoted to clothing retailers to 50,000 square metres. GfK forecast sales revenues of €350 million for the Überseequartier, €240 million of which will be generated by clothing retailers. According to bulwiengesa, at least 50% of these revenues (€120 million) will be at the expense of city-centre retailers (equivalent to 13% of their sales revenues). Further retail space is already in the pipeline in the city centre (35,000 square metres) and in neighbourhood centres (33,000 square metres). These trends pose problems, especially as the clothing segment’s take-up of retail space is increasing faster than its sales revenues. Alongside a reduction of overall retail space in the Überseequartier shopping centre, the association representing Hamburg’s inner-city has called for clothing retailers to be limited to occupying a maximum of 60% of the Überseequartier’s retail space, combined with a ban on the centre opening on Sundays. The

city’s authorities have also been called upon to increase investment and improve city-centre roads and squares.

Frankfurt is Europe’s third largest data centre market

As detailed by the FAZ on 24.03.2016, Frankfurt held on to its position as Europe’s third largest data centre market. According to figures released by CBRE, colocation data centre take-up in Frankfurt experienced a moderate decline from 17.5MW in 2014 to 16.2MW in 2015. Total capacity nevertheless increased and hit a new record of 181MW. This sees Frankfurt reclaim third place in Europe, just behind London and Amsterdam. CBRE forecasts relatively strong growth in the market throughout 2016.

Germany attracts increasing interest from Chinese investors

Chinese investors were responsible for around €390 million of commercial real estate investments last year, reported the IMMOBILIEN ZEITUNG on 31.03.2016. This is partly, although not solely, the result of the sale of Cologne’s Lanxess Arena. One reason for the increased openness of Chinese companies towards international expansion is identified by Fabian Klein of CBRE: “In tendering processes, they often just finish as runners up.” More transparency is needed. Due to turbulence on their home stock market, large numbers of Chinese investors have become interested in alternative investment opportunities, reported Marcus Lemli of Savills. A further devaluation of the Renminbi would make investments in Europe even more attractive. “Chinese investors are among the world’s biggest investors,” said Lemli. “Which is why they are most interested in large-volume products, typically in the hundreds of millions range.”

Record real estate transactions

As reported by the FAZ and DIE WELT on 29.03.2016, and the IMMOBILIEN ZEITUNG on 31.03.2016, apartments, houses and building land worth an estimated €200 to €210 billion changed hands in Germany last year. This figure was calculated by the working group of real estate valuation committees on the basis of registered purchase contracts. There was little change in the cities with the highest levels of transactions, with Düsseldorf, Leipzig, Munich, Frankfurt, Hamburg and Berlin recording the most transactions. Prices rose in each of these cities, with significant increases also recorded in the belts around the cities. A new development is identified in the fact that house prices in smaller cities and rural regions have also started to increase. As interest rates have fallen once more, it is predicted that the total value of transactions will rise yet again in 2016.

Property regains popularity as savings vehicle

The FAZ reported that property is once again becoming a popular savings vehicle in its edition on 30.03.2016. According to a representative survey carried out by TNS, only 48% of the German population are depositing their savings in bank saving accounts. In 2015, this figure stood at 53%. Checking accounts also lost ground, falling from 44% to 39%. Building society savings contracts were the third most popular vehicle, but also suffered a slight year-on-year fall from 37% to 35%. Pension and endowment policies also lost appeal. The Association of Building Societies (Bausparkassen-Verband) expects that savers will increasingly transfer their savings from regular savings and checking accounts to overnight and fixed-term deposit accounts. Property also remained among the most popular investment vehicles (+3% to 28%).

Germany’s Upper House proposes changes to special tax allowances for apartment construction

According to the IMMOBILIEN ZEITUNG on 31.03.2016, Germany’s Upper House (Bundesrat) has proposed a range of changes to new legislation designed to support housing construction. The proposals include reducing the maximum permissible construction costs or sale price for apartments benefiting from new special tax write-downs from €3,000/m² to €2,600/m²; cutting the maximum special tax allowance from €2,000/m² to €1,800/m²; and limiting the special tax allowances exclusively to the construction of social housing. The Upper House also wants tenanted condominiums to be explicitly declared as eligible for the tax benefits and has proposed setting up a database to enable municipalities to check whether the tax allowances could apply to their construction projects. According to the proposals, regulations are also needed to prevent double-funding, to include housing cooperatives, and to guarantee the repayment of any tax benefits in the event that an apartment is not let for at least ten years. Nonetheless, Jacopo Mingazzini of Accentro Real Estate also appeared in the IMMOBILIEN ZEITUNG on 31.03.2016 to express his firm opposition to special tax breaks for the construction of new apartment buildings. Instead of establishing a system marred by further regulations, it would achieve far more in Mingazzini’s view if thewhole real estate development process could be accelerated and red tape done away with. Otherwise there is a risk that misplaced incentives will end up supporting the wrong types of housing, in the wrong places and at the wrong levels of quality. The prime objective should be a market that is as free from state intervention as possible, added Mingazzini.

Increased support for social housing approved

As disclosed by the IMMOBILIEN ZEITUNG on 31.03.2016, the German Cabinet approved up to €500 million more in central funding for social housing in the 2017 budget and in subsequent years through to 2019. For 2017, the Federal Government plans to release an extra €500 million for the construction of housing in socially disadvantaged areas, along with €300 million more for the “Social City” programme. Before the funding is made available, Germany’s two houses of parliament, the Bundestag and Bundesrat, will need to approve the full budget, a process which is likely to have been completed by early autumn.

KfW amends funding conditions

From April 1, 2016, the KfW Bank is limiting its funding to newbuilds that fulfil the efficiency standards 55, 40 and 40 Plus, reported the SÜDDEUTSCHE ZEITUNG on 01.04.2016. This means that it may well be worth completely refurbishing multi-apartment buildings. “In particular, apartment complexes may benefit significantly from the use of this kind of subsidised financing”, said Frank Mattat from Gasag Contracting.

Housing is getting cheaper

In the view of the Cologne Institute for Economic Research (IW), housing has actually become more affordable over recent years as a result of income growth, rather than becoming more expensive as many believe, reported DIE WELT on 31.03.2016. The IW’s housing cost index has been falling across Germany since 2010. The institute’s figures include existing housing alongside newbuild, and indicate that only those moving into a new rental apartment or condominium are being affected by rising rents and prices. An average household paid 2.7% less for their housing last year than they were paying five years earlier. The cost burden of a condominium fell overall from 93.7 to 70 index points. There was even a fall in Berlin, from 131.5 to 111.5 points.

Prices for student apartments continue to rise

The IMMOBILIEN ZEITUNG reported on 31.03.2016 that student apartments are becoming increasingly expensive. This is shown by an analysis of 26,700 listings in Germany’s major university towns for apartments with less than 40 square metres of living space that have appeared on the immowelt.de portal. In Munich rents stood at €22.70/m² per month (median), in Ulm: €16,90/m² and in Stuttgart: €15.50/m². The most expensive towns and cities for students also include Freiburg: €13.30/m², Cologne and Potsdam: €12.00/m² and Hamburg: €11.90/m². In the period from the 2015 Summer semester through to the 2015/2016 Winter semester, rents rose by 21% in Munich, 36% in Ulm and 16% in Stuttgart. In total, only 21 of the 65 towns and cities included in the analysis recorded stable or falling rental prices.

Brokerage houses require more technical expertise

At Mipim 2016 it was clear that facility management and building services engineering are becoming evermore important ancillary service lines for real estate brokerage houses, reported the IMMOBILIEN ZEITUNG on 31.03.2016. The increasing importance of building services engineering as an element of CBRE’s advisory services was highlighted by Alexander von Erdely of CBRE when he pointed to the fact that CBRE, similar to other major brokerage companies, works according to the principles of what has become known as the “management model”: Hard Services are offered in-house, Soft Services are outsourced. CBRE Germany currently has 700 employees taking care of facility management services, with an additional 200 in its Building Consultancy department. Erdely no longer wants to market their technical expertise in fields such as space determination, budgeting, building services engineering and the development of workplace concepts separately. Instead, he wants to provide these services as individual elements within a single package, together with CBRE’s commercial advisory and brokerage services.

Is the construction industry on the verge of a boom?

As DIE WELT reported on 26.03.2016, growing demand for new housing in Germany could lead to a potential boom for the construction industry. Orders received by the construction industry in January 2016 were 11.4% higher than in January 2015. January 2016’s orders were worth a total of €4.2 billion, the highest monthly figure for 20 years. This is potentially just the start of a longer-lasting trend. The construction industry assesses demand for housing at 400,000 apartments per year and has called for streamlined planning and building permission processes. The construction industry has identified two concurrent trends, both of which are combining to stoke demand for new housing: The immigration of more than 1.1 million people in the last year alone; and massive internal migration to a small number of major urban centres including Berlin, Munich, Hamburg, the Rhine-Main conurbation, and their surrounding areas. Apartment construction is too expensive, construction costs have risen by more than 12% over the last five years. The construction industry’s trade association has called for the introduction of a type-approval system for construction that would enable houses to be produced in series and assembled on-site. This would cut building costs to between €1,300 and €1,400 per square metre and enable rents to be set at between €6.00/m² and €7.00/m².

Rise in the number of certified buildings in Germany

As the IMMOBILIEN ZEITUNG revealed on 31.03.2016, the amount of certified office space in Germany rose by 1 million square metres last year, an increase of 21%, to reach a total of 5.8 million m² (6.5% of total office space). JLL’s “Certification and Sustainability Radar” (Cesar) study is based on the amount of certified office space in Germany’s top seven office centres. Frankfurt continues to boast the most certified office space, with 1.98 million m² (16.7% of total local office space). Munich was just above the one-million-square-metre mark and Berlin was just under, with 930,000m². When it comes to office space take-up, certified space accounted for 23.9% of total space taken up in Frankfurt, 15.4% in Munich and 10.8% in Cologne.

Germany is the number one expansion target for retailers

As the IMMOBILIEN ZEITUNG wrote on 31.03.2016, Germany comes out as the top expansion target for international retailers in the “How Active Are Retailers Globally” study just released by CBRE. Of more than 150 surveyed retailers, around 35% are planning to open new retail stores in Germany. France follows with 33% and Great Britain is in the sights of 29%. As far as the impact of online shopping is concerned, 83% of the brands who took part In the study do not expect their expansion plans for 2016 to be directly affected.

Logistic real estate is in demand

Savills has revealed that logistic real estate is becoming increasingly attractive for investors, wrote the FAZ on 01.04.2016. Savills credits this to the considerable growth in the role of online retailing. Germany’s logistic industry generated revenues of €235 billion last year. The industry has been growing at an average of 3.3% per year since 1999. E-commerce grew by 28% per year between 2000 and 2015. Demand for space is still running ahead of supply. Further price rises are expected for logistic real estate over the next 12 months.

Munich introduces accelerated building approvals

Project developers and developers in Munich should be able to turn their plans into reality more quickly in future, revealed the IMMOBILIEN ZEITUNG on 31.03.2016. The City Council has passed a resolution to streamline and accelerate a range of processes and procedures that often delay construction projects. Research carried out by bulwiengesa on behalf of the Bavarian branch of the Association of Private and Public Real Estate Companies BfW has shown that it is the public administration’s lengthy administrative procedures that are largely to blame for delays and cost increases. The council has announced plans to add 70 new staff to its planning department and to improve inter-departmental project-related processes. The council is also standardising the project management of development plans.

Hamburg’s apartment and rental prices continue to rise

The IMMOBILIEN ZEITUNG of 31.03.2016 revealed that rents in existing apartments in Hamburg rose by 36% between 2004 and 2015, increasing from €7.50/m² to €10.20/m², according to figures compiled by HSH. Rents for first-time occupancies rose by 50% over the same period, up from €8.80/m² to €13.20/m². Between now and 2018 – dampened by the Mietpreisbremse rental price brake – Peter Axmann from the HSH expects growth of 3% to €10.50/m² in existing apartment buildings and a further jump of 9.5% for first-time tenancies to €14.45/m². The bank forecasts that condominium prices will add a further 4% – 5%, rising from around €4,275/m² to €4,500/m². There is a shortage of suitable building plots, and those that are available almost all cost more than €1,000/m².

Cologne’s hotel market hits new heights

With almost six million overnight stays, Cologne’s hotel market delivered a new record in 2015, reported the IMMOBILIEN ZEITUNG on 31.03.2016 in reference to an analysis carried out by Dr. Lübke & Kelber. This year, the number of overnight stays could climb to 6.2 million. Developments in overnight stays between 2006 and 2015, combined with the forecasts for this year, reveal surplus demand of around 14% through to the end of 2016.

Revenues rise despite lower floor-space productivity in home improvement stores

According to the IMMOBILIEN ZEITUNG on 31.03.2016, German home improvement stores paid for sales revenue and floor-space growth with lower floor-space productivity. In particular the market leader, Obi, was a big loser, with productivity dropping by 8%. A survey by the industry magazine “Baumarktmanager” and gemaba revealed that the company still managed to generate revenues of €6.7 billion across Europe in 2015, retaining its crown as the sector’s leading revenue generator, ahead of Bauhaus (€6.04 billion) and Hornbach (€4.05 billion). Obi also expanded the most and has a further 37 stores due to open in 2016. In contrast, Toom closed a number of its stores during 2015, and still managed to record higher sales with its remaining 340 stores than it had in 2014. Hornbach has the highest revenues per store, generating average sales of €26.47 million in stores with an average of 11,640m² of retail space.


Only the contributions titled “Commentary – by Dr. Rainer Zitelmann” reflect the editor’s opinion. Responsible: Dr. Rainer Zitelmann. The facts represented in press items are not checked for accuracy. Copyright for GERMAN REAL ESTATE NEWS: Dr.ZitelmannPB.GmbH, Rankestr.17, 10789 Berlin, Germany. Copying or electronic forwarding of the newsletter, except by contractual agreement with Dr.ZitelmannPB.GmbH, constitutes a violation of applicable copyright laws.

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Feri Real Estate Market Rating

The Feri Real Estate Market Rating provides a forward-looking assessment of potentials and risks for investment return on regional real estate markets. Ratings are based on detailed econometric forecasts of regional real estate markets including regional economic development. The rating currently includes more than 150 cities in Europe, in the United States and in Asia.

In this issue:

Real Estate Market Rating for Essen

Essen, formerly known mostly for mining and steel production, has outperformed other cities in the Ruhr area, demonstrating that it has developed the furthest in successfully reconfiguring its economic structure. Essen derives major advantages from its central location in one of Europe’s biggest urban agglomerations, and from very good transport connections. The biggest share of regional output now comes from trade, transport, communications and services, while the output share from manufacturing has declined. Today, Essen is one of the top service centers in the whole Ruhr area. Energy-related industries comprise one of the most important segments of the local economy. The University of Essen principally focuses its academic expertise on power engineering, and laser and plasma physics. Yet, notwithstanding these significant assets, Essen’s production is expected to increase at a weaker rate than the average for Germany’s largest cities.

Feri rates Essen as a business location “C”, which is upgraded to the 4th quarter 2014. It translates into “average potential, average risk”. With this rating result the city ranks 14th in the comparison of German A-Centers.

Office Real Estate

Regarding office real estate Feri rates Essen “B”, which is unchanged compared to the 4th quarter 2014. The city ranks 6th among office locations of German A-Centers. Feri awards the office top locations “B” and the side locations “C”

Essen’s office stock is about 3 million sq m. The demand comes from business related services, trade, transport and news agencies. Many large industrial companies have their administrative headquarters in Essen; this exceptionality results from the industrial history of the city. The share of owner-occupiers is therefore relatively large.

Essen’s rental market was extremely robust during the financial and economic crisis. The stability was supported by the traditionally large share of owner occupiers and the low speculative building activity. At current, the limited supply of modern office space still restricts the rental market. We assume from the fact that the relatively short supply of modern office space and the still good demand for this kind of space will lead to an increase of rents in the years to come.

2006 and 2007 characterize the preliminary low in terms of the net initial yields. In the following years risks for real estate investments were readjusted. We expect yields to be stable in the future.

The net initial yield for top offices is at 6.1%. We speak of a widely fair valuation of the real estate market in Essen.

Retail Real Estate

In the comparison of German A-Centers regarding retail real estate Essen placed 12th with a rating result of “A”, which is unchanged compared to the 4th quarter 2014. Feri awards the retail top locations “C” and the side locations “D”.

Retailers in Essen face a competitive challenge from outlying shopping centers (e.g., “Centro” in Oberhausen and the “Rheine-Ruhr-Zentrum”) and from shopping opportunities in nearby cities. Moreover, restrained consumption during economic downturns has repeatedly marred the performance of retail space rents. To reclaim lost purchasing power and enhance Essen’s city center as a shopping location, a new shopping center near the “Limbecker Platz” was decided to be built. Promoters of this project describe it as the largest inner city shopping center in Germany. Combined with the “Rathaus Galerie Essen” it generates a large area of space, which led to rental price adjustments. As for the mid- and long-term we expect retail rents to stabilize in prime-, as well as secondary-locations.

Residential Real Estate

When it comes to residential real estate, Essen placed 15th among German A-Centers with a rating result of “C”, unchanged compared to the 4th quarter 2014.

As a whole, Essen’s market for rental apartments is twofold: On the one hand, Northern sections of the town still have an excess supply of low-quality dwelling units that are hardly marketable anymore. On the other hand, demand in popular urban quarters, such as Bredeney, Schuir, Rüttenscheid or Stadtwald adopts positive levels. Given Essen’s low new building activity in the multifamily housing segment, along with a tight supply in preferred areas, rents are projected to rise during the years to come. Nevertheless, many such units will stay vacant indefinitely due to lack of investment to maintain a large stock of existing low-quality apartments properly.

Essen’s residential property purchase market shows a significant price differential. While in attractive districts, such as Bredeney, Stadtwald or Rüttenscheid, home ownership is sought after, there is a supply surplus of lower-quality property. This huge stock, difficult to market, is under pricing pressure. Prices for property in popular locations are rising. This is supported by a long period of low building activity.


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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