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Time to Exit: Sell Your Berlin Apartments Now!
By Dr. Rainer Zitelmann
For twelve years, from 2000 to 2012, I regularly urged investors to buy residential real estate in Berlin. Now I am urging you to sell!
The number of articles I have published over the last decade arguing in favour of investments in apartments and apartment buildings in Berlin is so large, I have honestly almost lost count. For many years I felt as if I were alone, standing by and watching as many private (and above all institutional) investors avoided Berlin. Every day I had to listen as people listed a catalogue of reasons explaining why it was a pretty stupid idea to invest in Berlin: too many benefit recipients, the economy wasn’t dynamic enough, rents were too low, rents and property prices were too flat. Lots of investors had also had their fingers burned, for example with investments in state-subsidised rental housing.
Leading research institutes were equally pessimistic in their assessments of Berlin’s residential housing market.
The landscape has, however, changed dramatically over the last few years. Berlin has been “in” for a while now: popular among both private and institutional investors, Germans and foreigners.
I am once again taking a position that is guaranteed to generate a lot of opposition, and which will probably leave me standing alone once more, as I argue that it is now the time to sell.
I never really planned on selling my Berlin properties; I had always intended to hold on to them. But now I have sold. Not everything, but a number of objects: Last Friday I sold some apartments (nothing special, built in 1959) in Berlin-Mitte at a rent-to-price ratio of 37.
Why am I selling? Can I rule out that prices in Berlin won’t continue to rise? Of course I can’t. Real estate markets are like stock markets. Almost nobody will manage to pick exactly the lowest point to enter the market, or the absolute peak to make their exit. Anti-cyclical buyers and sellers simply have to accept that it is highly likely that prices will continue to fall, at least for a limited period, after they buy, and will rise further after they sell.
Nevertheless, Berlin’s real estate market (and it is not the only one) is in a condition that stockbrokers would describe as “overbought.” There are almost no properties on the market as there too few sellers. The mood for Berlin is, and remains, bullish. I side with André Kostolany and Warren Buffett, who have always preached: Buy on panic, sell on euphoria.
How likely are future rental increases? Sure, there will be further rental increases in Berlin, but not with the same dynamism as we have seen over the last few years. So far, the Mietpreisbremse rental price brake hasn’t really bitten, but at some point it will dampen prices. In addition, the Mietpreisbremse hasn’t really been priced into real estate prices yet.
I cannot understand brokers and realtors who continue to confidently beat the drum for real estate investments in Berlin. They do so even though there is absolutely no shortage of would-be buyers! I can only explain it as force of habit. Some people are always of the opinion that now is exactly the right moment to buy. I advise nothing more and nothing less than what I do myself. That was the case back when I was buying, and is still true today as I sell.
I have still sold, even though I can’t really see any alternative investment opportunities right now. I previously wrote about the multi-family house in Berlin-Neukölln that I acquired in 2004 at a rent-to-price ratio of 6.8 and sold for 25-times the annual rental income. I subsequently invested the proceeds in a residential property in Oranienburg that I bought at a price-to-rent ratio of 16.6, and am sure I could sell today for at least 20-times its annual rental income, as well as in a Jamestown US institutional real estate fund, which generated a profit of over 20 percent (!) within a single year. So: On the one hand, it can be difficult to find alternatives. But, every now and then, an opportunity presents itself – in any case an opportunity that delivers more than 1.5 percent, which is all that is left after operating expenses on a property that cost 37-times its rental income. Even if you can’t find an alternative right away, it’s still better to “invest” your money in government bonds, at least for a year or two, even at negative interest rates. If you’ve generated strong yields elsewhere, it’s something you can live with. It is definitely a better strategy than buying over-priced assets right now. After all, today’s expensive acquisitions are tomorrow’s write-downs.
Read also Rainer Zitelmanns Finance Blog.
The Bundesbank and the Bubble
By Jürgen Michael Schick, President of the IVD
“Bundesbank warns of a real estate bubble” was the headline used by Spiegel Online a fortnight ago for its interview with Andreas Dombret, member of the Executive Board of the Deutsche Bundesbank. During the interview, Dombret expressed his concerns about the 3.5% growth in residential construction loans granted last year, which outstripped the rate of growth in each of the previous 13 years. There are many who, like Dombret, blame the ECB’s low-interest monetary policy for triggering a real estate bubble in Germany. Surely, more than anyone else, the Deutsche Bundesbank should know better. Highlighting an increase of 3.5% comes across as little more than absurd. Given the ECB’s zero-rate policies, this is nowhere near being a sign of loose lending practices. An increase of 35%, now that would certainly indicate a crisis.
As I have already written elsewhere, i.e. in the HANDELSBLATT on 06.04.2016 and in the April/May edition of the TAGESSPIEGEL KÖPFE magazine, those attributing a real estate bubble to recent interest rate reductions are putting causality before reality. Aren’t returns of three to four percent from a low-risk investment such as a tenanted property better than zero returns, or even the penalty interest we will soon see from savings accounts? What are the alternatives? Negative interest from German government bonds? Or higher-risk corporate bonds? Banks used to offer risk-free interest on deposits. Today there is interest-free risk. It’s no real surprise that many people are choosing to invest in their own four walls or in buy-to-let properties.
The chances of securing any kind of loan in Germany remain low for those without plenty of equity and a strong credit rating. It should come as no surprise that this equally true when applying to finance a house purchase. If anything, the conditions for granting loans have become stricter. House and condominium price growth is the result of the collision between high levels of demand and substantial shortages of supply. But this shouldn’t be taken as an indication of an over-valued market. Thus, the conditions for a real estate bubble, which would be evident with more relaxed lending practices and overvalued property prices, are not to be found in Germany.
In the aftermath of the Spanish real estate bubble in 2008, the blocks and blocks of empty apartments and never-to-be occupied condominiums were clear for all to see. Construction was not only speculative, it was also decoupled from concrete demand. The situation in Germany is totally different. Demand for newly built housing is immense. In metropolitan regions around Berlin, Hamburg and Munich, new apartments are absorbed by the market immediately.
In general, there is nowhere near enough new housing being built in Germany. In many regions, newbuild projects are being blocked by municipalities and residents because the newly built apartments are often, as you would expect with newbuilds, more expensive than existing apartments. The fact that these apartments lead to lower rents elsewhere is unfortunately not common knowledge. Given current and future levels of internal migration within Germany, and the sustained inflow of refugees, up to 500,000 new apartments per year are required. These apartments are desperately needed, irrespective of the costs of building them or the rents they will achieve.
When considering house price affordability, it is important not to ignore household incomes and interest rates. Despite rising prices for condominiums and houses, buying a home in Germany has rarely been more affordable. This is because interest rate cuts and real-term wage increases have combined to over-compensate for rising prices.
This also serves to explain the fact that there has hardly been any change in banks’ overall mortgage lending to private borrowers in years. Rather, buyers are using far more equity than they used to. In 2008, during the US or Spanish real estate bubbles, real estate was being bought with almost no equity capital whatsoever and banks were providing massive amounts of financing. We’ve never seen anything of the like in Germany, and we never will.
B Cities Rise in Popularity
As reported by the FAZ on 08.04.2016, office markets in cities ranked behind the Top 7 German metropolitan areas are now developing into serious alternative investment destinations. This is revealed in a new Feri study examining the office markets in what are commonly referred to as Germany’s A and B cities. The study shows that average net initial yields in the A cities, i.e. the seven biggest metropolitan areas, stood at 4.7% in 2015. In contrast, Germany’s B cities delivered an average of 5.8%. In addition, rents for office space in the best locations in the biggest cities rose by an average of 2.5% per year between 2010 and 2015, whereas rental growth in the B cities averaged 3% over the same period. Manfred Binsfeld of Feri said: “Our analysis really does show that initial yields in the seven biggest cities have now fallen back to the same level we saw before the financial crisis. The decline has been much more moderate in B cities.” This does not, however, mean that investors have been moving all of their office investments from A cities to B cities. Investors are still just as interested in trophy real estate and large office complexes in the €50 million to €100 million range. These are seldom found in smaller cities. Which is why Binsfeld believes that portfolio transactions in this sector could become a very interesting alternative. Generally speaking, Morten Hahn of Dr. Lübke & Kelber doesn’t think that the risks associated with investing in Germany’s B cities are any higher than those found in the traditional Top 7. Nevertheless, he does urge investors to be critical in their individual assessments. Andreas Lewandowski of the real estate investment company German Asset Management highlights the lack of speculative construction activity in Germany’s B cities. On 08.04.2016, THOMAS DAILY reported online that new figures from Savills show that transactions in the German office market grew by around 6% in Q1 2016, amounting to €3.7 billion. B cities made a significant contribution to this total, with investment growing by 79% to more than €1 billion. Meanwhile, in the Top 7 cities, investment contracted by 8%. Investment activity in the Top 7 was also skewed towards office investments in secondary locations. Given the strength of the lettings market, demand also rose in the Core-Plus and Value-Add segments. Taking a different view, Micheal Psotta wrote a commentary that appeared in the FAZ on 08.04.2016 arguing that this development is mainly a result of the pressure on investors to invest while interest rates remain so low. In Psotta’s opinion, investors are now doing exactly what investors did in the run-up to the 2008 financial crisis, becoming more and more willing to accept ever higher levels of risk. He warns that, in the case of portfolio transactions, there is always the risk of “rotten apples.”
Private Investors Drawn to Student Apartments
Student apartments are becoming more and more expensive, revealed the FAZ, HANDELSBLATT and DIE WELT on 07.04.2016. Rental growth has been particularly strong in Berlin, where rents have risen by 28% since 2010. Figures for eleven German cities are reported in the “Student Housing Index”, compiled for the first time by the IDW German Economic Institute in Cologne and Deutsche Real Estate Funds, an investor in student housing. Stuttgart (+18%), Munich (+16,5%), Hamburg and Cologne (both +12%) and Frankfurt (+11%) also saw rents for student housing grow strongly. Berlin’s students pay an average of €386 a month for their housing (including heating and water), much less than their peers in Munich (€580), Frankfurt (€505), Stuttgart (€474), Bonn (€457), Hamburg (€454), Cologne (€453) and Bremen (€391). Private investors who put their money into student housing funds benefit from the continued shortage of affordable housing. This is demonstrated by the high returns generated by Campus Bremen’s developer Kapitalpartner Konzept, who sold the campus at a healthy profit shortly after completion. Other funds have achieved similarly high levels of returns.
Real Estate Transfer Tax Exemption Rather Than Home-Owner Subsidy
The IVD association of real estate agents and property managers has long been a strong proponent of exempting first-time-buyers from real estate transfer tax, as reported by the IMMOBILIEN ZEITUNG on 07.04.2016. According to the IVD, such a move makes more sense than supporting repeated calls for the reintroduction of home-owner subsidies. “So far, threshold households have only been given a helping hand via rental housing policy changes. Given the climate of low interest rates, the time is ripe for the state to help these households via a targeted programme to increase homeownership rates,” said Jürgen Michael Schick, IVD President. Andreas Mattner of ZIA, the German Property Federation, also sees an extension of home-owner subsidies as the second-best solution. He warns the political establishment that they will not be able to use home-owner subsidies as an alibi for increased construction costs and higher tax burdens for private and institutional investors. “Affordable housing is desperately needed and has to be the priority of a responsible construction policy”, demands Mattner.
Climate Protection Plan 2050
As revealed by the IMMOBILIEN ZEITUNG on 07.04.2016, the German government aims to approve its much-heralded Climate Protection Plan 2050 before the end of the summer. As with the government’s EnEV regulations, opinions are greatly divided. ZIA has been particularly critical of EnEV. Construction costs have risen by 7% as a direct result. At the same time, CO2 savings amount to a paltry 0.02%. This has been described as hugely disproportionate by Andreas Mattner of ZIA. If the federal government has its way, the Climate Protection Plan 2050 will target energy-efficiency requirements at existing buildings, shifting away from what has so far been an exclusive focus on newbuilds. Mattner criticises these plans as he believes they are an attempt to force refurbishments via backdoor legislation. This would jeopardise plans for affordable housing put forward by the Alliance for Affordable Housing and Construction. The Climate Protection Plan 2050 covers 350 pages and contains a catalogue of 97 measures proposed by municipalities, associations and selected private citizens.
Higher Demand for Small and Exclusive Apartments
The trend towards small, exclusive apartments is most noticeable in major metropolitan areas, revealed the HANDELSBLATT on 08.04.2016. In particular, young professionally active people prefer smaller apartments, mainly because they spend comparatively little time at home anyway. The CG Gruppe is currently delivering its space-saving “Vertical Village” concept in a number of Germany’s largest cities. The apartments are between 45 and 65 square metres, supplemented by communal areas. “It’s all about satisfying growing demand for housing with ground-breaking innovations,” is how Christoph Gröner from the CG Gruppe describes the concept.
Digital Housing as Investment Assets
An article in the HANDELSBLATT on 08.04.2016 explored the opportunities offered to investors by new housing concepts and the growing role smartphones are playing in property management. The market research institute Catella fully expects that the digital culture of sharing, appropriation and personalisation will increasingly transfer to the real estate sector. Catella believes that these innovative housing concepts will also appeal to investors. Apartments in the Campus Gardens project in Heidelberg, for example, cost between €89,000 and €204,000, with net monthly rents of €350 to €925. This represents a rental yield of more than 5%.
Refurbish or Demolish?
Despite reductions to the country’s housing stock, vacancies in Germany’s new federal states still amount to between 12% and 16%, reported the SÜDDEUTSCHE ZEITUNG on 08.04.2016. This is true in particular, although not only, for regions in Eastern Germany. Structurally weak regions exist across the whole of the country. There is a programme in Western Germany to reduce the number of vacant properties. The government’s coalition agreement promised to evaluate the demolition of unused housing. A final report has still not been published. The programme is scheduled to run through to the end of 2016. However, the situation has altered since the third quarter of last year and more housing is now needed across the whole of Germany to accommodate refugees. As a result, demolition works have been halted in many municipalities. Nevertheless, it has so far not been possible to seriously assess the number of refugees who will stay for the long-term.
Demand for Residential Property in Munich Outstrips Supply
Yet again, Munich’s real estate market has set a new record, reported the SÜDDEUTSCHE ZEITUNG on 08.04.2016. According to Munich’s Property Valuation Committee, almost €12.6 billion was spent on condominiums, houses and commercial real estate in the city last year. Demand from would-be buyers remains unbroken, supply has failed to pick up. The amount spent on condominiums rose by 13% compared with the previous year, whereas the number of sales actually fell by 3%. This is explained by yet another significant price jump. As revealed in data released by bulwiengesa, newbuild condominiums in Munich cost an average of €6,500 per square metre last year. This meant that buyers parted with almost 10% more per square metre than in 2014, and just under 80% more than ten years ago.
Decline in Commercial Real Estate Investments not Substantial
The FAZ on 08.04.2016 highlighted figures released by CBRE, JLL and Colliers showing that investments in commercial real estate in Germany during Q1 2016 declined by around 15% to just under €8 billion. This should not be interpreted as the result of a substantial fall in demand. More than anything, the decline is due to a lack of large-scale deals in comparison with those seen during the first quarter of 2015. For the remainder of the year, CBRE and JLL still believe that a transaction volume of €50 billion is achievable. There are a number of factors in favour of investing in Germany, including economic stability. Thanks to low interest rates, office, retail, hotel and logistic real estate remain attractive. What is missing is a sufficient supply of real estate coming to market.
Start-ups Drive Berlin’s Office Market
Thanks to young, international companies, Berlin’s office lettings market is currently enjoying a boom, as highlighted by the HANDELSBLATT on 8.4. The city is well on the way to becoming Europe’s start-up capital. IT companies were responsible for 22% of office take-up in Berlin during 2015. A further 14% was attributable to retailers whose business models were largely based on online sales channels. The companies have shown that they know exactly what type of office space they want. Open loft spaces are most in demand. Location is also a key criterion. Demand is highest in sought-after inner-city districts such as Berlin-Mitte, Friedrichshain and Kreuzberg. In any case, there has been a decrease in the amount of office space available. Start-ups have shown that they are willing to pay high rental prices. For example, GSG in Kreuzberg has let office space for €16 per square metre. The Berlin average is €15 per square metre. Leases with terms of two or three years are not disadvantageous to landlords, as rents are still rising at this stage in the market cycle.
Highly Dynamic Office Market in Frankfurt
On 07.04.2016, the IMMOBILIEN ZEITUNG reported on figures released by the real estate consultancy Aengevelt showing that take-up of office space in Frankfurt, including owner-occupiers, amounted to 389,000 m² in 2015. Where some may point to the 6.5% year-on-year increase, others could also point to the ten-year average, which is 60,000 m² higher. Daniel Milkus of Aengevelt argues that reference to the five-year average (422.800 m²) is more appropriate, as the economy has become more dynamic. As a consequence, there could well be growth in the number of speculative office developments. Although high vacancy rates in Frankfurt’s office sector (currently 10.9%) might put some developers off the idea of speculative development, Milkus points out that investors have long factored this excess supply into their calculations. In any case, Aengevelt assesses the amount of excess space at 590.000 m².
Often Better to Demolish than to Develop
For 1.8 million buildings containing 3.5 million apartments across Germany, it makes more economic sense to demolish and rebuild than to completely refurbish. As the FAZ reported on 15.04.2016, this is shown by a study into Germany’s housing stock carried out by the Working Group on Contemporary Construction together with the Pestel Institute and commissioned by the Central Federation of the German Construction Industry, and others. Replacement construction makes particular economic and environmental sense for apartment buildings erected between 1949 and the end of the 1970s. 7.2 million buildings from the 1950s to 1970s fail to satisfy current energy-efficiency standards, whilst also exhibiting defects in building substance, such as defective soundproofing or the presence of problematic construction materials, outdated room planning (e.g. too small bathrooms) and a lack of accessibility. Comparing data from 168 buildings with 1,800 apartments shows that high-quality modernisation is the most expensive option, costing between €2,276 and €2,968 per square metre, whereas replacement construction would offer better value, costing between €2,173 and €2,692 per square metre. As a result, the study calls for an extension of KfW subsidies to support the replacement of existing housing stock and create new affordable housing.
Prices Up and Yields Down in the Residential Segment
In its 14.04.2016 edition, the IMMOBILIEN ZEITUNG noted that yields in the residential real estate investment segment continue to slip as high demand is frustrated by a lack of supply. This imbalance is driving prices ever higher. As a result, residential units in Germany’s biggest cities were changing hands for 45% more in Q1 2016 than was the case one year earlier. The residential real estate segment has become the second strongest asset class for institutional investors, behind the office segment. According to CBRE, the first quarter saw €2.3 billion of transactions involving apartment portfolios and complexes of more than 50 units, a third more than during the same quarter of 2015. CBRE attributes the rise to a shortage of supply. As Karsten Nemecek of Savills explains, real estate owners are hardly inclined to sell given the lack of alternative investment opportunities, a situation which isn’t likely to change much while interest rates remain low. Q1 2016 saw just four portfolios of more than 1,000 units change hands. The average over the last three years is more than double this amount. CBRE has revealed than transactions involving newbuild developments exhibited year-on-year growth of 35%, reaching €574 million. This means that project developments accounted for a quarter of total investment in Q1 2016. Low levels of supply are also driving prices higher. As CBRE reports, the average price paid per residential unit in Q1 2016 increased to €89,000, 45% more than at the same time last year. Square-metre prices rose by 43% in comparison with the first quarter of 2015, increasing to €1,430.
Positive Mood across Germany’s Real Estate Markets
The Deutsche Hypo Index shows that the mood in Germany’s residential real estate segment remains positive, continuing to outstrip sentiment in the other real estate segments, according to the HANDELSBLATT of 12.04.2016. As bulwiengesa reports, the residential market index has reached a peak over the last few months and is now showing signs of falling back again. Sentiment currently stands at 158.5 index points. Investors are content as, despite higher prices, interest rates have been kept low. It is not only institutional investors who are benefiting from low interest rates, but also private investors. Four-fifths of the experts surveyed by Interhyp are of the opinion that there no interest rate rises are to be expected within the next four weeks. The other fifth expect rates to be cut further. Nevertheless, 50% of those surveyed believe that interest rates could rise in the next six to twelve months, whereas 40% expect rates to remain unchanged, and 10% think that interest rates will fall further.
Criticism of Maas’ Rent Index and Cost Allocation Plans
As reported by the FAZ on 12.04.2016 and 14.04.2016, along with DIE WELT on 13.04.2016, the plans put forward by Heiko Mass to amend regulations on allocating the costs of modernisations and to reform the country’s rent indexes have been slightly relaxed. The draft bill proposes that rent indexes should be based on an assessment period of eight years instead of the current four. In addition, the draft bill would only permit landlords to allocate 8% of modernisation costs to tenants per year, rather than the current 11%. The German Association of Towns and Municipalities (DStGB) has warned of an increased risk of tenants taking legal action against landlords as doubling the assessment period for rent indexes will not allow more recent rent increases to be accurately reflected. The Federal Working Group on Property has described the correction of the assessment period as “cosmetic,” as it would lead to rent index benchmark rents being frozen at low levels and would also put a brake on modernisations. The IVD has estimated that extending the assessment period would amount to “the state manipulating benchmark rents downwards” by 10 to 20 cents per square metre. Michael Psotta appeared in the FAZ on 14.04.2016, commenting that such measures would add further teeth to the Mietpreisbremse rental price brake. Psotta believes that this would only offer short-term and superficial respite in capping substantial rental increases. All that would really be achieved is that the emerging upswing in residential construction would be cut off at the roots.
Growing Disparity in Germany’s Housing Market
There is growing disparity in Germany’s housing market, reported DIE WELT on 12.04.2016 and the SÜDDEUTSCHE ZEITUNG on 15.04.2016. While wealthy buyers are able to part with ever-increasing sums for luxury real estate, lower-income households are struggling to find affordable housing. The problems faced by Germany’s housing market have not been eased by the recent boom in construction activity. An 80-square-metre apartment in Munich now costs €800,000 or more. Even prices in standard locations often exceed the average square-metre price of €6,000. Asking prices for existing apartments in standard locations have risen to between €4,000 and €5,800 per square metre, while in better locations sellers are asking for €7,000 per square metre. The biggest winners in the current environment are landowners who are able to sell their land at premium prices to developers. The highest price registered by Engel & Völkers is €19,020 per square metre for a condominium in Berlin-Mitte. The second highest price was registered in Hamburg (€19,000 per square metre). The market is not expected to calm down anytime soon.
Financing for development projects remains cheap thanks to the European Central Bank (ECB) decision to set interest rates at 0%. Solutions to the problems currently dominating the German housing market are to be found above all in the areas around Germany’s metropolises. Extending the metropolitan areas of Germany’s biggest cities and improving infrastructure in the regions around these cities are the most important measures. According to IVD calculations, the €219 billion consumers invested in real estate last year was the highest figure ever (and 12% more than in 2014). According to figures from the Federal Office of Statistics reported in the SÜDDEUTSCHEN ZEITUNG, the housing market was so dynamic that many construction companies couldn’t keep pace with the number of orders flooding in. The figures show that more than 300,000 building permits were issued last year, the highest figure for any year since 2000. And even this growth isn’t enough to make up for the subdued construction activity seen in Germany over the last few years, the result of which is the current shortage of affordable housing in major metropolitan areas.
New Judgement on Cost Reimbursements for Landlords
As reported in the SÜDDEUTSCHE ZEITUNG on 15.04.2016, Munich’s District Court has confirmed that a landlord’s right to claim for reimbursement of the costs for small-scale repairs is in no way curtailed when the landlord commissions a tradesman to carry out a number of unrelated repairs, for which the tradesman issues a combined invoice, the sum of which exceeds the maximum reimbursable amount for small-scale repairs. The court ruled that, as none of the amounts invoiced for each of the individual small-scale repairs exceeded the maximum limit, it is immaterial whether the combined invoice for all of these small-scale repairs exceeds the threshold. Landlords should retain the right to commission numerous repairs simultaneously. As a general rule, only landlords are able to claim reimbursement for the cost of repair works. Tenants should not attempt to initiate repairs themselves, otherwise they risk being left to pick up the tab.
Ceilings for Housing Loans
The German government and the Deutsche Bundesbank are working on laws to rebalance the over-heated housing market, reported the SÜDDEUTSCHE ZEITUNG on 15.04.2016. Any new legislation would aim to set limits on loan approvals, potentially aligning them more closely with a borrower’s financial strength and the value of the property being mortgaged. It is also possible that clear repayment deadlines will be included in the new regulations. The new rules will only apply to new loans in the residential sector. The Federal Financial Supervisory Authority (Bafin) is to decide on how the legislation is applied. The German government should really have implemented FSC recommendations by the end of March, or at least initiated legislative proceedings by then. It is currently unclear how long the process will take. ZIA’s Burkhard Dallosch had the following to say: “We fully understand that the Financial Stability Committee wants to take early action to create the necessary tools to eliminate the potential risks of an overheated real estate market.” Nevertheless, the industry naturally expects to be consulted before any interventions into mortgage-lending practices and the real estate economy. After all, it would need to be determined whether such interventions impinge on contractual freedoms.
Rising Prices Compensate for Losses
Anyone who has invested in German residential real estate over the last 40 years has had to accept losses, wrote the IMMOBILIEN ZEITUNG on 14.04.2016. As a consequence, there is catch-up potential. The financial advisor and asset manager Catella applied the economist Harry M. Markowitz’s portfolio theory to twelve European housing markets and calculated the risk sensitivity of the national housing markets using Markowitz’s beta factor. Germany was the only country to have a negative beta (-0.11).
Lower Tax Burdens for Landlords
The HANDELSBLATT on 14.04.2016 outlined how investors and landlords can save money via their tax returns. There are a number of potential savings. Expenses incurred as a direct result of letting activities can be deducted as business expenses. Wages paid to tradesmen carrying out repairs or refurbishments can be deducted alongside the costs of materials. Differentiating between production costs and maintenance costs is a particularly important topic for landlords as this is often a point of disagreement between tax payers and tax authorities over what are known as “costs of readying for use.” These are costs that would normally be classified as maintenance costs, but are treated as delayed production costs if they are incurred within three years of acquiring a property and do not exceed 15% of the cost of the building.
Shoddy Workmanship and Planning Mistakes Can Be Avoided
As the FAZ reported on 15.04.2016, construction projects involving detached and semi-detached houses have an average of 20 identifiable defects per project. This is the result of an analysis carried out by the Berlin-based Bauherren-Schutzbund, an alliance of developers, architects and construction companies, and the Institute for Construction Research. The study evaluated 600 building site inspections. By far the largest number of defects were identified in building sealing and perimeter insulation, followed by the waterproofing of bathrooms, along with the shell and roof constructions and structural weaknesses. The German government now intends to anchor consumer rights more firmly in construction law. This would include minimum standards for contracts between contractors and their principals, regulations for fixed completion dates, upfront payments of no more than 90% until completion and a 14-day right to withdraw from any contract. For the first time, tradesmen and construction companies will bear equal responsibility for replacing faulty construction materials.
Commercial Real Estate Continues to Deliver Strong Returns
According to an assessment from Credit Suisse Asset Management, yields on commercial real estate in Germany are still attractive, revealed the HANDELSBLATT on 14.04.2016. The German Real Estate Index reported a total return of 8.1% in 2015, the highest annual figure since the index began. Net initial yields in the premium real estate sector remained stable in the 4% range. There are, however, indications of local bubbles developing in segments of the residential market in Germany’s major cities. Given expectations of economic growth of around 1.5% in 2016 and 2017, Credit Suisse Asset Management foreasts lower vacancies in the retail and office sectors, which will lead to corresponding rent increases. The positive yield spread of 350 basis points in relation to government bonds is a fundamental difference to the situation in 2007 when risk premiums for real estate were much lower. As long as interest rates are kept low, commercial real estate remains appropriately valued. Nevertheless, investors should not lose sight of risks posed by financial market volatility and geopolitical instability. They should have a clear idea of the returns and value growth potentials of their real estate. A disciplined investment approach is the key to generating robust returns across a range of market phases.
Significant Investor Interest in Logistic Real Estate
As revealed by the IMMOBILIEN ZEITUNG on 14.04.2016, investments in German warehouse and logistic real estate during Q1 2016 totalled between €780 million and €1.1 billion, depending on who made the calculations. CBRE reported the largest transaction volume, at just under €1.1 billion, registering year-on-year growth of 135%. Savills arrived at €780 million (+6%), the lowest reported figure; JLL reported €830 million (+19%); Colliers International €910 million (almost +100%); and BNPPRE registered €818 million (+64%). According to CBRE, this ranks warehouse and logistic real estate as the third biggest real estate asset class, behind office and retail, with a 13% share of overall investment. This is the highest share of overall investment, “that we have ever registered in the logistic real estate segment,” said Kai F. Oulds from CBRE. A larger share of the transaction volume was attributed to German investors. JLL arrived at a figure of 86%, BNPPRE reported 83%. However, CBRE and Savills both registered a much lower share of around 50%. Major package deals accounted for almost one-third of transactions in Q1 according to Colliers, JLL and BNPPRE (CBRE: 54%). There was no change in the most active buyers, as asset and fund managers accounted for 39% of transactions (€422 million), followed by project and building developers with 14% each (€154 million), then insurance companies and pension funds (€146 million). On the seller-side, project developers were the largest group (€670 million, or 63%). High demand and a lack of supply have driven yields down. Colliers reported gross initial yields of 5.9% at the start of 2016, 50 basis points lower than at the same time twelve months earlier. The lowest gross initial yields were registered in Munich (5.4%); gross initial yields in the remaining top six regions stood at between 6.2% and 5.8%.
It’s Getting Tight in Munich’s Commercial Lettings Market
On 14.04.2016, the IMMOBILIEN ZEITUNG reported that take-up in Munich’s commercial real estate lettings market in Q1 2016 amounted to around 180,000 square metres. CBRE revealed that TMT companies (Technology, Media, Telecommunications), along with the public sector, were the most active market participants. The lease agreed by MorphoSys for 12,100 square metres of space at the former Imtech site in Planegg was the biggest lease of the quarter. According to Colliers, five leases were agreed for 5,000+ square metres. The vacancy rate fell by 100 basis points to 3.6%. BNPPRE reported that the 899,000 square metres of currently available space is the lowest figure or 16 years. Only around one-quarter of this available space satisfies modern requirements. The market is heading towards a bottleneck as only 192,000 square metres of pipeline space is not pre-let. The prime rent for commercial space in Munich stood at €35,50 per square metre, according to BNPPRE.
No Fall in Demand for Office Space in Berlin
Even after a record year in 2015, demand for office space in Berlin remains high, reported the IMMOBILIEN ZEITUNG on 14.04.2016. According to figures released by CBRE, a total of 226,000 square metres was let during Q1 2016. The sustainably achievable peak rent rose by 14% in comparison to early 2015, reaching €25 per square metre. In contrast, weighted average rents fell back to €15 per square metre. In comparison to the previous year, median rents were up by between 8% (CBRE) and 11.3% (Colliers). Average rents have risen continuously over the last few years due to the strong growth of demand for office space in Berlin.
Decline in Retail Real Estate Investments
As revealed by the IMMOBILIEN ZEITUNG on 14.04.2016, investment in retail real estate suffered from a substantial reverse in Q1 2016. Compared to Q1 2015, CBRE registered a decrease of 59% to €1.5 billion. 46% of investment flowed into retail warehouses, retail parks, supermarkets and discounters, 26% was invested in shopping centres and roughly 20% in inner-city retail real estate. Savills reported a contraction of 40% to €2.2 billion. Savills identified the biggest transactions as those involving Loop5 in Weiterstadt, Forum Hanau, Hainspitze in Leipzig and Revcap’s acquisition of a 13-property retail portfolio for €160 million. CBRE primarily blames the decline on the ongoing shortage of suitable investment objects. Despite the subdued start to the year, CBRE forecasts investment in the double-digit billion range for the year as a whole.
Shortage of Hotel Real Estate Specialists
There is growing demand for specialists who combine expertise in the real estate sector with experience in the hotel industry, reported the IMMOBILIEN ZEITUNG on 14.04.2016. Given rapid growth in the number of overnight stays in Germany’s hotels, there are far too few employees with the requisite skills currently working in the country’s brokerage houses, project developers and in-house development departments within the hotel and hotel advisory sectors, with no more than 200 to 250 specialists in total. Dr. Lübke & Kelber is just one of the affected companies, having spent months hunting for specialists to strengthen its Hotel Team. Higher wages in the real estate sector can make it easier for employees looking to switch careers. The hotel industry would do well to pay its employees more as, outside top managements, wages are lower than in other sectors.
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 Warsaw
Warsaw is Poland’s largest economic and cultural center as well as the national capital and seat of government. Since the fall of the “Iron Curtain” in 1989, Warsaw has developed into a city of international importance. Its economic growth in the latter part of the nineties significantly outpaced the Polish average as well as the overall European average. Warsaw still has to catch up with other European urban centers in attaining a more modern, dynamic economic configuration. Warsaw has a generally very good infrastructure with functional transport and communication connections. The political changes that have taken place since 1990, and especially the opening of the Polish border, have facilitated a noticeable increase in the number of international companies that have located in Warsaw in order to enter the Eastern European market.
Feri rates Warsaw as a business location “AA”, which is unchanged compared to the 4th quarter 2014. It translates into “high potential, low risk”. With this rating result the city ranks 6th in the comparison of European Metropolises.
Office Real Estate
Regarding office real estate Feri rates Warsaw “C”, which is unchanged compared to the 4th quarter 2014. The city ranks 16th among office locations of European Metropolises. Feri awards the office top locations “C” and the side locations “C”
The office market in Warsaw, with its size of almost 5 million square meters, is Poland’s largest office market; in recent years it also became an attractive European office location. Warsaw as state capital, a good level of education, and comparable cheap rental prices attract West European enterprises to outsource single business activities or to set up a foreign base for the entrance to the East-European market. The share of modern office stock amounts to 65 %. Usually rents are paid in the euro currency. Risks are seen in a high volatility and an only average transparency.
The development of office space demand will remain weak due to economic conditions in the next two years. A significant number of new office jobs will be created again only from 2016 on. At the same time, construction activity will remain extraordinary dynamic. With an annual amount of office space of more than 300,000 square meters this is well above the average of the last fifteen years. As a result, the vacancy rate will continue to rise within a timeframe of two years. Only after 2017 the Warsaw office market will show a growing tendency to find a new market-equilibrium, supported by the recovery in economic activity. Therefore rental growth will exceed the long-term trend growth not before the later forecast period.
During last year, rental yields dropped significantly, anticipating the starting occupier cycle from next year on, despite some ongoing uncertainty in the investment market. The future performance of the office market capital values will therefore depend more and more on the coming positive development of rents and less of the remaining yield compression. Price increases caused by further decreasing rental yields are only likely if political situation and the still restrictive credit terms will improve. After the new installed political government, the country risk premium is expected to rise again. In the medium to long run, the risk of rising interest rates will additionally restrict further yield-shifts.
Between the years 2002 and 2007 rental yields in the Warsaw office market compressed almost 400 basispoints, from 10% to about 6%. This was caused by favorable credit terms, euphoric expectations with regard to an ongoing dynamic economic development and the introduction of the Euro. Due to the unexpected high uncertainty caused by the financial crisis and the weak economy in the years following the crisis, the rental yields have been developed rather cautious. Considering foreseeable potentials and risks, we expect a fair rental yield of 6.1% for the years to come. The current rental yield is only some 20 Basispoints below this “Fair Value”.
Retail Real Estate
In the comparison of European Metropolises regarding retail real estate Warsaw placed 12th with a rating result of “B”, which is unchanged compared to the 4th quarter 2014. Feri awards the retail top locations “C” and the side locations “A”.
The Warsaw area accounts for about a quarter of all the retail space in Poland. Yet, it still has a cumulative shortage of retail space per capita, compared to the European average. The supply of retail space in the inner city is very low. In response to demand, developers added store space in secondary locations and built shopping centers in the periphery. International retailers, the main source of demand, have frequently opted to locate in the peripheral centers due to the scarcity of retail space in the central city. Even though Warsaw’s stock of retail space will be augmented in the upcoming years, retail rents in Warsaw’s top locations are expected to rise slightly over the course of the next years. In secondary locations rental growth will be weak due an oversupply of low quality space and increasing vacancies.
Residential Real Estate
When it comes to residential real estate, Warsaw placed 21th among European Metropolises with a rating result of “B”, upgraded to the 4th quarter 2014.
Since the late 1990s, due to high demand for apartments and the structural change on the supply side, rents increased strongly in Warsaw, even though rents were already on a high level. Both rents for existing and new apartments slowed down significantly as a result of a weak economic development in the years after the financial crisis. In the years to come, when the economy and the labor market will be recovering again, apartment rents in Warsaw should start to rise again. Future demand is supported by increasing immigration for several years. Nevertheless, given the relatively high rent level for central Europe, rent increases in coming years will not reach levels seen in the 1990s or during the years before the financial crisis.
Warsaw is Poland’s most preferred market for buying residential property. Demand for condominiums focuses on the two opposite extremes of the market: small, inexpensive housing units, and luxury accommodations in very good locations. For both condominiums and houses, prices vary significantly by location. In the last years before the financial crisis rising demand has led to a price increase in all segments. Since then, a sharp correction of prices took place, especially during the economically weak years 2012 and 2013. In coming years, one can expect demand, reinforced by Warsaw’s ever-growing importance as Poland’s economic center, to recover significantly. However, since an ongoing high rate of new completions, major price leaps will be rather unlikely.
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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