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Warning: Housing Markets Dominated by Irrational Exuberance
By Dr. Rainer Zitelmann
No-one has been more enthusiastic about investing in the German housing sector over the last ten years than me. Or can you name another real estate expert who has recommended investments in residential real estate as frequently, as passionately and for as long? The fact that I have been right all along is confirmed by a glance at the MSCI German Real Estate Index (DIX). The index shows that the annualised total return (= sum of capital gains and net cash flow yields) for German real estate as a whole over the last ten years stands at 4.4 percent, whereas residential real estate has delivered 6.9 percent.
According to MSCI, office real estate, the absolute favourite of open and closed-end funds and institutional investors, returned a mere 3.2 percent over the last decade. This just goes to prove how dumb the investment strategies of open-ended funds have been as they have poured two-thirds of their money into the lowest-performing real estate sector (office) and less than one percent into the best-performing (residential).
Total returns have continually gained momentum. In 2015 alone, the total return on German residential real estate was 11.1 percent; over the last three years the figure was 9 percent per annum. The fact that net cash flow yields for residential real estate (together with offices) have since fallen to 4.5 percent, becoming the lowest of any real estate category, certainly provides food for thought. 57 percent of the total return is attributable to capital gains, which means that that they owe a great debt to the massive increase in rent-to-price ratios.
And that’s the root of the problem. Everyone is now investing in residential real estate, even those who previously didn’t want anything to do with the sector. Large insurance companies sold massive amounts of housing to foreign investors at the start of the century. Their explanation: yields on rental apartments were simply too low. When opportunity knocked it was the foreign investors who were clever, while the German insurance companies were just plain stupid.
In the meantime, the mood in the German residential investment market has shifted dramatically and there are clear indications of “irrational exuberance”. I have now shifted
from beating drums to sounding alarms. A recent Famos survey of 30 family offices confirms the housing hype. Here are some figures from the 2016 study that reinforce my scepticism:
65 percent of family offices want to add to their apartment portfolios – nine percentage points higher than in the same survey four years earlier. Two-thirds of those surveyed assess the housing markets in Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart as “low risk”. And this is despite (or perhaps because of) the fact that these markets have recorded the strongest price increases. Of course, the massive price rises have not escaped the attention of investors. The Famos study also reveals that 40 percent of respondents expect gross initial yields of between 0% and 3% from their residential real estate investments! This is, naturally, overly “conservative” as a gross initial yield at this level actually means a zero return, or even a negative return of the type currently being offered by German government bonds. 90 percent of those surveyed declared that the primary objective of their investments is to maintain the value of their assets. I am sure that many of them will fail to achieve even this. It is quite likely that large numbers of private investors will not even notice that their assets are losing value, because they are reluctant to have their real estate valued at regular intervals. This makes it easy to convince themselves that their investments are “stable”…
Rent-to-price ratios for newbuild apartment buildings, e.g. for forward deals, have risen to between 20 and 25. This means that newbuilds are no longer more expensive than existing apartment buildings. A past-its-prime apartment block will now sell at a higher rent-to-price ratio than a brand new property that has been developed to satisfy the latest energy-efficiency standards. And this applies equally to apartment buildings that offer no potentials for rent increases. Rent-to-price ratios of 25 and more have become common in Berlin. I sold a property in Berlin-Neukölln last year at a rent-to-price ratio of 25, having bought in 2004 at ratio of 6.8. A couple of weeks ago, I sold some quite ordinary apartments in Berlin-Mitte at a ratio of 37!
The market for existing housing has more-or-less been swept clean. Everyone wants to buy, hardly anyone wants to sell. The current market situation is exactly what is leading to such excessive prices.
As with any overheated market, articles are appearing on an almost daily basis to explain why there is apparently no bubble developing, why the fundamentals are fine, why all of the warnings are unjustified. Indeed, demand for housing is still enormously strong. Housing construction remains too weak to satisfy rising demand. This is all correct, and yet these factors have already been priced into the housing market. And this is exactly what gets ignored.
Another indicator of irrational exuberance is that negative news gets suppressed. The state is interfering in the German housing market on a massive scale. I have little doubt that plans put forward by the social democrat ideologue Maas will be implemented. His legislative proposals would require rent indexes to be calculated on the basis of rents over the last 8 years (!), effectively leading to a complete ban on rental increases. The CDU will – as they always do – offer slight resistance before caving in and fully toeing the social democrat line. The combination of the Mietpreisbremse and the planned “Rent Index Manipulation Act” will become a huge problem for investors who have largely targeted their investments at existing apartment buildings. The fact that these investors deny, ignore or sugarcoat the problem just serves to support my “irrational exuberance” thesis.
Do I think that prices are set to fall? No. They will continue to rise. No-one can say when prices will peak. What does this mean for investors? Personally, I would now be much more likely to invest in newbuild project developments than existing apartment buildings. Having said that, caution is still required: In Munich, where the market is particularly overheated, local developers have told me that, due to massive increases in the price of land, investments only really make sense when you are convinced that prices will continue to increases at the same rate as they have been doing over the last few years.
Read also Rainer Zitelmanns Finance Blog.
Strong First Quarter in Hotel Investment Market
On 21.04.2016, both the IMMOBILIEN ZEITUNG and FAZ reported that investment on German hotel real estate grew by 45% in 2015, increasing to around €4.4 billion. This was followed up with transactions worth €720 million in Q1 2016. These figures were reported by JLL, BNPPRE and Colliers International, with investment even higher, at €750 million, according to CBRE. BNPPRE highlighted the fact that this is the second best figure for a first quarter in any year since 2007. This represents a year-on-year increase of between 17% and 30%, depending on which figures are used. Irrespective of their different final totals all of the analysts highlight the striking fact that the quarter’s total was made up solely of individual transactions. Open-ended and special real estate funds were the most active buyers, accounting for 44% (€319 million) of transaction volumes, according to Colliers. €100 million is attributed to the next most active group, Germany’s listed real estate companies. Major insurance companies emerged during the quarter to play a greater role on the investor side than has previously been reported. On the seller side, project developers and construction companies dominated, accounting for more than 50% of sales volumes. They increased their share of the market from 21% in Q1 2015 to 52% this year. Net initial yields of 5% have become typical, despite the fact that hotels would usually be viewed as riskier investments than well-let office and retail properties. Although it is too early to predict whether investment in the hotel sector this year will undershoot, equal or beat last year’s record total, one thing is clear: there are no signs of clouds on the horizon for the time being.
Property Prices Increase Faster than Incomes and Rents
As revealed by DIE WELT on 21.04.2016, a new Postbank study has shown that property prices are rising faster than wages. On average across the cities analysed by Postbank, would-be buyers have to pay the equivalent of around 7.5 average local annual salaries to purchase a 100-square-metre condominium. In Munich the situation is far more extreme – the ratio of 15 average local annual salaries is twice the figure for 2010. A condominium in Berlin now costs almost ten annual salaries. While 8.7 annual salaries was enough to buy an apartment in Stuttgart in 2010, the figure has now risen to 11. Prices in Hamburg have also risen faster than wages, from 6.7 to just under 10 average annual local salaries. Prices have also risen faster than rents, widening the gulf between the condominium and rental markets. Empirica reports that advertised prices for condominiums in Germany’s Top 7 cities in Q1 2016 were 13% higher than Q1 2015, whereas advertised rents had only risen by 2%. This did nothing to dampen the enthusiasm with which Reiner Reichel advised readers of the HANDELSBLATT on 21.04.2016 to make the most of current low interest rates and buy property. As he explained, even with recent price increases, condominiums in Germany’s biggest cities are still comparatively more affordable now than they were ten years ago. “A 60% to 80% mortgage might involve getting into more debt than ten years ago, but the monthly burden of interest and loan repayments are substantially lower.” This is especially true for a ten-year, fixed-interest mortgage with 1% loan repayments.
Increasing Levels of Mortgage Debt are Worrying, But Not Dangerous
The FAZ on 21.04.2016 contained a lengthy analysis of research carried out by the economists Oscar Jordà, Moritz Schularick and Alan M. Taylor into industrial nations’ economic development since the mid-nineteenth century and the conclusions that can be drawn in relation to the causes and effects of high levels of indebtedness. Banks’ increased focus on mortgages, strong property price growth in many cities and the high levels of household indebtedness that result are all conducive to the development of speculative property bubbles which, once they burst, threaten the stability of the banking system as real estate values fall and large numbers of borrowers are unable to service their debts. The financial crisis of 2007 dispelled any final illusions. In the HANDELSBLATT on 20.04.2016, Felix Hufeld, a financial regulator, expressed his views on a range of related subjects, including the risks associated with significant increases in mortgage lending. Germany’s Federal Financial Supervisory Authority (BaFin) has also expressed concerns that mortgage lending could develop into a threat to general financial stability. The BaFin’s Committee on Financial Stability has been regularly reviewing bank and mortgage lending. So far, the committee has reported signs of regional “overheating”, at the same time stressing that, as long as banks do not relax their lending criteria, it is not appropriate to talk of a bubble. The committee sees no need for market intervention.
Sentiment on Germany’s Real Estate Markets Cools Slightly
The IMMOBILIEN ZEITUNG on 21.04.2016 reported on bulwiengesa’s latest Deutsche-Hypo-Index figures. The index stood at minus 3.7 in April. Euphoria is currently limited to the residential sector, which registered sentiment of 158.5 points. The index, a survey of 150 to 200 top managers and executives, revealed that respondents were generally optimistic across the remaining real estate sectors. The study’s authors stressed that any marginal deterioration in sentiment can not be interpreted as an indication of a market reversal. In a discussion of the study with the FAZ on 22.04.2016, bulwiengesa ‘s Andreas Schulten admitted that the longer the unnaturally extended upsurge continues, the greater the risks become. He went on to point out that the current economic data is better than many experts perceive: “We’d need to see a lot more building activity right now if we were heading towards a tipping point.” Jan Bettink from vdp identifies excess liquidity and uncertainty surrounding the ECB’s strategy for exiting its current monetary policy. Bettink sees no signs of a speculative bubble. After all, he points out, current development is not speculative – new buildings are actually needed. He still describes bank lending practices, particularly in relation to debt-to-equity ratios, as “conservative”. Even in the extremely unlikely worst-case scenario of rapid interest rate rises, things would not be too bad in Bettink’s view, as long as cashflows remained stable.
Fierce Criticism of Proposed Reforms to Germany’s Tenancy Act
On 20.04.2016, Hermann Otto Solms, former leader of the FDP parliamentary faction, commented in the HANDELSBLATT on proposals submitted by Federal Justice Minister Heiko Mass to reform Germany’s Tenancy Act. If anything, he wrote, the proposals would actually worsen the situation in the country’s housing market, rather than improving it, as they would unnecessarily impede investment. The housing shortage would be exacerbated as a result, claimed Solms, with rents and property prices climbing further and leading to exactly the opposite of the proposed reforms’ stated aims. In future, plans to amend Germany’s rent indexes would mean that they no longer reflect market conditions, but would instead function as a centrally planned tool allowing the state to set rental prices. Solms also identifies legal uncertainties and contradictory signals given by the government in relation to tax concessions and write-downs, combined with constantly revised environmental regulations, as key contributors to the massive increase in the costs associated with building new housing.
Berlin Wants More Affordable Housing
In its 21.04.2016 edition, the IMMOBILIEN ZEITUNG examined efforts being made to create a greater supply of affordable housing in Germany’s capital. Newly announced plans envision twelve new residential quarters providing a total of 45,000 new apartments. Despite fairly dense construction, with between 3,000 and 5,000 apartments per quarter, planners have been careful to ensure sufficient open spaces. The city’s authorities have explicitly stated that they hope to create a stable social structure and better work-life balance for residents, and are working closely with state-owned housing companies, housing associations and private developers to do just this. Berlin’s Senate has also presented its “Roadmap for 400,000 affordable state-owned apartments.” The roadmap is an agreement between Berlin’s Senate and the city’s municipal housing companies and is designed to add 80,000 affordable units to the city’s housing stock by 2026, bringing the total to 400,000 apartments. At a cost of €11.5 billion, 26,600 apartments will be bought and 53,400 will be built. Introductory rents will be set at an average of €6.50/m² and the maximum purchase price at €2,000/m². The Senate has committed itself to transferring state-owned land to the state-owned housing companies; any profits will be retained by the housing companies and reinvested in achieving the roadmap’s targets.
Office take-up Trending Upwards
As revealed by the IMMOBILIEN ZEITUNG on 21.04.2016, more office space was let in Q1 2016 than during the same period a year earlier. At 19%, CBRE reported the strongest growth in office space take-up. CBRE bases its figures on lettings in Berlin, Munich, Frankfurt, Hamburg and Düsseldorf. An analysis of the Top 7 cities by Colliers revealed an increase of 8%. Take-up in Stuttgart was down by 12%, and in Cologne 33% less space was let. Hamburg’s year-on-year drop of 20% represented a relatively weak start to the year. Nevertheless, Colliers reports strong demand for newly built office space and healthy fundamentals for speculative office developments. Berlin retained its top position, both in terms of take-up and growth. Munich and Frankfurt placed equal second in the ranking for take-up. The letting volume in Munich was the second highest across the whole of Germany (approx. 185,000 m², almost identical to the previous year’s first quarter). Frankfurt’s previously weak office market was able to make up considerable ground. The analysts forecasts are closely aligned: 2016 is set to be a strong year. For Düsseldorf, the experts’ figures may have varied widely, but they all predict that the market will pick up as vacancies are reduced. Berlin reported the largest reductions in vacancies, with BNPPRE registering a 15% decrease over the last twelve months to less than 4%.
Food is Important to the Shopping Centre Experience
A study released by ECE shows that a shopping centre’s food offer is the most important factor consumers consider when choosing which shopping centre to visit, reported the IMMOBILIEN ZEITUNG on 21.04.2016. ECE surveyed 2,500 visitors to its 143 German shopping centres. 40% of visitors said that choose to visit a centre based on its food and beverage offer. A representative survey of German shopping centre visitors carried out by TNS Infratest revealed that 60% eat in a shopping centre during every visit. 89% spend more than fifteen minutes in the food court every time they are in a shopping centre.
Virtual Retailers Lease More Physical Retail Space
A growing number of what have so far been purely internet retailers are entering into bricks-and-mortar retail, reported the SÜDDEUTSCHE ZEITUNG on 22.04.2016. It seems to be merely a question of time until Germany has a range of delivery services for fresh food and grocery produce comparable to that found in the USA or Great Britain. Traditional food retailers have not been observing these developments passively, and have already been actively expanding their online sales platforms. Joachim Stumpf from BBE does not expect that existing retail outlets will close as a result, believing that they will instead be “repurposed.” At the same time, “large department stores […] will have to downsize as they reduce their non-food retail space in response to the growth in non-food online retail and the specialist retailers.” Leases in the grocery sector may well become shorter, explained Christine Hager from redos real estate. According to calculations made by GfK, food’s share of total online retail volumes is set to double from 8% to 16% by 2025. Food retailers will require more physical space, as groceries are best delivered over short distances. “The winners will be those retailers that manage to successfully combine online and offline,” said Hager.
CBRE Identifies New Trends in Facility Management
Facility management faces a number of significant changes, reported the IMMOBILIEN ZEITUNG on 21.04.2016. CBRE’s Global Workplace Solutions team have identified a range of trends in their new “Digitalisation” study, a number of which are already having an impact on the market. Sensors already allow movement to be detected and tracked in buildings, revealing just how often individual rooms are used. The study’s author, Hannah Hahn from CBRE, explained that the widespread adoption of some products will be hindered on cost and compatibility grounds. In order to promote the topic of digitalisation, greater emphasis needs to be placed on the benefits for end-users, and not just on gains in a building’s efficiency. “More and more clients are prioritising employee satisfaction,” added CBRE’s Gino De Jonghe. CBRE has invested heavily in testing the possibilities offered by new technologies, in particular in the retail segment, where they could have a significant impact on the core business of customer engagement. The new technologies could also be helpful when it comes to risk management. Facility management is best addressed within the overall context of any business. For this reason, CBRE has produced an agenda designed to help a variety of market participants as they grapple with the challenges of digitalisation.
Number of Franchise Real Estate Agents Rises
A growing number of real estate agents are signing up to become part of franchise operations, revealed the IMMOBILIEN ZEITUNG on 21.04.2016. According to the IVD, franchises have rapidly expanded their market presence over the last few years. Sun Jensch from the IVD believes that this highlights the need for “ready made systems.” The IVD admits that it has no way to reliably determine just how many franchisee real estate agents there are in Germany, as only a small proportion of them are members of the IVD. One positive aspect identified by the IVD is that the franchisees have a strong and qualitatively promising online presence. Further investigation is needed to ascertain whether franchisees are required to possess suitable qualifications: “Without the requisite expertise, even a professional-looking online presence won’t help in the long run.”
Positive Start to the Year on Munich’s Office Market
A number of exclusive large-scale transactions could push Munich’s office investment market to another record result this year, revealed the IMMOBILIEN ZEITUNG on 28.04.2016. Of the roughly €4 billion invested in German office properties during the first quarter, one in every four euros was invested in the Bavarian capital. Prime yields may have fallen to between 3.5% and 3.65%, but a healthy lettings market has ensured that prices continue to rise. The peak rent has climbed to up to €35/m² per month. Tenants in typical office space are now paying between €15/m² and €25/m². CBRE does not view vacancy rate developments as providing much hope of any respite in the near future. They calculate that only 4.7% of office space is currently available across the whole of Munich. This is the lowest value reported since 2003.
Little relief will be provided by the projects currently under construction. CBRE forecasts that around 182,200 m² will come to market this year. Of this total, almost 80% is either pre-let or due to be taken-up by owner-occupiers. CBRE views this as the major factor behind the current sustained price growth. CBRE’s Stefan Striedl doesn’t see much room for yields to fall back further in prime locations. He does, however, identify the potential for price increases in the city’s B locations, partly because buyers have become increasingly willing to accept higher levels of risk. “Munich is one of Europe’s most competitive economies,” said Jan Linsin of CBRE. He went on to explain that above-average economic growth, coupled with a first-rate labour market, continues to attract companies and qualified workers. The stability of the market is another factor he highlights.
Housing Shortage in Munich
By the year 2030, around 6.5 million people will be living in the Munich metropolitan region, with 1.7 million of them living in the city of Munich itself, reported the IMMOBILIEN ZEITUNG on 28.04.2016. With a projected population of this size, there is no way that housing construction can keep pace. There is a shortage of available development land, which is certain to result in further price hikes. Condominium buyers in Munich are currently paying around €6,000/m² for a newbuild apartment, 7% more than a year before. Munich’s authorities hope that municipalities in the city’s surrounding region will deliver this much-needed new housing. Disappointingly, the eight municipalities in the Munich metropolitan region only delivered 5,745 new apartments in 2014. According to a study published by Munich’s Technische Universität, population growth will be seen across the entire region, from Munich and its direct surroundings, to Augsburg, Ingolstadt and Rosenheim, where rents have already risen rapidly over the last five years. Tenants in Munich are currently paying an average of €14.70/m². This is in contrast with average rents across all of Bavaria’s big cities of €10.20/m² according to IVD figures.
Real Estate Buyers in Munich are the Most Solvent
According to EURO AM SONNTAG on 23.04.2016, real estate buyers in Munich, Germany’s most expensive city, take on the lowest proportion of debt capital to finance their purchases, with a loan-to-value ratio of just 64%. The highest average loan-to-value ratio was registered in Cologne (73.2%). Lying between the two extremes were Düsseldorf (72.4%), Berlin (71.1%), Frankfurt (70.1%), Stuttgart (67.3%) and Hamburg (64.9%). Buyers and house builders have taken on a record €1.2 trillion of mortgage loans. The Deutsche Bundesbank has expressed concerns, whilst admitting that recent price developments are a result of sustained strong demand for apartments. The Bundesbank also conceded that interest rates remain low, ruling out the threat of a speculative property price bubble.
Second Legal Challenge to Mietbremse
As reported in the IMMOBILIEN ZEITUNG on 28.04.2016, a second landlord, this time in Kiel, has launched a legal challenge to the Mietpreisbremse this week at the Administrative Court of Schleswig. According to Haus & Grund, which is supporting the plaintiff, the complaint is based on the claim that Schleswig-Holstein’s Mietpreisbremse legislation is unconstitutional as it is based on federal legislation that is also unconstitutional. If it is not possible to resolve this matter at state level, the Federal Constitutional Court will be asked to deliver a ruling.
Politicians Inflate Building Costs
As the SÜDDEUTSCHE ZEITUNG reported on 29.04.2016, developers find themselves in something of a catch-22 situation: On the one hand they are constantly being told to build more affordable housing, on the other they are being saddled with new statutory requirements and regulations from the EU, federal and state governments and municipalities that significantly add to the cost of new construction. Bulwiengesa was commissioned by the BFW Bayern to investigate what share of these added costs is attributable to Bavaria’s municipal authorities. Bulwiengesa interviewed 20 developers from all over Bavaria, collating their experiences from 43 projects involving the construction of 2,000 apartments. The study, “Bavaria’s Municipal Cost Drivers” reveals that it is the long drawn out planning and building permit procedures that are the greatest problem. Developers also stated that they would like to see closer cooperation with municipalities throughout competitive tendering procedures, a simplification of surveying procedures, the suspension of further energy standards, more flexibility in relation to noise and fire protection, car parking requirements, environmental protection regulations and a greater willingness to share the costs of infrastructure.
Federal States Call For Changes to Energy Regulations
On 28.04.2016, the IMMOBILIEN ZEITUNG reported that the Conference of State Construction Ministers had formally expressed its disapproval at the federal government’s plans to update the country’s energy efficiency regulations (EnEV) and Renewable Energy Heat Act (EEWärmeG). The conference called for more attention to be given to reducing construction and operating costs, an increased willingness to consider innovative technical solutions, and a simplification of statutory building requirements. These demands were formulated as far back as October 2015, but their release was delayed until it became clear that current draft legislation proposed by the Federal Ministry of Construction fell short of expectations on these issues. Outlining their demands, the state construction ministers said that they wanted to see suitable legislation drafted during the first half of 2016 and that they should be involved in any steps to update energy efficiency regulations. “Now is not the time to push for climate protection at any price. We cannot accept higher construction costs, especially when the economic impact is entirely disproportionate to any ecological and environmental benefits,” said Andreas Mattner of ZIA. Moreover, ZIA and the German Federation of Housing and Real Estate Associations (GdW) rejected the new KfW 55 energy saving standard, describing it as “uneconomical”. They pointed to the fact that an official report was based on assumptions of excessively high gas prices and overly lengthy amortisation terms, as well as calculating only theoretical savings without applying these to actual buildings. They concluded that the costs of these new technologies far outweigh the energy savings they deliver.
Stricter Lending Criteria for Mortgages
As revealed by the IMMOBILIEN ZEITUNG on 28.04.2016, banks have “significantly tightened” their lending criteria. These revelations were contained in the Deutsche Bundesbank’s latest quarterly survey of German banks. The surveyed banks reported that they have only slightly adjusted their margins. The same banks have not amended their criteria for granting consumer loans, and have even loosened requirements for their business customers. Compared with the same quarter last year, the banks reported accelerating demand fro mortgages from private households.
New Construction Activity Suffers a Reversal
An ever increasing number of apartments are being absorbed into the housing markets of Germany’s biggest cities, reported DIE WELT on 29.04.2016. According to data published by the Federal Office of Statistics, building permits were issued for more than 54,000 apartments in January and February this year, a year-on-year increase of 33%. Bulwiengesa analysed 3,400 real estate project developments in Germany’s top cities and established that housing construction is the major driver of construction companies’ full order books. They also identified the first signs of a slowdown and reported that the supply of new housing is still unable to satisfy demand.
Increase in Building Permits Issued
As revealed by the FAZ on 29.04.2016, the number of apartments granted building permission during the first two months of this year was 33% higher than during the same period in 2015, representing the highest figure for twelve years. According to the Federal Office for Statistics, 54,200 apartments received building permits in January and February. A total of 309,000 permits were issued last year, the highest figure for fifteen years. Final approval of special tax allowances for the construction of rental housing has been withheld by Germany’s parliament after criticism of a number of the new legislation’s details. The number of permits issued for apartments within larger single-family houses was also higher in January 2016 than in January 2015, rising by 35.3%. This was reported by the SÜDDEUTSCHE ZEITUNG on 29.04.2016. These developments are being driven by the extended period of low interest rates, which have made it cmparatively cheaper to buy property than to rent. Ten-year fixed-rate mortgages with repayments of 2% per year are currently available at rates of 1.5% and lower. The FMH-Finanzberatung Mortgage Index recently stood at 1.31%, representing monthly payments of just under €690 on a ten-year, fixed rate €250,000 mortgage. In the opinion of Immobilienscout24, this is increasing would-be buyers’ willingness to borrow larger sums. Across Germany, average mortgage applications increased by 24% to almost €200,000 between 2013 and 2015. In Munich the increase was even higher, with would-be buyers hoping to borrow an average of €340,000, 53% more than in 2013. Hamburg came second at +42%, or an average of €279,500. Of course, these figures do not reveal whether all of these mortgage applications were ultimately approved and resulted in a house or condominium purchase, or not. The financial services company Dr. Klein & Co. AG arrived at a completely conclusion and has revealed that, according to its figures, buyers have actually become more cautious over the last few years. They reveal that the number of 100%-mortgages has decreased massively, from 11.4% in 2011 to just 2.6% in early 2016. At the same time, the number of borrowers with equity of less than 10% has also declined substantially, claimed Dr. Klein & Co. AG.
Demand for Warehouse and Logistic Space Remains High
Almost 1.5 million square metres of warehouse and logistic space was taken-up during the first quarter of 2016, predominantly in halls with between 20,000 and 50,000 square metres. This was revealed by the IMMOBILIEN ZEITUNG on 28.04.2016. According to CBRE, this is the highest take-up of any first quarter ever recorded, representing a year-on-year increase of 45%. Take-up was highest in Frankfurt at 170,500 m², equivalent to an increases of 53% over Q1 2015. Frankfurt was followed by Hamburg (126,200 m², -8%), Berlin (86,300 m², -34%), Munich (60,200 m², +68%) and Düsseldorf (31,900 m², -52%). Almost two-thirds of take-up was attributable to newly constructed space (approximately 1 million square metres), which was 18% higher than the results reported over the last three years, explained Rainer Koepke from CBRE: “In view of the growing shortage of suitable logistic space in existing buildings, and despite strong growth in the amount of speculative warehouse and logistic space available in the short-term, it has taken an increasing number of user-specific project developments to satisfy demand.” Outside these five regions, CBRE registered take-up of just under 1 million square metres, an increase of 86%. The peak rent remained largely unchanged in comparison with Q1 2015. Munich retained its position as the most expensive location, at €6.75/m². Frankfurt followed (€6.20/m²), then came Hamburg (€5.70/m²) and Düsseldorf (€5.40/m²). Berlin was the cheapest at €4.80/m². New construction delivered around 460,000 square metres of logistic space during Q1 2016, compared with 590,000 square metres in Q1 2015. Market observers expect construction activity to increase as the year progresses. The IMMOBILIEN ZEITUNG went on to disclose that Bavaria’s state government, in order to address the current shortage of appropriate space, has announced plans to approve more commercial developments on greenfield sites. “This is the right approach to guarantee the long-term security of supply lines to major metropolitan regions,” said Segro’s Andreas Fleischer. In particular, there is still great potential in the area between Munich city and Munich airport, with demand for logistic space far outstripping supply. As a direct result, Segro has announced that it will soon be opening an office in Munich. Around €1 billion was invested in warehouse and logistic space across Germany in Q1 2016.
Hamburg’s Logistic Market Makes Gains
Hamburg’s logistic market got off to a strong start to 2016, with take-up of around 130,000 square metres, as reported by the IMMOBILIEN ZEITUNG on 28.04.2016. Only a shortage of larger-scale spaces of above 10,000 square metres prevented an even better result. Take-up was dominated by leases in the 3,000-5,000 square metre category. G&B reported a tripling of take-up in this segment, while CBRE registered a near fivefold increase in take-up compared with Q1 2015. Market sentiment was unsurprisingly reported as positive. CBRE’s Frank Freitag had the following to say: “The last time I saw such a strong pipeline of logistic space was in 2011.” Only a single hall in the segment above 10.000 square metres is currently unlet. As a result, Freitag expects that take-up will increasingly relocate from the city’s urban areas to its surroundings as the year unfolds, despite the fact that two-thirds of take-up in Q1 was within the city limits. Major tenants with requirements in excess of 30,000 m² have already started to shift their attention to neighbouring towns and cities such as Soltau, Hannover and Walsrode. Both CBRE and Grossmann & Berger reported a peak rent of €5.70/m², with an average rent of €4.80/m². “We expect to see the peak rent rise moderately in 2016,” said Freitag. The analysts reported that rents in urban areas have been moving in a completely different direction to rents outside the city. While rents within the city have risen by 3% to an average of €4.88/m², buoyed by strong demand, rents in the areas around the city fell by 3% to €4.73/m². Freitag sees these developments as a direct consequence of the 80 basis point drop in peak yields, which have fallen to 5.2%. Higher prices and stronger demand for larger spaces have fuelled an increase in speculative logistic developments, even in more rural areas around Hamburg. Freitag believes that take-up for the year could break through the 500,000 m² threshold. The IMMOBILIEN ZEITUNG went on to add that, with this volume of take-up, Hamburg is set to retain its crown as Germany’s most important logistics centre. If Hamburg hopes to keep its position in the long-term, experts have identified the need for substantial investment and improvements to infrastructure, above all the regions critical traffic conditions.
House and Condominium Prices Continue to Rise in NRW
In its 28.04.2016 edition, the IMMOBILIEN ZEITUNG contained an article looking at rising property prices in the state of North Rhine-Westphalia (NRW). According to the IVD West, prices for free-standing single-family houses in the state’s most sought-after cities have broken through the seven-figure barrier, even though NRW only has four cities reporting strong population growth: Bonn, Cologne, Düsseldorf and Münster. Above all, buyers are most interested in free-standing single-family houses in superior locations. Prices for houses in this segment in Cologne have risen by 6%. The IVD West reported an average in
crease of 4% across all locations in towns and cities in NRW with more than 50,000 inhabitants. Condominiums were an average of 6% more expensive than twelve months earlier. In metropolitan areas with more than 300,000 inhabitants, the price increase was even greater (7.25%), while in Cologne, double-digit rises were widespread. Existing condominiums in attractive locations now cost an average of €3,400/m² (+17%). The highest prices were reported for newbuild condominiums along the Rhine. A property of this type in a desirable district of Düsseldorf will cost would-be buyers an average of €5,100/m² (5% more than a year ago). Prices in Cologne have risen by 13% over the same period. For the IVD West this is proof that, “property has obviously now become the only asset class that offers private investors […] a realistic opportunity of attractive and sustainable investments.” Further interest rate cuts appear to have driven many buyers to accelerate their plans. The IVD West reports that demand for residential property along the Rhine has enjoyed yet another noticeable boost. Recent dramatic net rental increases in NRW’s biggest cities, i.e. those with more than 300,000 inhabitants, seem to have been curtailed for the time being as average rents only increased by 2%. Nevertheless, above-average rent increases were still registered in Cologne (5%). The IVD West revealed that newbuild condominiums in Cologne command the highest rents (€14.50/m²), with comparable rental apartments in Düsseldorf rented at €13.00/m².
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 Rostock
Rostock, an old Hanseatic town, is the most important business center in Mecklenburg-Western Pomerania, and also the site of a university. The port is the core of the regional economy: Rostock is the transport hub for both passenger and freight traffic between Scandinavia and the urban agglomeration around Berlin. The ongoing expansion of the port will strengthen Rostock’s position in this respect. The transport and trade sector accounts for an above-average share of regional production. The unilateral specialization in Rostock has entailed strong cyclical fluctuations in the past. Expansion of the service sector, which accounts for an increasing share of total output, and the successful establishment of research facilities, are helping to mitigate Rostock’s high dependence on maritime sectors and on the trade and transport sector in general.
Feri rates Rostock as a business location “D-“, which is unchanged compared to the 1st quarter 2014. It translates into “below average potential, above average risk”. With this rating result the city ranks 26th in the comparison of German B-Centers.
Office Real Estate
Regarding office real estate Feri rates Rostock “C”, which is unchanged compared to the 1st quarter 2015. The city ranks 22th among office locations of German B-Centers. Feri awards the office top locations “C” and the side locations “C”
In comparison with the typical conditions in Eastern Germany, the vacancy rate on Rostock’s office market is relatively low (5.8%). However, this situation does not reflect strong demand for office space; rather, it stems mainly from the fact that Rostock has experienced a comparatively small expansion of supply. Even though the service sector has gained in importance, it is still too small to push up demand for office space significantly. Nevertheless, the service sector will continue to grow during the years to come, and hence its capability to stimulate demand will gradually rise. Office rents in Rostock are expected to rise moderately in the coming years.
Retail Real Estate
In the comparison of German B-Centers regarding retail real estate Rostock placed 16th with a rating result of “C”, which is unchanged compared to the 1st quarter 2015. Feri awards the retail top locations “C” and the side locations “C”.
Retail trade in Rostock benefits from purchasing power brought into the town by tourists. Scandinavian visitors, in particular, have done much to stimulate the region’s retail trade. However, this inflow of shoppers’ money is a more significant factor for top retail locations than for secondary ones. Rents for retail space at the prime central city locations are expected to rise for the years to come. There is only limited space for future building projects in the main shopping street “Kröpeliner Straße” which supports future rental increases. The development of the “Glatter Aal” inner city mixed property is one of the scare new development projects in the inner City of Rostock.
Residential Real Estate
When it comes to residential real estate, Rosotock placed 18th among German B-Centers with a rating result of “C”, unchanged compared to the 1st quarter 2015.
Unlike many other Eastern German regions, Rostock experienced only limited supply expansion on its rental housing market after Germany’s reunification. Therefore, its apartment vacancy rate is comparatively low. The increase of the population has strengthened demand. Combined with long-term low new building activity, rents for both new and existing apartments are expected to increase in the coming years.
Compared to the downturns posted in many other Eastern German cities since the mid-nineties, the price decreases in Rostock’s market for the purchase of housing property have been rather modest during this period. Rising population and long-term low new building activity have lead to rising prices. Most wanted locations to purchase property in are the train station area “Steintor-Vorstadt”, and the area around the port. In the medium term prices for both houses and condominiums are expected to rise. The good demand for the preferred residential areas has meant that the project developments increase again. Most prominent urban development areas include the Neptun Werft and Holzhalbinsel.
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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