Author Archives: Andreas Selk

Dear readers,

The European Central Bank (ECB) has slightly lowered interest rates. However, sustainable relief for the real estate market is still lacking. While short-term financing has become cheaper as a result, construction interest rates have slightly increased recently — driven by higher government debt and acute geopolitical risks. Economic uncertainty persists, and the real estate industry once again faces challenges.

At the same time, the market is proving more stable than it was a year ago. Buyers and sellers are meeting on equal terms again, social sustainability is gaining importance as a value driver, and new opportunities are emerging even in B and C cities. Those who understand the market can take advantage of these opportunities.

We wish you an enjoyable read!

JMS and HFR

Social Impact as an underrated value driver

Tenants are increasingly willing to dig deeper into their pockets for apartments that offer added social value. The Process Management Real Estate Monitor 2023 clearly confirms that tenants are willing to pay higher rents for housing that promotes the common good. In particular, properties that promote health and well-being and have convenient access to public transport and cycling paths are increasingly attractive to tenants, who are, in turn, willing to pay more for extra amenities. This trend is further supported by a PwC study on the social sustainability of residential real estate, which highlights a range of factors including accessibility, green spaces, and communal areas.

These developments are catching the attention of investors, especially as the sustainability debate in the real estate industry has so far tended to focus on the environmental. While the market has already implemented many of the easier environmental measures, the “low hanging fruit”, the more challenging and cost-intensive measures that remain often only deliver marginal added value. In contrast, there is still significant and cost-effective potential in the social aspect of sustainability – the “S” in ESG.

Social Impact as an economic factor
And it is in this area, perhaps more than any other, that the market is still in its infancy and many opportunities have not yet been tapped. This is not about playing environmental and social measures off against each other. On the contrary, both can contribute significantly to the long-term value and appreciation of real estate. That said, it is often possible to achieve more with less effort in the social sector today.

This is because investments in social measures do not always have to be expensive. Strategic planning, especially in neighbourhood management, can yield significant benefits, whether in new or existing buildings. Incorporating amenities such as daycare centres or healthcare facilities can enhance the neighbourhood as a whole and boost the market value of properties in the long term. This underscores the importance of integrating social measures into the planning process early on to streamline subsequent certification and reporting procedures.

Long-term trends and new standards as a lever for social sustainability
Furthermore, long-term social trends such as New Work, community, and diversity are increasingly shaping the requirements for real estate. The demand for integrated living and working spaces that prioritise sustainability is on the rise.

These trends are also evident in regulatory developments. The planned EU social taxonomy, combined with initiatives to measure social impact are creating new standards and establishing social sustainability as a quantifiable value factor. For instance, the EU social taxonomy is taking the first steps towards standardised measurement of social sustainability. At the same time, existing models, such as Livable Places and the Social Impact Investing Initiative, are already supporting the systematic appraisal of social added value.

This is coupled with enormous pressure to enact environmental measures driven by tremendous technological advances, increasing regulatory requirements, and an (in)active legislator. This, in conjunction with the pressure to innovate and the constant development of new state-of-the-art solutions in environmental technology, can, in some cases, create a barrier to investment. Given the level of complexity involved, successful value retention and efficient investment strategies are primarily achieved by experienced market participants with strong implementation capabilities.

Viewed through this lens, social investments may soon emerge as plannable and cost-effective long-term investments, to some extent offering a lower level of risk compared to their environmental counterparts. The expectation is therefore that the social dimension will no longer be viewed merely as a “soft factor”, but will instead establish itself as a financially relevant factor that contributes to sustainable value growth.

Secondary cities: underappreciated markets for residential mixed-use developments

Everyone in the industry is familiar with the distinct characteristics of the two primary real estate categories, residential and commercial. While residential real estate fulfils a basic need and generates reliable, albeit conservative, returns, commercial real estate is more susceptible to economic fluctuations but provides higher returns. Residential properties have therefore always had a stabilising effect on institutional investors’ portfolios.

Residential properties can be integrated in two ways:

Firstly, they can be included as an ‘admixture’ in a fund via the acquisition of one or more purely residential buildings or a mixed-use building. Secondly, residential properties can also have a stabilising effect within a single property – as is the case with the aforementioned mixed-use, residential/commercial properties. This model has been a defining feature of typical Central European cities for centuries, with retail, crafts, or gastronomy on the ground floor and residential units above, sometimes with storage, production, or offices in between.

A whole neighbourhood under a single roof
This concept finds its urban nucleus in the Gründerzeit districts that are just as popular and desirable places to live in today as when they were first developed 120-150 or so years ago. The high quality of life experienced in these areas, from Prenzlauer Berg in Berlin to Lehel in Munich and Nordend in Frankfurt, is testament to the enduring appeal of these neighbourhoods. Having buildings that offer a combination of commercial and residential space under the same roof helps create vibrant neighbourhoods with convenient amenities and contributes to the stability of the local real estate market. Investors who take advantage of this configuration stand to benefit from a granular tenant structure and more balanced risk profile.

While this approach may seem tailored exclusively to major cities, this is by no means the case. It is not just the Top Seven cities in Germany that offer potential for mixed-use buildings in urban locations. Many B, C, and even D cities also have streets that present viable opportunities for investment in mixed-use buildings. In addition to structural conditions and micro-location, the local infrastructure also plays a decisive role.

More than just the major cities
After all, compared to many other European countries, Germany is highly decentralised, with numerous major metropolitan areas and strong regional centres. While Germany’s Top Seven cities have a combined population of around ten million, secondary cities such as Bremen, Hanover, Bonn, Essen, Mannheim, and Nuremberg also boast significant populations and strong economies.

The same applies to C cities such as Darmstadt, Mainz and Offenbach, as well as to a number of medium-sized cities. These urban centres offer a high quality of life and diverse economic opportunities that are often overlooked by institutional investors, even though they are ideally suited for mixed-use investments. The frequently more attractive price-performance ratios – and thus higher yield potentials – further underscore the advantages of investing in smaller cities, which are largely exempt from the bidding wars of large and international investors in the A cities.

Markets in B and C cities are less liquid – which is also an asset
Many investors have been discouraged by the lower liquidity of real estate markets in B and C cities. However, what may initially appear a disadvantage is, on closer inspection, actually an opportunity: The stability of peripheral markets serves as a deterrent to speculative investors looking for a quick exit after a couple of years, without any major property management effort. Instead, the lower liquidity attracts investors with long-term investment horizons, leading to more stable and less volatile real estate markets. As a result, the price surges common in A cities during economic upswings are far less likely in these secondary cities. When it comes to selecting locations, investors should take off their blinkers if they want to capitalize on Germany’s polycentric regional structure.

Adding residential space to commercial real estate portfolios through urban mixed-use developments in lesser-known markets is a prudent strategy to diversify portfolios and ensure consistent long-term returns. Investors who seriously consider the entire German real estate market, rather than focusing solely on A cities, stand to benefit from these diverse opportunities to add a ‘pinch’ of residential to their portfolios. And institutional investors, many of whom have failed to adequately diversify their portfolios by focusing exclusively on commercial real estate in A cities, would be well advised to do the same and position themselves for both the next real estate boom and the next real estate slump.

405 days until the deal is done – How investors can accelerate transaction processes

It’s not quite as hopeless as in Samuel Beckett’s Waiting for Godot, where two men wait in vain for someone who never comes. However, at an average of 405 days to close a transaction last year, many investors found the experience to be frustratingly drawn out. That was up from 374 days in 2023, positioning Germany as one of the leading countries in Europe in terms of transaction completion time, second only to the United Kingdom where real estate professionals typically wait an average of 499 days for deals to close.

The reasons for this negative development are quite clear. Investors point to the increasing demands of Environmental, Social, and Governance (ESG) criteria, regulatory requirements, and stricter guidelines as the primary causes for delays – especially for large portfolios. And real estate transactions not only involve moving a lot of money, but also more and more data. In 2023, there were 3.0 gigabytes of documents and records per transaction; this figure has now risen to 3.6 gigabytes.

Appeals to politicians are often disregarded, so investors must take it upon themselves to develop more efficient processes in order to reduce time-to-market and time-to-close risks. After all, these risks are real: buyers and sellers may back out, liquidity is not always assured, and market demand can shift more quickly than expected. Efficient processes are the key to avoiding delays. However, the potential for improvement is within reach.

Streamline processes, improve coordination, and honour the handshake
First of all, investors should carefully analyse their own processes. Which control mechanisms do little to enhance security but a lot to hold up the process? Which phases of due diligence can be conducted simultaneously? Which legal contrivances really need to be included in the purchase agreement? And how can cooperation with external service providers, both domestically and internationally, be improved?

International deals often fail due to language barriers, missing documents, and unclear responsibilities. If reports go missing or documents exist in different versions, an entire transaction can be jeopardised. A single source of truth and clear communication with partners can speed up the process considerably. This is because transactions often hinge on legal details – and on the parties themselves. Relying on tactical contractual clauses or incorporating unnecessarily complicated safeguards can hinder progress on closing any deal. Clear and binding commitments are essential. Establishing a reputation as a reliable and trustworthy partner does a lot to speed up negotiations.

Targeted application of new technologies throughout the transaction process

Artificial intelligence (AI) and technology can significantly expedite the transaction process – with no immediate need for neural networks to calculate purchase prices or risks. The automated capture, searchability, and translation of documents are enough to save valuable time on their own. Many investors simply underestimate how inefficient traditional processes can be: While AI is already capable of running complex analyses, it is not uncommon for deals worth millions to be conducted through insecure channels such as WhatsApp, posing a significant security risk that can certainly result in hefty fines. Just recently, for example, the SEC in the USA fined eight investment companies 63 million dollars for this very reason.

Investors must not only optimise their transaction processes from a technical standpoint but also from an organisational perspective. Because efficiency alone is not enough. A strong reputation as a reliable partner can often expedite negotiations more effectively than any technological innovation. However, without centralised and transparent data management, even the most promising deal can become unnecessarily complicated.

The Ideal Market

An ideal market is one where buyers and sellers meet on equal terms. Supply and demand are balanced, decisions are based on rational fundamentals rather than speculation or market pressure. Sellers come with realistic expectations, buyers have sufficient options and can invest strategically according to their objectives. There are no frantic exaggerations or a one-sided buyer or seller’s market, but a balance that allows for meaningful transactions.

This ideal market is actually a model concept. It is described as an equilibrium model in which all market participants operate under fair conditions. However, such conditions are very rare in practice. Especially in recent years, reality has been far from this ideal.

From Overheating to Correction
For a long time, sellers had the upper hand in the German real estate market. Demand significantly exceeded supply, and prices only went in one direction. Anyone wanting to sell could demand almost any price. A buyer could almost always be found.

However, with the market shift, the situation changed abruptly: buyers became scarce, sales processes stalled, and those still active dictated the terms. Headlines like “Real estate market in free fall” or “Buyer strike paralyzes the market” echoed in the press. Suddenly, talk of the real estate bubble bursting or even a crash that could shake the market surfaced. But it didn’t come to that.

Today, we are experiencing a very different phase: a stabilization on equal terms. Buyers are back in the market, sellers are more flexible, and negotiations are much more balanced than in the extreme market phases of the past. It’s a situation that is rare and one that I haven’t witnessed in a long time.

Why 2025 is the Ideal Market
The current market offers opportunities for both buyers and sellers. Buyers find a market with moderate prices, a wide selection, and stable financing conditions. While hasty purchases were often made during the peak phase, now one can act strategically, with a clear focus on location and substance.

At the same time, sellers also have strong arguments on their side. Those who wish to undertake energy-efficient renovations or adjust their portfolio can do so without sales pressure. Increased demand is bringing movement to the market, and those with a long-term perspective can find reliable buyers with a clear investment horizon. Additionally, the current situation offers sellers the opportunity to sell their properties at fair prices without fearing overinflated expectations or undervaluations. The chances of a faster sales process have also significantly improved, as interested buyers are once again more active in the market.

In boom and crisis times, usually only one side benefits. But now both sides have a rare opportunity: buyers and sellers are operating on equal terms, and decisions can be made strategically and with foresight.

2025 will not be a market of extremes, but rather an exciting market for both private and commercial players who are ready to seize the opportunities now.

News

Property prices across Germany stagnate, while prices and rents in Berlin continue to rise

The real estate markets in Germany and Berlin are experiencing mixed fortunes. In its new housing index, the German Economic Institute (IW) reports that purchase prices for real estate in Germany remained largely unchanged at the end of the year – while new contract rents increased by approximately 4.7% on average compared to the previous year. In contrast, the real estate market in Berlin is far more dynamic, with the IW reporting an 8.5% increase in new contract rents during the same period. This growth can be attributed to the ongoing shortage of living space, which has resulted in increased rental demand and subsequently higher rents, especially in major cities and popular locations such as Berlin. The ImmoScout24 Residential Barometer paints a more nuanced picture, putting the average price per square meter of a new-build apartment in Berlin at EUR 6,575 . For the end of 2024, the barometer indicates an increase in new-build prices in Berlin of 1.4% compared to the third quarter and 2.5% compared to the previous year. Existing apartments, on the other hand, cost an average of EUR 4,643 per square meter, representing a year-on-year price increase of 2.1%. Dr Gesa Crockford, Managing Director of ImmoScout24, attributes the rising purchase prices to an unprecedented surge in demand: “Demand in metropolitan areas and major cities has reached new heights, surpassing even the levels seen during the low-interest phase at the beginning of 2021.”

Renovating Berlin’s building stock will cost billions

Legislation on zero-emission buildings sets out some very specific targets: according to the EU Buildings Directive, all new buildings must be emissions-free from 2028, with existing buildings required to meet the same standard by 2050. In order to bring emissions in the German capital under control, Berlin’s Senate has set itself the target of reducing emissions by 70% by 2030, with the primary focus is on heating, air conditioning, and hot water supply, which collectively contribute approximately half of Berlin’s emissions. Specific measures include the electrification and decarbonisation of the heating supply as well as the expansion of renewable energies and district heating networks. However, a building’s age is a major factor in its energy consumption. The majority of Berlin’s two million apartments were constructed during the Wilhelminian era at the end of the nineteenth/beginning of the twentieth century, or between 1949 and 1978. According to calculations by Bulwiengesa, around 27% of Berlin’s apartments require urgent refurbishment and energy efficiency upgrades over the next ten years in order to meet the final energy consumption targets. Bulwiengesa estimates that the total investment needed to comply with the German Climate Protection Act (KSG) of 2019 by 2045 is approximately 41 billion euros, or 1.9 billion euros annually. This estimate excludes buildings constructed after 2001 that already meet current energy efficiency standards.

Berlin’s rent brake is lawful according to Federal Supreme Court ruling

Berlin’s rental price brake remains in force. On 18 December 2024, Germany’s Federal Supreme Court (BGH) ruled that regulations limiting rents for re-lettings in Berlin are constitutional. As a result, the Court confirmed that the rental price brake, which was introduced in 2015 and extended in 2020, continues to apply across the entire capital. Since June 2015, Berlin has enforced rules to control rents for new leases. Originally limited until the end of 2020, the regulation was subsequently extended by a further five years until the end of 2025. The ruling by the BGH concerns a dispute between tenants and their landlord over a sliding rent scale that was significantly above the permissible limit. The judges in Karlsruhe determined that the rental price brake is a justifiable restriction of property rights, intended to curb escalating rents in tight housing markets and ensure the availability of affordable housing. According to the BGH, the regulation is suitable, necessary, and proportionate to achieve this goal. The BGH emphasised that landlords should never have banked on the rental price brake not being extended. The ruling provides legal clarity for tenants in Berlin, who can continue to rely on protection against excessive new contract rents. Landlords, on the other hand, are required to comply with the regulations of the rental price brake and are prohibited from unrestricted rent adjustments. While the ruling provides legal certainty in the long-running debate, it is unlikely to bring an end to the controversy surrounding the rental price brake in Berlin.

Dear Readers,

These are indeed dynamic times: Germany’s coalition government has collapsed, new elections loom, and international attention is focussed on the aftermath and potential economic implications of Donald Trump’s election as U.S. President. At the same time, geopolitical tensions continue to dominate the headlines.

The property market is also under pressure: renovation backlogs are hindering progress, and there is a significant population shift as a growing number of people relocate from urban areas to the suburbs and exurbs. This trend can only be reversed with innovative approaches.

Nevertheless, there are signs of optimism on the market. The latest Residential Investment Barometer shows that the mood among market players has improved significantly.

We hope you enjoy reading this edition of our newsletter and wish you a successful conclusion to an exciting year!

JMS and HFR

Serial refurbishment can accelerate the pace of transformation

Almost two thirds of Germany’s building stock was constructed before the introduction of the first Thermal Insulation Ordinance in 1979 and consume up to five times more energy than modern buildings. That adds up: about 21 million buildings in Germany account for around 35 per cent of the country’s energy consumption. This not only places a strain on the environment but also torpedoes Germany’s goal of achieving greenhouse gas neutrality by 2045. Moreover, in accordance with the EU Buildings Directive, all buildings in Europe are expected to meet net-zero standards by 2050.

And the reality? Germany is struggling with a substantial building refurbishment backlog. Despite the fact that an annual refurbishment rate of two per cent is required to achieve the country’s climate targets by 2030, the rate stagnated at just 0.7 per cent in 2024. If this trend persists, it is projected that only 275,000 residential units will undergo refurbishment by 2025, falling significantly short of the legally mandated targets.

A solution with potential: serial refurbishment
Serial refurbishment has the potential to deliver a breakthrough. This process uses prefabricated modules that act as a second skin on existing facades and, in the best case, allow buildings to be upgraded with high-performance insulation, integrated photovoltaics (BIPV), and controlled ventilation systems. Photovoltaic modules can be embedded in the new facade and supply a large proportion of the energy required for the building. Furthermore, the improved insulation reduces heating requirements, while the ventilation system ensures a constant supply of fresh air while minimising heat loss. Serial refurbishment is particularly well-suited for standardised buildings with uniform structures and facades, such as the large housing estates built between the 1950s and 1980s. The owners of these estates – large municipal, state-owned or private housing companies – are under increasing pressure to modernise their properties in line with ESG standards. The EU taxonomy requires companies to fulfil environmental sustainability criteria in order to be considered sustainable investments. ESG-compliant properties not only increase their market value but also reduce operating costs in the long run through energy savings. For capital market-oriented housing companies, ESG-compliant refurbishments are essential to remaining competitive and attracting sustainability-focused investors.

What is serial refurbishment – and what can it achieve in a best-case scenario?
Ideally, serial refurbishment could revolutionise the entire process of energy-efficient building refurbishment and transform even inefficient properties into climate-neutral buildings. For instance, consider a typical residential building from the 1970s with 20 units and a primary energy requirement of 300 kWh/m²a. Through serial refurbishment, this energy requirement can be reduced to less than 50 kWh/m²a. This cuts CO₂ emissions by over 80 per cent, allowing the building to meet its remaining energy requirements with the integrated PV system. This transformation is achieved thanks to the refurbishment method described above that effectively turns old buildings into fully-insulated, energy-generating structures. By enveloping the building in a protective “cocoon”, this solution could to a certain extent preserve the original structure and transform it at the same time. Remarkably, this process can be completed in a relatively short amount of time and with minimal disruption to residents.

What’s the hold-up in Germany?
In Germany, serial refurbishment is yet to really take off and faces various hurdles. On the one hand, there are very few providers with completed refurbishment projects to serve as references. On the other, most property owners are still busy laying the groundwork for future refurbishment projects. The most important aspect here – as banal as it may sound – is for property owners to define their objectives and carefully assess their portfolios to identify which buildings are best suited for serial refurbishment. Internal procedures and planning processes must also be reviewed, as serial refurbishments often differ significantly from traditional refurbishment projects. Special funding programmes, like the federal serial refurbishment bonus, aim to support property owners during this start-up phase. Initial pilot projects are already confirming that serial refurbishment could become an increasingly valuable tool as demand increases and experience grows.

The outlook: the dawn of a sustainable refurbishment culture
The German Energy Agency (dena)[1] and other key stakeholders are actively working on measures to speed up and streamline funding processes, eliminate legal obstacles, and enhance market acceptance in order to accelerate the expansion of serial refurbishment across Germany​. There is no doubt that serial refurbishment can help to finally clear the refurbishment backlog and significantly increase the building refurbishment rate. Serial refurbishment also offers housing companies the opportunity to create attractive, ESG-compliant property portfolios for many years to come – without having to resort to drastic measures such as selling inefficient buildings. So, serial refurbishment is not a matter of “if” but “when”; it offers a sustainable answer to Germany’s energy issues within the building sector. It is efficient, it is expedient, and it is sustainable. The question we must now ask ourselves is whether we are content to carry on as usual – stuck in a traffic jam – or whether we are finally ready to change lanes?

[1] https://www.dena.de/projekte/energiesprong-deutschland-serielles-sanieren/

Time to market: How timing has once again become a risk factor

In the 2010s, developers – and the investors who backed them – were not so bothered about how long it took to complete a property, or even if their projects went over budget and took a lot longer than planned. After all, interest rates were low and rising prices meant that their assets constantly gained value. As a result, whether renting or selling, the timing of any deal became almost irrelevant.

The risks associated with build times
Attitudes changed fundamentally once interest rates began to rise in 2022: Declining market values and rising borrowing costs have made lengthy build times, even those that remain on schedule, among the most critical risk factors for developers and investors. Of particular concern is the uncertainty surrounding interest rates for follow-up financing. An analysis conducted by Interhyp reveals that real interest rates for private construction loans have swung by 55 basis points in 2024 alone and, despite recent interest rate cuts, are currently showing a tendency to rise again. As you would probably expect, interest rate fluctuations typically follow a similar trajectory on the professional real estate market.

In the third quarter of 2024, Bulwiengesa’s BF.Quarterly Barometer reported an index value of minus 13.79, indicating a continued reluctance on the part of lenders. This is comparable to the value of minus 15.24 seen during the Corona crisis in the Q2 2020. Developers looking to refinance at the wrong time are therefore exposed to heightened risks. Furthermore, analysts at Lübke Kelber have observed a stabilisation in the institutional residential real estate market, with an average purchase price of EUR 3,541 per square metre. However, given current economic uncertainties and global crises, many investors cannot be sure what prices their developments might achieve in six, twelve, or let alone 24 months.

With a volume of EUR 4.5 billion, market liquidity has significantly decreased since the interest rate turnaround. What’s more, lengthy marketing times further complicate the situation.

In addition to liquidity concerns, regulatory risks are often overlooked. As rules and regulations change over time, the zoning or long-term financing of a project may be jeopardised even before its completion. This risk is particularly pronounced in projects with low sustainability ratings that are nearing completion or about to come to market. Unforeseen events, such as economic crises or external shocks, can also transform certain asset classes into non-sellers. These unpredictable factors can have devastating consequences for investors and developers.

Considering these factors, time to market – the period between a property’s development and its marketing – becomes a crucial lever for managing project development risks.

Modular and serial construction methods can save time
One effective way to significantly cut the time to market is to use modular building techniques. By incorporating a high level of prefabrication, up to 90 per cent of the time typically spent on traditional masonry construction can be saved. This not only accelerates the construction process but also leads to significant cost savings, including reductions in additional expenses such as HOAI fees. The efficiency of modular construction is particularly advantageous in a competitive housing market. Architects can develop a solution once and replicate it multiple times, streamlining the construction process and allowing for scalability. Modular buildings are also more efficient when it comes to building approval procedures.

While speed is important, it is not the only factor; modularity does not automatically guarantee quality. However, a well-planned and executed modular construction project not only looks sophisticated and modern, it also reduces construction defects and minimises human error on the building site. In order to create a desirable product, it is essential to combine design and quality of stay with high ESG standards and sustainable construction methods, such as wooden modular construction. Anyone who prioritises build time at the expense of quality may struggle to achieve their desired sales price at exit. Conversely, a high-quality product can yield market-standard returns for both the developer and the future property owner.

The neighbourhood as an investment factor
It is equally important to consider individual location factors alongside standardised processes when developing space concepts. By tailoring amenities to suit the specific needs of a community, developers can enhance the overall appeal and functionality of a property.

For instance, in areas lacking fitness or wellness facilities, adding a gym and swimming pool can greatly enhance the attractiveness of a development. Similarly, incorporating coworking spaces can provide a valuable alternative for residents in suburban areas, reducing the need for commuting to city centres. Simply put, properties that offer a high quality of stay and a sense of community perform measurably better than those that don’t. And for investors, this enables greater space efficiency. Shared areas create synergies, especially in combination with smaller private residential units, reducing the need for living space and leading to reduced construction costs and higher cash flow.

In addition, such concepts promote social mixing, which plays a crucial role in fostering social sustainability, the “S” in ESG. A recent study from the Zukunftsinstitut identified “connectivity” as a significant megatrend that will have a major influence on the market in the foreseeable future. Establishing a conducive environment for community building is now considered a necessity rather than a choice in the development of new construction projects.

Despite all the doom and gloom, these seemingly intangible factors can translate into tangible benefits, such as increased rental income, higher property purchase prices, and more affordable follow-up financing. The fact is, properties that offer superior quality of living tend to outperform others on almost all performance metrics.

Time to market becomes a catalyst
By the end of 2023, the market share of serial construction in Germany stood at approximately five per cent, as reported by the Federal Association of German Housing and Real Estate Companies (GdW) – although the analysts predict a potential market share of ten per cent. The current landscape of soaring construction costs, housing shortages, and financing uncertainties may drive the market share of serial construction even higher in the medium term. And the time-to-market factor could serve as a significant catalyst. As developers – and the investors who back them – increasingly prioritise shorter planning and construction timelines, the appeal of serial or modular construction methods is likely to grow. The efficiency gains associated with quicker project delivery remain one of the biggest levers for investors seeking to manage risks more effectively.

Immigration remains high – surprises on the housing market

2.2 million people – that’s how high net immigration has been in Germany over the past two years. In 2023, the country recorded the third-highest net migration rate since 1992, with a population gain of 660,000. Unsurprisingly, this growth has had a significant impact on the housing market, prompting cities and regions to adapt to shifts in demand. However, it is crucial to note that not all regions are equally affected. Precise differentiation is key to truly understanding what is happening.

Regions with high levels of inward migration find themselves dealing with surges in demand for housing, while other areas are grappling with increasing vacancy rates and declining property prices. Heightened demand is particularly evident in major cities and their satellites. And while it is important to keep an eye on international immigration figures, it also makes sense to factor in internal migration trends, especially as rising housing costs are leading more and more people to accept longer and longer commutes.

One major city records a net migration exodus
Data from the Bavarian capital, Munich, of all places, confirms an interesting internal migration trend. Of Germany’s Top 7 cities, Munich is the only one with a negative migration balance, with more people leaving the city than arriving. Notably, the decline in international migration is quite significant. In 2022, approximately 36,800 people relocated to Munich, whereas in 2023, this number was only around a quarter as high at 9,600. At the same time, negative internal migration has continued – almost 14,800 people moved from Munich to other German regions. It should, however, be noted that there have also been a number of register adjustments in the city of Munich, which have caused official population figures to fluctuate somewhat, creating a negative migration balance, despite the fact that Munich continues to grow.

Furthermore, there has been a decline in the immigration of young professionals, impacting a potential source of future growth. This can be attributed to the city’s housing shortage and exorbitant rents, which make it more difficult for people to access the housing market. This in turn fuels a growing willingness to commute, ultimately benefiting suburban and exurban districts. If this suburbanisation trend persists, it is likely to have repercussions on property prices in Munich and its environs.

Berlin retains its appeal
The trend in Berlin is quite different. The city is experiencing a significant influx of international immigrants. Without these 50,000 or so new arrivals, Berlin’s migration balance would also have been negative. This is because a substantial number of Berliners have also been migrating from the German capital to neighbouring districts and the nearby city of Potsdam, with as many as 15,500 doing so in 2023 alone. Both immigration and emigration will continue to have a profound impact on the capital’s housing market. Similar patterns can be observed in Hamburg, where strong international migration is also a prevailing trend.

Rural districts continue to face challenges
The outlook appears grim in many rural districts, especially in structurally weak regions. According to data from empirica regio, 85 rural and urban districts across Germany shrank last year. In many cases, the number of deaths exceeded the number of births, and migration failed to compensate. Consequently, many of these regions are facing challenging futures. Nevertheless, there are encouraging exceptions, such as the strategically located district of Wesel in North Rhine-Westphalia. Situated on the Lower Rhine and on the north-western periphery of the Ruhr region, in close proximity to two major cities, the district witnessed the highest internal migration rate of all districts, with a net influx of 3,805 people. This demonstrates that rural areas can also reap benefits from the “urban exodus”. In contrast, the Heidekreis district in the Lüneburg Heath region continues to grapple with a declining population. Despite a slight decrease in the rate of decline, the district is still shrinking, having lost another 1,299 residents last year.

What does the future hold in store?
The suburbanisation trend and the shift in housing demand towards peripheral areas are projected to significantly impact the property market in the long term. Suburbs and rural regions are poised to become increasingly important, while migration could slightly relieve the pressure on core cities. However, immigration from abroad will continue to be a key driver of growth in Germany’s Top 7 cities, ramping up the pressure on affordable housing. Regional differences are crucial: some rural areas are benefiting from internal migration, while others are struggling with outward-migration. Investors and urban planners should closely monitor these trends if they are to have any hope of making informed decisions.

All signs point to optimism

With the year steadily drawing to a close, it is a good time to contemplate the current and future state of the property market. And above all, what does the latest survey of market sentiment tell us as we approach the end of 2024?

To gain a deeper understanding of market trends, SCHICK Immobilien regularly conducts an exclusive Residential Investment Barometer survey of 2,000 private and commercial property owners and investors. The most striking aspect of the latest Barometer is that it reveals a clear and positive shift in the market, with existing properties becoming increasingly appealing as a viable investment option for both private and commercial investors.

The surge in optimism compared to the previous survey in May of this year is quite remarkable: around 38 per cent of surveyed property professionals now describe the market as “good”, a significant increase from the 25 per cent reported in the previous survey. There was also an uptick in sentiment among the somewhat less brash experts, with the majority of respondents now rating the current market situation as “average” (46 per cent), marking an increase of more than 5 percentage points from the May 2024 survey. In total, more than 80 per cent of respondents rate the market situation as neutral to positive, signalling a positive outlook for the residential investment market and providing a clear indication of what lies ahead in 2025.

Most owners and investors are planning acquisitions in 2025
These trends are also reflected in price expectations. The percentage of respondents expecting prices to remain stable is almost unchanged at around 38 per cent (compared to 35 per cent in May 2024). At the same time, a significantly larger proportion of investors and owners expect prices to rise: 36 per cent predict price increases – a significant increase compared to the 23 per cent from the previous survey. In contrast, the percentage of respondents who expect purchase prices to fall is down to just under 23 per cent (May 2024: 31 per cent). These indicators point to activity and optimism in the market. Looking back a year, only about a third of the survey’s participants were expecting neutral or positive price growth, whereas now, more than three quarters of respondents hold such expectations.

These developments are further bolstered by the strong interest in property acquisitions – another finding of the SCHICK Immobilien Residential Investment Barometer that gives us reason to be optimistic about the upcoming year. Over 56 per cent of respondents are planning acquisitions within the next twelve months, while only about one in five are considering selling. Approximately a third of the survey’s participants are focused on expanding their existing property portfolios, a trend that has remained consistent since the May survey. Such stability in this regard shows, not least, that we are not dealing with a short-term, flash-in-the-pan development: 73 per cent of respondents say they are focused on holding their assets for the long-term. This underscores their confidence in the stability and value retention of real estate assets. In contrast, less than 25 per cent of respondents are planning energy-saving renovations, a factor that is likely to gain importance in light of increasingly stringent ESG (Environmental, Social, and Governance) requirements.

Reasons for concern: tightening of tenancy laws and ESG requirements
Given the current political uncertainty in Germany, in combination with overall economic developments, there are also a number of challenges that cloud the outlook for 2025. The primary concern for investors is the potential tightening of Germany’s tenancy laws, which is viewed as the most significant investment risk by 72 per cent of respondents, followed closely by ESG requirements, identified as a key challenge by 68 per cent. Other risks, however, play a lesser role, with further price declines, for example, expected by only 8 per cent of respondents, and concerns about rising interest rates and inflation also declining at 27 per cent.

Energy-efficiency refurbishment continues to be a source of uncertainty for investors throughout the real estate market. The percentage of respondents weighing up whether to dispose of their properties due to potential costs associated with energy-efficiency renovations has decreased from 14 to 11 per cent. However, only slightly less than a third of those surveyed are currently planning energy-efficiency refurbishments within the next three to five years, while nearly 58 per cent have decided to adopt a wait and see approach. This indicates that while the topic is on the minds of many investors, political instability is hindering long-term planning for property owners.

As the survey confirms, a majority of real estate professionals and investors are approaching the new year with confidence and are looking to grow their businesses in the upcoming year. Nevertheless, the fundamental need for planning security and stability remains a critical factor in determining whether 2025 will be a successful year for the real estate market or not.

News

A nationwide rent cap based on the Berlin model would mean 60 per cent fewer lettings

A study conducted by the German Economic Institute (IW) on behalf of the Friedrich Naumann Foundation for Freedom examined the potential impact on the housing market of a nationwide rent cap based on the Berlin model. The rent cap, a regulatory instrument that was adopted in Berlin in 2020 before being declared unconstitutional by the Federal Constitutional Court in April 2021, differs significantly from the rental price brake, which was introduced in 2015 and is used across Germany to curb rent increases for new lettings. Currently, 477 municipalities across Germany have implemented rental price brake policies, pegging market rents to legally defined local comparative rents, which landlords are not allowed to exceed by more than ten per cent. The Berlin rent cap had a significant impact on the city’s rental market, especially as the rent cap was in some cases much lower than standard market rates. Despite the fact that rents fell by an average of eleven per cent under the Berlin rent cap, the supply of housing also fell by around half. Simply put, the rent cap motivated landlords to sell their rental apartments or convert them into condominiums rather than renting them out. The impact of the rent cap was felt most by families in need of housing, while long-term tenants with higher incomes benefitted. The IW study reveals that a rent cap based on the Berlin model would more than halve the supply of housing in areas across Germany where rental price brakes are already in place. Instead of 280,000 new listings, the supply would plummet by over 60 per cent to approximately 108,000 units within a year.

State-owned housing companies raise rents for 90,000 apartments in Berlin

On Monday, October 7th, Stephan Machulik (SPD), State Secretary for Housing, informed the Urban Development Committee that Berlin’s state-owned housing associations are planning to increase rents for more than 90,000 apartments in the city. The affected properties include 20,000 apartments owned by Degewo, 27,900 units owned by Howoge, 12,500 residences owned by Gesobau, and 12,200 dwellings owned by WBM. According to Machulik, the rents charged for these apartments will increase by an average of eight to nine per cent. When measured against the state-owned housing companies’ total housing stock, he added, the increase would not exceed the prescribed limit of a maximum 2.9 per cent price increase per year. Prior to Machulik’s appearance before the Urban Development Committee, Gewobag had already announced rent increases for around 20,000 apartments averaging 8.3 per cent or EUR 32.00 per month. Tenants living in particularly spacious apartments can expect increases of up to EUR 207.33. Following the collapse of the Berlin rent cap, the Senate froze rents within its own property portfolio. Subsequently, state-owned housing companies in Berlin reached an agreement with the SPD-CDU government in autumn 2023, permitting them to implement rent hikes starting in 2024. In light of the companies’ mounting debts, which stood at nearly EUR 17 billion by the end of 2021, a figure that has not been updated in the last three years, these appear to be necessary measures.

IVD Berlin-Brandenburg property price tracker: prices in Berlin have finally bottomed out

According to the IVD Berlin-Brandenburg, the prices of condominiums in Berlin only decreased by an average of two per cent in the third quarter of 2024 compared to the previous year. The current average purchase price for a condominium is approximately EUR 4,810 per square metre. While the number of property sales remains low, the rate at which prices are declining has slowed significantly, the IVD reported. Both condominiums and single-family homes saw a decrease in sales of around six per cent to the third quarter. According to the IVD’s Berlin-Brandenburg property price tracker, single-family homes, on average, are slightly more expensive than condominiums, with prices averaging EUR 5,480 per square metre. However, prices have fallen by approximately four per cent compared to the previous year, while average rents have remained largely unchanged compared to the same period last year. For more than 90 per cent of households, the price tracker reports a comparative rent of EUR 9.24 per square metre. However, the IVD Berlin Brandenburg has raised concerns about the lack of dynamism in the rental market: “New lettings for unfurnished, open-ended tenancies are now almost exclusively concluded under the table. This is the result of the flawed rental policies of recent years. The market has been regulated within an inch of its life”, commented Kerstin Huth, Chair of the IVD Berlin-Brandenburg. “There is a complete lack of incentive for new construction. And even if construction were to resume, rents would likely continue to rise. There is no other way to finance the energy transition”.

Dear Readers,

Autumn is just around the corner and, in recent months, industry experts have been reassessing their forecasts and evaluating market trends. It is evident that the market is showing signs of recovery, albeit with some ambivalence. While residential property prices continue to vary across Germany, prices for investment properties have notably stabilised, particularly in major urban centres.

In this context, it is crucial to determine the precise factors influencing the development of a property’s value. The economic climate is certainly a significant factor, but other elements such as social milieu, flexibility, infrastructure, and sustainability also play pivotal roles. Although the mountain of non-performing loans (NPLs) is growing, which could also create opportunities, investors have the potential to enhance and revitalise entire districts through urban regeneration projects.

EXPO REAL, Germany’s leading real estate trade fair, is also fast approaching. Despite the ongoing shortage of new residential construction in Germany, the residential investment market is far more vibrant than is often portrayed in the media. Investors are seizing the opportunity to capitalise on attractive prospects that are arising in this market phase. We are confident that the atmosphere at EXPO REAL will mirror these positive trends and exceed expectations.

We look forward to seeing you at the EXPO REAL. In the meantime, we hope you enjoy the rest of your late summer and our latest informative newsletter!

JMS and HFR

Milieu has a major influence on value-determining factors

Given the challenges of the current economic climate, German property developers are more careful than ever before in their analysis of parameters such as construction costs, rental price trends, and yield potentials. Nonetheless, the quality of local infrastructure, including access to public transport, schools, daycare centres, nurseries, local amenities, and green spaces, also has a major influence on developers’ pricing models. The impact of these factors largely depends on the specific social milieu of the target demographic.

The situation is by no means getting easier
For the period from 2010 to 2022, the Federal Statistical Office’s construction price index registered an increase of 64 per cent – while the general inflation rate rose by just 25 per cent over the same period. Despite the current crises, these costs have not fallen significantly, while the uncertainties surrounding new ESG regulations and financing have increased.

If, despite these challenging circumstances, a property developer does decide to go ahead with a planned project, it is absolutely crucial to precisely define the target group of potential buyers from day one. All too often, developers become too focused on the property’s features and potentials, and neglect the social mix and existing infrastructure in the surrounding area.

Analysing social factors may initially seem like nothing more than common sense. For example, a developer in Hamburg is hardly likely to plan a residential project exclusively for families in the business-oriented HafenCity district. Instead, they would look at somewhere like Winterhude, Lokstedt, or Eppendorf. For the same reason, it makes no sense to rely on generic, one-size-fits-all solutions simply because they have proved successful in other locations.

The Sinus Institute’s milieus are shifting
However, as always, the true challenges lie in the details. It is becoming increasingly apparent that the wants and needs within different social milieus are rapidly evolving – especially at the very centre of society. A recent study conducted by social researchers from the Sinus Institute in Berlin and the Bertelsmann Foundation in Gütersloh has revealed that the “middle class” is experiencing a significant decline in confidence in the future. Only one in four individuals in the “nostalgic-bourgeois” milieu and just one in two in the “adaptive-pragmatic” milieu, both of which constitute the middle class, are optimistic about the future. This represents a far more pessimistic outlook compared to the same study’s findings in 2022. This shift in sentiment may lead to more frugal lifestyles and a heightened desire for security. Consequently, when assessing residential property locations, this may in turn mean that certain leisure amenities, such as having a nearby venue for cultural events, are less important than traditional social infrastructure such as schools, daycare centres, parks and green spaces, along with high-quality medical facilities. In addition, the affordability of living space is also becoming even more of an issue for residents.

In contrast, the opposite is the case for the Sinus Institute’s upper-middle-class and upper-class milieus. The “educated elite,” “performance elite,” and the more artistic milieus are all now focussing on location qualities that were not considered important just a few years ago. Environmental and social sustainability criteria are now among the most significant factors in property concepts, construction methods, as well as in the immediate surroundings. In addition, many of these households have developed a far more international mindset over the last few years. For a property developer with a focus on these more affluent demographic groups, it can be well worth checking whether the school in the neighbourhood offers language courses in Mandarin, or whether rugby is among the sports on offer at nearby clubs.

Ultimately, it is the realities of the target groups’ lives that will determine which location factors are important in terms of pricing. Accordingly, property developers should adapt their concepts to the existing milieus – rather than expecting the target demographic to be drawn to their project and willingly relocate to a neighbourhood that may not suit them. The key challenge in neighbourhood development is to identify a diverse range of suitable target groups with varying economic and social backgrounds, and to create a contemporary neighbourhood concept that caters to everyone’s needs. Where infrastructure is lacking, it should be specifically developed within the neighbourhood. Neglecting or disregarding these factors – or even merely understating their importance – poses a significant risk to the long-term sustainability of any project.

Mobility is the common denominator
It therefore makes no sense to generalise about which location factors are the most value-determining – with perhaps one exception. In today’s world, modern mobility concepts and the reduction of private transport play a crucial role in nearly every new property development. Of course, locations in the suburbs are still more car-centric than those in city centres, which means more consideration needs to be given to the practicalities of parking and a host of other small (and sometimes large) details.

However, a decreasing number of people across nearly all social milieus now depend on their own personal vehicles. And the already heightened environmental awareness among younger generations is expected to further amplify this trend in the future. Convenient access to efficient public transportation systems and the availability of car-sharing services are already having an increasing impact on the achievable rental and purchase prices of residential properties. As a result, these factors are becoming increasingly important. And not only in urban centres, but in outlying areas, too.

How investors can benefit from urban regeneration

In an age marked by urban densification and a rising call for sustainable development, the optimisation of current urban structures is a key issue for the real estate industry. The concept of urban regeneration is emerging as a groundbreaking approach that goes beyond just the modernisation of buildings. This holistic process presents enticing prospects for investors by not only emphasising the upkeep of current infrastructure, but also promoting the transformation of entire neighbourhoods. The objective is to reimagine existing urban areas and render them economically, ecologically, and socially sustainable. 

Urban regeneration as a value driver
Urban regeneration, defined as the holistic enhancement of urban areas, creates a wide range of investment opportunities. This strategy seeks to not only renovate existing structures, but also to upgrade entire neighbourhoods, effectively integrating residential, commercial, and recreational spaces. For investors, this represents a chance to invest in initiatives that not only drive urban development but also appreciate in value over time. Investing in the ongoing enhancement of urban areas means utilising the potential that lies in the economic revitalisation of our cities.

Strategies for sustainable success
Investing in urban regeneration projects can be challenging. On the one hand, the complexity of the projects requires close cooperation with urban planners, local authorities, and civil society. On the other, investment decisions are now increasingly guided by Environmental, Social and Governance (ESG) criteria, which makes the evaluation of projects more even more complex. However, this complexity and the focus on sustainability also offers significant opportunities for investors. After all, the growing demand for environmentally friendly and socially responsible residential and commercial space further boosts the potential for stable returns.

By engaging in the planning process early on, investors not only have the opportunity to shape the design of individual projects, they can also ensure their economic and social viability. In addition, investing in sustainable urban development projects opens doors to attractive subsidies and tax benefits, further enhancing financial returns.

ESG as the key to resilient investments
ESG criteria are becoming increasingly important in investment decision-making. Investors who engage in urban regeneration projects can not only generate financial returns, they are also able to deliver environmental and social benefits. By conscientiously managing resources, promoting social equity, and adhering to rigorous governance standards, investors can mitigate investment risks and proactively address potential future regulatory demands.

A roadmap for the future of urban development
Urban regeneration as a comprehensive approach to redesigning urban spaces presents investors with the potential for not only lucrative returns, it also gives them the opportunity to actively contribute to the development of sustainable and livable cities. By strategically aligning economic, ecological, and social goals, investors can make a lasting impact that goes far beyond financial success and lays the foundations for long-term urban sustainability.

Non-Performing Loans: The Worst Is Yet To Come

Finally some good news! The European Central Bank (ECB) has lowered its key interest rates for the first time in almost five years, following ten consecutive rate hikes. At least that’s probably what many in the property sector are thinking. However, it is still too early to sound the all-clear on the real estate market. Construction costs remain high. Transaction activity is sluggish, with few deals being closed. Achievable price-to-rent ratios have also taken a bit of a tumble and are no longer always above 20 –in some cases they can now be as slow as 10 or 15, even for perfectly appealing, easily marketable properties.

Furthermore, financial institutions continue to be cautious in providing financing for real estate ventures. This reluctance from banks suggests that a return to pre-crisis “business as usual” is improbable. In fact, it looks as if lenders are more likely to step on the brakes in the near future and make their lending criteria even more stringent.

Banks are having to act slowly
One significant factor is the increasing number of non-performing loans (NPLs) on banks’ balance sheets. Then there’s the pressure regulatory authorities are exerting on banks in relation to property financing, which is also steadily increasing.

In response, the ECB has launched a programme of Targeted Reviews und On-Site Inspections. Similarly, the German Federal Financial Supervisory Authority (BaFin) is conducting special audits under the German Banking Act. Of particular importance is the strict monitoring of risk management requirements (MaRisk) and Loan-to-Value (LTV) risk, which involves an analysis of loan collateral in relation to the value of any loans. As property market values decline, banks are gradually seeing these impacts reflected in their loan portfolios, and they are being forced to take defensive action.

Non-performing commercial property loans up by 129 per cent
Regarding NPLs, the latest data from the European Banking Authority (EBA) indicates a clear upward trend. At the end of the first quarter of 2024, the total volume of non-performing commercial property loans in Germany amounted to 14.2 billion euros, marking a significant 129 per cent increase compared to the previous year. The overall volume of NPLs in Germany also rose by 25 per cent to 39.8 billion euros during the same period.

And this trend is not expected to end anytime soon. This is because refinancing has become far more expensive, despite recent interest rate reductions. Particularly affected are loans acquired approximately seven to ten years ago, many of which are set to mature between 2024 and 2026. The challenging refinancing landscape means we are likely to see even more property companies experiencing financial difficulties. According to our estimates, there should be around 60 billion euros in NPLs in the German market as a whole by the end of the year, representing a more than 50 per cent increase compared to the end of the first quarter. And this number may continue to climb as a significant volume of loans from the previous economic boom phase reach maturity over the next couple of years.

To some participants in the property market, the outlook may be bleak. For others, however, there are also opportunities on the horizon. The increasing volume of non-performing loans is expected to result in an uptick in real estate asset sales. Currently, many sales are still taking place below the 100-million-euro threshold. It is only really above this threshold that Anglo-Saxon private equity and hedge funds become interested.

Ongoing reluctance to buy NPLs
Offers for these “smaller” NPL sales are currently being very closely examined by single and multi-family offices – and sales are being conducted with maximum discretion and confidentiality. Despite this interest from family offices, German institutional investors have been holding back on NPL purchases, potentially missing out on a favourable entry point, as they did in the years around 2003, and again in the wake of the global financial crisis.

Successful NPL sales require robust restructuring concepts and consistent workout strategies, expertise that is no longer available in many banks. As a result, market participants, whether investors or credit institutions, are reliant on partners who can provide the necessary expertise and management support.

Ahead of EXPO REAL: An industry between crisis and a new beginning

At first glance, the headlines about the state of the real estate market and, above all, the crisis in new construction, always convey the same negative messages. Auch das The standard of political proposals for solutions has also reached a new low. However, upon closer examination, a sense of stability and optimism emerges, particularly in the residential property investment sector. Where is the real estate market heading this year?

When the key players in the property industry convene at this year’s EXPO REAL in Munich a few weeks from now, one thing is already clear: sentiment among delegates from the various asset classes could not be any more varied.

On one hand, there are companies striving to promote new construction. In this field, however, they are operating against an incessant tide of negative headlines. One of the most striking recent stories reveals that only 175,000 new dwellings are expected to be built in 2026. According to the Ifo Institute, this figure starkly contrasts with the nearly 300,000 new apartments built in 2022, and falls far short of the German government’s target of 400,000 new-build apartments. The new-build crisis is manifesting itself above all in cities, where living space is already in such short supply. There is also an acute shortage in terms of the quality of the political proposals on how to tackle the crisis. One of the latest quick-fix proposals comes from Federal Building Minister Klara Geywitz, who has suggested that house-hunters turn to vacant properties in the exurbs and rural areas – a superficial solution that fails to address the root of the issue.

Stabilisation of the residential investment market
On the flip side, as the latest figures prove, the residential investment market has been becoming consistently more stable over recent months. This trend is confirmed by data from Schick Immobilien’s Berlin Residential Investment Market Report for the second quarter of 2024, which reveals that average prices and the number of transactions are both on the rise, indicating a surge in market activity. Currently, the average cost of a mixed-use, residential and commercial building in the German capital is EUR 2,401 per square metre. This marks a notable increase from the average purchase price of EUR 2,377 per square metre for multi-family and mixed-use, residential and commercial buildings in 2023.

The transaction volume in this market has also developed positively and is now up on the same quarter of the previous year for the third consecutive quarter. The transaction volume in Q2 2024 was around 18 percent higher than the same quarter of the previous year. In total, residential and commercial properties worth EUR 863.9 million changed hands on the Berlin market – another indication of the continued stabilisation of this submarket.

Private investors particularly active
As important and dominant as the Berlin property market may be for the German market as a whole – after all, it accounts for a good 20 percent of the national market – it is also important to have broader horizons. At Schick Immobilien, we have extended our reach as real estate agents well beyond Berlin to encompass a total of 75 locations. Our focus now includes top-tier cities such as Munich, Hamburg, Frankfurt, Düsseldorf, Stuttgart, Cologne, and Leipzig. At the same time, we recognise the potential in smaller city markets and remain open to exploring opportunities in those areas as well.

This all goes to show that the current state of the residential investment market in Germany is robust, despite the prevalence of negative news. Two groups of investors in particular are currently showing a keen interest in real estate as an investment opportunity: The first group, private investors, family offices, and foundations are interpreting the current market situation as an opportunity to actively engage in expanding and enhancing their portfolios to secure stable returns over the long term. The second group is commercial investors, who are strategically focusing on value-add opportunities in response to increasingly stringent climate protection regulations.

The reasons for the success of this asset class are obvious. Firstly, this development is the result of demographic trends in the capital. Berlin’s population grew from around 3.67 million to around 3.78 million in the short period from the beginning of 2020 to the end of 2023, an increase of more than 3 percent. This had and continues to have an impact on rental prices. In fact, rental prices for existing apartments have seen a substantial increase of around 20 percent compared to the same quarter of the previous year, while new-builds have experienced an 11 percent increase. This continuous rise in asking rents for both existing and new-build apartments is expected to persist, with the existing property segment showing particularly strong growth.

Outlook: Finding solutions, together
Looking ahead to EXPO REAL in Munich, it is evident that the residential investment sector is not facing the same crisis as many other asset classes within the property industry. Optimism prevails. This highlights the importance of collaboration between all stakeholders, whether politicians or industry figures, to develop tangible solutions. These solutions must not only address immediate challenges but also contribute to a comprehensive political framework with lasting impacts beyond today and the current legislative period.

News

New census data provide insights into Berlin’s vacancy rate and rent burden

Data from the 2022 census have now been published. The data were collected during a random survey of 12 percent of the population. The Federal Statistical Office (Destatis) also gathered information from 23 million property owners and 8,000 property companies as part of its building and housing census. One key finding is the national vacancy rate, which stood at approximately 1.9 million apartments on the census date of 15 May 2022. According to calculations from Destatis, Germany as a whole therefore has a vacancy rate of 4.3 percent. Despite the housing shortage, which is particularly prevalent in urban centres, there are thousands of empty apartments in several major German cities. On the census date, there were more than 40,000 unoccupied apartments in Berlin, more than 20,000 in Munich, and slightly less than 20,000 in each of Hamburg and Leipzig. At a national level, 55 percent of vacant apartments had been unoccupied for over a year, while 38 percent were expected to be available for occupancy within the next three months. The city states of Berlin, Hamburg, and Bremen had higher rates of quickly available flats (between 52 and 61 percent) compared to the national average. Among vacant apartments, 24 percent were due to be modernised or refurbished, 7 percent were vacant for sale or owner-occupation, and only 4 percent were slated for demolition. In Berlin, the vacancy rate has decreased since the last census in 2011, when around 66,000 apartments were empty. The average price per square metre for in-place rents in Berlin in 2022 was EUR 7.67, lower than in Munich, Stuttgart, and Frankfurt am Main. Moreover, Berlin’s rent burden, at 27.2 percent, was also lower than the national average of 27.8 percent.

Purchase prices fall in Berlin in Q2, new-build rents continue to rise

According to data from the real estate platform Immowelt, prices for existing flats in Germany increased by 0.3 percent in the second quarter of 2024. Immowelt Managing Director Piet Derriks explained that property prices have now returned to pre-crisis levels: “We are seeing that the property market has recovered noticeably since the beginning of this year after two years in crisis mode, largely because access to financing has improved compared to the previous year”. With further interest rate cuts by the European Central Bank on the cards, Derriks expects prices to continue to rise throughout the year. However, he observed, price trends for existing apartments in individual German cities have been quite mixed. For instance, while Frankfurt am Main saw a 5.5 percent increase in prices in Q1, there was a 0.6 percent decline in Q2. Conversely, Stuttgart experienced a 0.8 percent drop in prices in Q1, followed by a 3.6 percent increase in Q2. Berlin, on the other hand, witnessed price decreases for two consecutive quarters, most recently by 0.2 percent. The reason for this is that the high price level fell much later and less sharply and is now more in line with the rest of the market. In contrast, rental prices for new-build apartments tell a different story. According to data from Immoscout24, Berlin has surpassed Hamburg and Frankfurt am Main to become the second most expensive city after Munich in terms of average rent, at EUR 19.62 per square metre.

New rent regulations are being planned for Berlin

Berlin is a city that has long been a battleground for tenants, with a long history of efforts to regulate the rental market. Various political initiatives, such as the rent cap, price brake, and housing alliance, have been implemented to provide relief, especially on the price front, on the sought-after housing market. Christian Gaebler (SPD), Berlin’s Senator for Urban Development and Building, told the Berliner Morgenpost newspaper about the Berlin Senate’s latest plans: a new inspectorate to combat exorbitant rents is to be launched in November. “After the summer break, we will introduce the necessary bill. I assume that this will be passed relatively quickly”, commented the senator. Berlin’s Senator for Economic Affairs Franziska Giffey (SPD) has additional proposals: “In a light of budget constraints, we also have to talk about the revenue side”, she commented to the German Press Agency. “Another lever is the population register”, she noted, especially as the 2022 census has revealed fewer residents in Berlin than assumed: “More and more people want to live in Berlin. But the question is, do they all register here? For every person who is not registered in Berlin, the city loses over EUR 3,000 in national financial allocations.” She also wants to tackle residents’ parking and has proposed increasing the cost of permits from EUR 20.40 for two years, to EUR 20.40 per year. Independently of the plans of the Senate and the SPD, the Berlin Greens are preparing to introduce a new legislative proposal known as the Housing Industry Act, which they say they will present in the autumn. The Greens’ proposal will call for the introduction of a “landlords’ licensing” system, requiring larger landlords to adhere to specific criteria and social standards.

Dear Readers,

As the seasons brighten, encouraging market data is steadily improving the mood in the residential real estate sector. And the more positive sentiment is not only reflected in the progress made with Berlin’s Faster Construction Act, it is also evident on the market for apartment buildings in Berlin. What’s more, numerous market surveys have underlined the enhanced sentiment among industry professionals.

Towards the end of May, the capital markets responded calmly to the slightly better-than-expected price data from the USA and Europe. However, the pressure on prices and financing continues to impact residential construction, highlighting the urgent need for additional support measures. One potential solution could be the implementation of a higher special depreciation allowance.

Meanwhile, we also explore the future of construction, focusing on the benefits of sustainable and profitable operations through the utilisation of geothermal energy and photovoltaics, as well as looking at the political measures that are already promoting sustainable infrastructure today. This is where a flexible and secure transaction environment to enable swift data exchange and expedited transaction processing is so crucial.

With the latest edition of our newsletter, we make sure you stay informed and engaged!

JMS and HFR

Geothermal energy
It pays to harness the Earth’s heat

Developers who aim to increase the value of their properties rather than see them lose value in years to come already understand the importance of investing in sustainability. The aim of forward-looking property development should be to create properties that use as little energy as possible – and the more self-sufficient the energy supply, the better. One promising but often overlooked energy source is geothermal energy, which offers significant potential for sustainable energy generation. Geothermal energy is derived from the heat stored beneath the Earth’s surface. Within the first 100 metres below ground, the temperature remains a constant ten degrees Celsius. As you drill deeper, the temperature increases. According to the Renewable Energy Information Portal of the Federal Ministry for Economic Affairs and Climate Protection, the temperature rises by three degrees Celsius every 100 metres.

Depending on the location, there are three distinct methods for harnessing geothermal energy as a sustainable energy source: near-surface geothermal energy, which involves tapping into heat sources at depths of up to 400 metres; geothermal systems that utilise hot water underground and reach depths of around 4,500 metres; and systems that extract heat from deep rock formations to generate power, also known in specialist circles as petrothermal geothermal energy, tapping deep-lying heat reservoirs up to 5,000 metres below the surface. Of course, not all of these methods are universally applicable. For instance, when it comes to supplying houses with geothermal energy, the near-surface variant is typically going to be the preferred option.

The use of geothermal energy enhances the value of a property
For investors and property developers, it is well worth looking into geothermal energy as a viable energy source. Not only does it align with environmental principles and promote the sustainable development of our building stock, it also offers significant financial benefits.
Simply put, using geothermal energy enhances the value of a property. A building powered by geothermal energy not only meets the European Union’s sustainability standards, it also makes building users independent of the public grid. The only electricity the building needs is the power to run its geothermal heat pump, and this can usually be purchased at a subsidised price or generated directly via solar panels. This leads to a significant reduction in tenants’ ancillary costs. As a result, property owners can command higher rents over the long term, allowing them to recoup their investment in a relatively short period of time.

Test drilling needs to be approved by the authorities
While the benefits of geothermal energy are numerous, there is one hurdle to overcome: the need for test drillings to determine the suitability of a given building site. A Thermal Response Test (or TRT for short) needs to be conducted to determine the thermophysical subsurface parameters and establish whether on-site conditions are suitable for the use of geothermal energy. This procedure can be quite costly, with investors often required to pay substantial five-figure sums. Moreover, geothermal installations are also subject to approval from the relevant authorities. After all, drilling can have an impact on local tectonics, groundwater, and neighbouring buildings. Understandably, the authorities approach all such projects with caution, ensuring they comply with a strict set of regulations.

Geothermal power plants can have an impact on local vegetation
It is important to bear in mind that geothermal energy, when extracted from close to the surface, can potentially harm vegetation directly aboveground. The process of extracting heat from the earth can cause the soil to dry out, affecting the surrounding plant life.

However, this should not stand in the way of thoroughly assessing local conditions and gathering relevant data. Where test drillings have already been conducted or geothermal is already in use in a specific area, valuable insights may potentially already be available regarding the opportunities on site.

One potential drawback that may deter investors is the higher initial cost associated with geothermal heat pump systems compared to conventional heating systems. On average, a geothermal heat pump can cost between 12,000 and 15,000 euros and it typically takes approximately seven to ten years to yield a return on this upfront investment.

Attractive returns on long-term investments
Accordingly, equipping a property with a geothermal heat pump system is a particularly profitable proposition for investors who want to keep properties in their portfolios over a longer period of time. Conversely, anyone looking for a quick turnaround on their investment may struggle to recoup their outlay within a short timeframe.

Furthermore, geothermal heat pump technology may not be suitable for all types of properties. Retrofitting existing buildings can be a complex and labour-intensive process, requiring specific features such as underfloor heating. As a result, new construction projects are better suited for the installation of geothermal heat pump systems.

The economics of geothermal energy primarily depend on the type and scale of the project at hand. For instance, near-surface geothermal energy may be the most viable option for single-family homes with ample land, whereas deep drilling may be more suitable for larger buildings and larger-scale projects.

But where conditions do allow the use of geothermal power, it is a far more effective solution than an air-to-water heat pump. The enhanced efficiency of geothermal systems mean they are always going to be the more cost-effective and sustainable option in the long run.

Geothermal heat pumps provide heat in winter and cooling in summer
Geothermal energy is not only attractive from a financial point of view, it also enhances the overall quality of life for residents. During the winter months, living areas are efficiently warmed by underfloor heating. But that’s not all as, unlike traditional heating systems in Germany that do not offer a cooling feature, geothermal heat pump systems can be “reversed” in summer to provide a cooling effect, guaranteeing comfortable ambient temperatures whatever the season.

Geothermal energy presents a compelling opportunity for investors in the real estate sector to develop sustainable and forward-thinking projects. While the initial costs can be higher, the long-term advantages in terms of energy efficiency, environmental sustainability, and tenant satisfaction are undeniable. Incorporating geothermal energy into real estate developments could play a vital role in helping achieve ESG objectives and decarbonising the building stock.

The aim across all sectors should be to promote geothermal projects as effectively as we possibly can. And that goes far beyond simply handing out new subsidies. Above all, the government needs to streamline approval processes for deep geothermal energy, which are currently regulated by the Federal Mining Act (BBergG). And if developers could be granted controlled access to the findings of previous test drillings, they would certainly find it easier to evaluate the potentials of this technology in the first place.

Institutional investors set their sights on photovoltaics

The installation of photovoltaic systems on buildings is becoming increasingly popular among professional investors. A survey of institutional investors (insurance companies, banks, pension funds, and so on) conducted by Universal Investment in the spring of this year revealed that 68 per cent of respondents are already using photovoltaics, in particular to reduce the carbon footprint of their real estate portfolios. The same proportion, 68 per cent, said they had taken steps to optimise heating systems across their portfolios, while a staggering 95 per cent confirmed they had implemented initiatives to reduce electricity and energy consumption. The survey allowed respondents to select multiple applicable statements from a variety of options.

According to the survey, 45 per cent of respondents want to use the majority of the electricity generated by photovoltaic systems on their buildings and feed the rest into the grid, whereas 35 per cent said they would prefer to lease their systems to an external operator. And, of course, it is essential that investments in photovoltaics make economic sense. The survey revealed that 59 per cent of respondents are primarily focused on optimising the value of their properties, while only 14 per cent of respondents are looking to boost their free cash flow yields.

The growing political momentum to increase the use of decentralised, emissions-free energy sources currently coincides with the growing desire among institutional investors to expand the provision of owner-operated photovoltaic infrastructure. For example, an amendment to the German Renewable Energy Sources Act (EEG) in 2023 eliminated a technical restriction on photovoltaic systems installed after January 1, 2023, allowing them to feed in excess of 70 per cent of their nominal output into the public grid.

Among the forest of certificates, traditional energy certificates remain popular
One issue that is currently on the minds of professional investors is the complexity surrounding sustainability certificates. A relative majority of investors continue to rely on traditional energy certificates (35 per cent), with the GRESB methodology coming in second place (24 per cent). Other certifications, such as DGNB, LEED, or BREEAM, as well as proprietary scoring models, also play a significant role in the industry. The fragmented nature of the certification landscape highlights the lack of a universally accepted standard.

This particularly applies to the one-third of respondents who have not yet assessed the ESG performance of their real estate portfolios. Conducting this assessment is, however, the first decisive step towards successfully transforming the building stock. While there has been no shortage of discussions on this topic in recent years, there is clearly still a need for action on the part of some. Implementing a standardised methodology would streamline processes and enhance clarity and transparency. This should be the ultimate goal for both policymakers and businesses.

The new gold: Data play an increasingly important role in the transaction process

The length of time it takes to close a transaction on the real estate market has reached a new record level. This has made buying and selling even more difficult, further exacerbating the challenges on what is already a stagnant real estate market. The slowdown certainly has not been helped by escalating regulatory requirements. However, the persistently challenging economic conditions, including high construction costs, unattractive interest rates, and an uncertain market environment, are also putting the brakes on countless transactions.

To conduct a thorough analysis of transaction activity, we sifted through all of the data from transactions in Drooms data rooms last year. We also asked a select group of real estate experts for their insights. With the “Drooms Real Estate Transaction Barometer 2024”, we can pinpoint issues within the real estate market and provide a framework for understanding overall market trends. But the data are not only valuable in terms of retrospective analysis, they also play a crucial role in identifying and addressing potential issues during the transaction process itself.

Closing a deal has never taken longer – only Switzerland bucks the trend
At an average of 342 days per transaction, transaction times in Drooms data rooms reached yet another historic high last year. This is remarkable in several respects, as it represents the continuation of a longstanding tend rather than just a one-off snapshot. In last year’s report, we reported a new all-time high – and even this has now been surpassed. In fact, a majority of investors surveyed said that the time needed to close a deal had risen by up to 20 per cent.

In established real estate markets such as the UK and Germany, we recorded a notable uptick in transaction timelines, with the UK experiencing the most substantial increase. In the UK, transaction times rose from 319 to 391 days, an increase of 72 days. In Germany, in contrast, the transaction duration increased by just 21 days. Despite these clear European trends, there were also a number of positive surprises, such as Switzerland, where the average transaction timeline of 46 days was significantly lower than in the previous year.

Residential real estate continues to lead the field
The second key insight from the Drooms Real Estate Transaction Barometer 2024 is that residential and logistics real estate are still rated as attractive. While this is not exactly surprising, it is nevertheless well worth mentioning. Clearly, investors appreciate the reliability of rental income from these asset classes. More than 50 per cent of respondents see these two asset classes as the most attractive investment targets, with logistics/industrial at just under 35 per cent in first place and residential properties at around 20 per cent in second place. Our report also provides a glimmer of hope for the long-suffering real estate market: 40 per cent of respondents indicate they are open to new acquisitions.

However, the outlook for office properties is less favourable, with only nine per cent of respondents showing interest in investing in this sector. The long-term nature of this development is confirmed by the investors we surveyed, over 70 per cent of whom expect office space to be significantly less in demand in the future.

Increased regulation dampens the real estate market
The likelihood of closing a transaction after the completion of due diligence has apparently begun to decline: More than half of Drooms’ respondents reported a falling success rate for property transactions in the past year. It is particularly worrying that around a third of those surveyed noted a decline of more than 20 per cent.

The declining certainty of projects is having a detrimental effect on the real estate market as a whole. Developers and investors are finding it increasingly difficult to accurately predict the duration of a project. This uncertainty is further impeding the real estate market, which is already so heavily dependent on new construction and development.

Expediting transactions means you are more likely to successfully close deals
Slower transaction processes, regulatory uncertainties, and the challenges of a growing volume of data, particularly in relation to ESG criteria, are becoming ever greater hurdles in the transaction process on the property markets. Data are worth their weight in gold because having a better overview of the transaction process means you can make decisions more quickly.

Modern data rooms are a valuable tool that can expedite the completion of real estate transactions. And while they may not resolve financing issues, they do have the capability to highlight problems and identify unfavourable deals more quickly. Added to this is the growing use of AI-based data rooms, which are also gaining in importance in view of the shortage of skilled workers and shrinking margins in the transaction business.

Click here to download your copy of the Drooms Real Estate Transaction Barometer 2024

Residential Investment Barometer points to optimism

Despite some pretty healthy figures, sentiment on the residential investment market did not really improve last year. Nevertheless, many in the industry are now expressing a more optimistic outlook. The trend towards a potential upturn in the market seems to be gaining momentum and the fundamentals have become more robust.

Optimism has returned to the residential investment market – at least as far as existing properties are concerned. This is a significant development, especially considering the prevailing negative sentiment that has otherwise been widely reported. Given the doom and gloom headlines, we could be forgiven for thinking that the entire real estate market is on the verge of a total collapse. Every day we read about a “Real estate market collapse”, “Tough times ahead”, or a “Deep freeze on the real estate market”. In reality, the challenges are far more localised, affecting submarkets such as new construction or the office and commercial real estate sectors. But the truth doesn’t make for such exciting headlines. The fact that there are markets in which the economic slump has bottomed out and things are looking up is also rarely mentioned, both in terms of sentiment and figures.

In the residential investment market, for instance, sentiment and figures are both positive. This is confirmed by the latest data from the Schick Immobilien “Zinshausmarktbericht Berlin” (Berlin Residential Investment Barometer”) for the first quarter of 2024. These figures suggest that the fundamentals of the residential investment market in the German capital are sound. Incidentally, it is worth noting that Berlin’s market is representative of the overall German residential real estate market, as it accounts for approximately 20 per cent of the nationwide market for apartment buildings. In the first quarter of 2024, there were 116 transactions involving apartment buildings in Berlin, compared to 108 in the same quarter of the previous year, marking an increase of around 7 per cent. While this increase is notable, it is not a game-changer in and of itself.

There were clear indications of a significant turnaround in the previous quarter, as evidenced by a notable increase in the number of transactions. In the fourth quarter of 2023, transactions rose by approximately 30 per cent compared to the previous quarter, reaching a total of 184 (compared to 142 in Q3/2023). This followed a relatively modest 106 transactions in the first quarter of 2023. The market for multi-family homes in particular registered an exceptionally strong increase in transaction volumes. In the fourth quarter of 2023, sales in Berlin reached EUR 1.1977 billion, marking the highest figure in two years and representing a 48 per cent increase compared to the same period in 2022. In comparison to the third quarter of 2023, the increase is even more impressive, equating to roughly 120 per cent. The volume of transactions also grew significantly in the first quarter of 2024. With an increase of 114 per cent to EUR 832.6 million, the transaction volume more than doubled compared to the same quarter of the previous year.

Sentiment has brightened
So, do the data point to a significant change between the two quarters? Not really. Both periods showed signs of a recovery. However, the key difference lies in market sentiment, which we gauge in our Residential Investment Barometer ­– a survey of 2,000 private and commercial investors. A direct comparison of the results of the two most recent barometers reveals that the mood among the surveyed investors was far more pessimistic last year. Thankfully, in line with the improvement in revenues and transaction volumes, sentiment has now brightened considerably. The majority of respondents now view investment opportunities as “average” (around 41 per cent), with a quarter rating them as “good” (25 per cent). This marks a significant improvement over the last survey in November 2023, when most respondents expressed a negative outlook on investment opportunities.

Hope for the year as a whole
The latest Residential Investment Barometer reveals consistent trends across various parameters. Take price trends, for example: A relative majority of investors and property owners, approximately 35 per cent, anticipate stable prices, while around 23 per cent are forecasting rising prices. This marks a notable shift from the previous survey, where less than a third expected stable or rising prices. Or take willingness to buy: In the November 2023 survey, only 37 per cent of investors said they were planning to expand their portfolios. In the latest survey, in contrast, the figure has increased to 58 per cent – indicating another significant positive correction.

These examples illustrate a significant shift in the mood on the residential real estate market and give us great hope that the current stability will continue through the middle of the year and the second half of the current year.

There are already some significant forks in the road ahead: How will regional election campaigns affect residential construction and rent regulation? What decisions will the ECB make regarding the key interest rate? And what impact will foreign policy developments and crises have? It is therefore imperative that all stakeholders – including politicians, investors, owners, and users – work together to chart the right course ahead. By doing so, we can anticipate a positive ripple effect throughout other submarkets across the real estate sector, leading to a brighter outlook overall. With a concerted effort, we may soon be seeing headlines proclaiming “Positive signals from the real estate markets” and “Things are finally looking up again!”

News

First draft of Faster Construction Act has now been finalised

After several announcements over the last few months, including one from Christan Gaebler (SPD) to the German Press Agency that the Faster Construction Act would be in place by mid-2024 (recently reported in his very newsletter), the Berlin Senate finally presented an initial draft at the beginning of April. Business and environmental associations were then given two weeks to provide feedback on the draft. The law, currently due to come into force at the end of 2024, comprises 41 amendments to nine state laws and one ordinance and is primarily designed to speed up the completion of residential construction projects. In general, the proposed law aims to streamline planning and approval procedures, introduce review and processing deadlines, and establish a clearer division of responsibilities between state and district authorities. This will give the state greater influence and aims to promote digitalisation in the construction sector. Additionally, building owners will receive more accurate information about approval timelines and, according to Christian Gaebler, stop the misuse of inspection procedures and nature and species protection to delay construction projects. According to the Tagesspiegel, the Expert Advisory Council for Nature Conservation and Landscape Management, an independent body affiliated to the Senate Administration, criticised the draft law for doing little to expedite the construction of new buildings or enhance social infrastructure. The Council also said that the proposed legislation would “alter key standards related to the protection, preservation, and development of nature and the environment”. As this could result in a significant dilution of nature conservation efforts, the council has recommended that the draft be “roundly rejected”.

State of Berlin takes over 4,500 apartments from Vonovia

As the Governing Mayor Kai Wegner (CDU) announced on April 24, the municipal housing company Howoge is taking over 4,500 apartments from the Bochum-based real estate group Vonovia in the district of Lichtenberg. The deal also includes 6.9 hectares of building land in the Berlin-Buch and Berlin-Lichtenberg districts, which Howoge is taking control of together with Berlinovo, another state-owned housing company. According to Handelsblatt, the EUR 700 million transaction is expected to be finalised by the end of the year. Ulrich Schiller, Managing Director of Howoge, has evaluated the location, construction, and condition of the newly acquired properties as being on par with Howoge’s existing municipal portfolio. According to Schiller, the average rent of EUR 7.04/sqm also aligns “perfectly with municipal housing.” The EUR 700 million will be a combination of equity and loan capital. Three years ago, Berlin’s three municipal housing companies Berlinovo, Degewo, and Howoge took over almost 15,000 apartments and 450 commercial units from Vonovia and Deutsche Wohnen, prior to the two companies’ merger, at a price of EUR 2.46 billion. In 2019, around 2,100 units were also acquired by Degewo from Deutsche Wohnen for EUR 358 million and almost 5,600 apartments by Gewobag from Ado Properties for EUR 920 million. The aim of these purchases is to bring the Berlin rental market back under municipal control. According to official figures, more than a fifth of Berlin’s approximately 1.7 million rental apartments are currently in public ownership.

KaDeWe changes hands as the list of insolvent Signa companies lengthens

Following the insolvency proceedings and restructuring under self-administration of Signa Prime and Signa Development Selection AG, two subsidiaries of the Signa Group, the iconic Berlin department store Kaufhaus des Westens (KaDeWe) has now been sold. The buyer, Thai Central Group, has agreed to acquire the entire KaDeWe property. The transaction was valued at one billion euros according to Berlin’s Senator for Economic Affairs, Franziska Giffey (SPD). Neue Zürcher Zeitung (NZZ) has also reported that Signa Prime is actively seeking buyers for its remaining properties, including the renowned Swiss department store chain Globus. In a related development, Galeria Karstadt Kaufhof, the Signa-owned German department store chain, also filed for insolvency at the end of the year, and now the investment company for department stores, Signa Retail GmbH, has also filed for bankruptcy. Signa Retail held stakes in Galeria Karstadt Kaufhof, KaDeWe, Globus in Switzerland, and the British Selfridges Group, among others. Following the takeover by a new owner, Galeria Karstadt Kaufhof will be rebranded as Galeria from the end of July, as announced by the insolvency administrator Stefan Denkhaus in early May. Additionally, 16 of the chain’s 92 department stores will be closed, as revealed by Denkhaus in late April. As the insolvencies within the Signa Group continue to mount, the Austrian Public Prosecutors Office for Economic Affairs and Corruption has launched an investigation into company founder René Benko. The investigation relates to the extension of a loan totalling EUR 25 million, with Benko allegedly having misled the lending bank as to the Signa Group’s financial situation.

Dear Readers,

The new year got off to a mixed start with a chance of sunshine to come. After a challenging twelve months for the real estate industry last year, market sentiment is still somewhat subdued, but the cloud cover is slowly clearing. Cancellations, developer bankruptcies, and declining commercial property purchase prices are still causing problems, but they will no longer shape the real estate landscape in the year ahead.

Germany’s cities have enjoyed a year-end spurt, capital market interest rates have recently decreased, and the inflation rate has fallen sharply, all of which gives us plenty of reason to be happy and look ahead with a keen sense of optimism: What changes lie ahead on the European residential real estate market in 2024? Increases in key interest rate appear to be a thing of the past end and the availability of financing for property buyers is likely to continue to improve as the year unfolds.

It is important to take advantage of this window of opportunity: moderate interest rates and lower prices allow us to address the important questions in the residential real estate segment. When is the right time to buy and when to sell? What condition is the real estate industry in at the start of the year at MIPIM? How can we manage energy consumption efficiently? And why is over-insulation so inefficient? Last but not last, how do we best modernise real estate portfolios and ESG management processes in this age of digitalisation?

We wish you an informative read and a sunny spring!

JMS and HFR

Useless over-insulation

Right now, I have the feeling that Germany is increasingly becoming a “belt and suspenders” society. We want to double-safety-proof everything. For example, our country’s politicians want us to maximise energy-efficiency and minimise carbon emissions in the building sector, so they ask us to fit comprehensive exterior and interior insulation in all of our buildings. At the same time, they want us to install state-of-the-art heat pumps that run on green electricity. Why? To minimize emissions through insulation, even those emissions never even arise. Is that logical?

Moreover, grey emissions mean that excessive insulation is neither economical nor environmentally-friendly. The energy and carbon footprints of popular Styrofoam insulation materials are likely to be devastating.

In addition, triple glazing and thick insulation actually make the climate worse. At least the climate inside our buildings. It is only thanks to complex ventilation systems that real estate – whether residential buildings or office complexes – can be protected from mould.

Not that anyone gets the wrong idea: Depending on which figures you believe, the real estate sector is responsible for up to 40 per cent of greenhouse gas emissions. And our industry is rising to the challenge and making a valuable contribution to climate change mitigation. But let’s not go overboard. We need to concentrate on identifying and implementing sensible solutions. Because, undoubtedly, there is a great deal to do. However, intensively discussing the pros and cons of individual measures should not only be permitted, it should be welcomed and even encouraged.

I want us to approach this discussion with the greatest possible efficiency and effectiveness, and with all due consideration of the requirements of energy policy. Legislators clearly want to prioritise electricity in years to come, whether in the field of mobility, where electric cars have already been lined up as the backbone of individual transport, or in the real estate industry, where electric heat pumps have been earmarked as the technology of choice – if lawmakers have their way. At the same time, the federal government has set Germany the goal of generating a good four-fifths of electricity from renewable energies within the next six years. If the government hits its targets, the entire economy should be climate-neutral by 2045.

However, if the electricity for heating and cooling properties comes from renewable and emission-free sources, insulation cannot have any positive impact on our energy and carbon footprints. The opposite is likely to be the case. The biggest factor in the energy and carbon footprint of a building is its construction, and that includes insulation, which is usually unnecessary.

With a view to tenants’ energy costs, energy-efficiency upgrades certainly make sense if heating is still provided by fossil-fuel sources. My concern is simple: Let’s keep a sense of proportion in all this. Let’s do what’s best in each specific case. So, when it comes to the issue of insulation and a property’s carbon footprint, let’s leave our suspenders in the closet. A belt is all we need.

Digital competence – why technological innovation alone is not enough

The real estate industry is facing growing challenges: rising ESG requirements, evolving market conditions, and an increasing flood of data. Driven by the need to remain competitive in a highly dynamic market environment, digital transformation is no longer an option, it is an imperative. And this is changing the way real estate is managed and optimised. The loss of familiar routines also leaves employees grappling with new challenges, because digital competence requires openness to change.

Digitalise data and processes together
For years, the real estate industry was so successful that many companies saw no urgent need to optimise their data processing and business processes via new digital capabilities. The value of real estate continued to rise, even without exploiting its full potential in asset and property management. But times have changed. Digital management is now becoming increasingly important as companies strive to increase the quality of their data and improve their workflows. However, simple software solutions that can be applied to individual workflows are not enough. Companies need comprehensive digital solutions that solve the problem of data silos if they are to effectively use data in every facet of their businesses.

However, even a meticulously maintained data set can only be used to improve real estate assets and their performance if everyone involved in the value chain adheres to defined, clearly structured processes. It is essential that digitalisation also includes work processes. Digital workflow management takes the diverse range of tasks in different departments and defines specific conditions, rules, and decision points. This enables routine tasks to be automated, which, in turn, can speed up accounting processes, to name just one area of application.

In particular, process landscapes that have many interfaces – for example between asset and property managers, or between property and facility managers – stand to benefit greatly from digital networking. In addition, digital process environments are adaptable systems that allow users to modify processes whenever other methods prove to be more efficient in practice. This allows workflows to undergo continuous optimisation.

Digital competences
Real estate management companies not only benefit from digitalisation because it gives them more efficient processes, but also in recruiting employees. A modern, technology-oriented job profile can help reduce the shortage of skilled workers in the industry. Younger people have grown up with digital tools and are drawn to jobs that use and promote digital skills. The integration of modern technologies into property management directly appeals to this digitally savvy group.

For employees who are used to traditional work methods, digitalisation often means adopting a new way of thinking. Openness to change is crucial. Employees must be prepared to fully exploit the potential of digitalisation and to actively participate in the continuous development of processes. To do this, each individual must be empowered to rethink familiar processes in order to identify ways to optimise them.

It is therefore crucial to create a culture that welcomes and supports change. Employers should foster an environment in which questioning routines and experimenting with new solutions are viewed positively. You also need to recognise that employees who are not so tech-savvy can find transformation processes stressful. A lack of management support or inadequate training and resources to cope with new demands can increase uncertainty. It is therefore important not only to consider the technical aspects of the transformation, but also to consider the psychological impact of change on employees.

Willingness to change
The digitalisation of the real estate industry marks a turning point that increases the efficiency of data and process management and also modernises job profiles, making the sector more attractive for the next generation of employees. In all this, it is important not to underestimate the challenges for the workforce, because employees will need to adopt a mindset that embraces change. Employers should support the introduction of digital tools through training and a supportive culture. Ultimately, digitalisation is a holistic approach that combines technical innovations with the ability and willingness to change.

Smart buying strategies in times of crisis

Complaints from stakeholders within the real estate industry are getting louder and louder: interest rates and construction costs are too high; large numbers of property valuations need to be reduced; transaction volumes collapsed dramatically in Germany in 2023. According to data from JLL, the total volume of transactions fell by 52 per cent to EUR 31.7 billion. And overall prospects for this year are not exactly rosy either, even if the European Central Bank (ECB) does decide to lower its key interest rate. In this environment, many market players are saying that there are hardly any attractive opportunities to buy at the moment, at least not at current interest rates and market conditions. They are wrong.

Because, at the same time, the volume and ratio of real estate loans at risk of default on bank balance sheets have also risen sharply. According to the latest calculations from Germany’s Federal Financial Supervisory Authority (BaFin) and the Bundesbank, the volume of non-performing commercial real estate loans (NPLs) on the books of institutions supervised by the ECB was more than ten billion euros at the end of September 2023. In the middle of the year it was around eight billion euros. Moreover, the NPL ratio at major banks rose to more than three percent.

BaFin even sees dangers for individual banks, as it writes in its current report “Risks in Focus 2024”: “The difficult situation on the commercial real estate market is likely to impact the earnings of the affected banks for a longer period of time and require higher risk provisioning. Highly specialised business models or poor selection of properties by the banks could even cause difficulties for individual institutions”.

Given these statements, credit institutions will certainly look to divest themselves of NPLs. Especially since the BaFin requires real estate loans to be backed by a sectoral equity buffer of two percent.

And this is where potential investors come into play. Because one person’s suffering can become an opportunity for someone else. For example, for investors who are interested in real estate transactions despite the crisis. In our view, the loans at risk of default are a suitable purchase target, as this would allow investors to obtain the underlying assets more economically.

Lower entry prices reduce the risk of further devaluations for investors. In fact, we might even see the opposite of devaluations. In an ideal case, asset values could even increase.

In addition to banks, insolvency administrators and mezzanine investors are also likely to be potential suppliers of bargain real estate. The latter in particular are under significant pressure in the current market. Some may even find themselves owning a distressed property or two. If they do not want to risk the total loss of their investment, mezzanine financiers would be left with just two options: sell their loans or take on a partner. Both are likely only possible with significant discounts on the purchase price, which means opportunities for other canny investors.

Is springtime approaching on the Côte d’Azur?

The international real estate trade fair MIPIM is due to open its doors in a matter of hours. What can German participants expect? And what does the future of the market hold in store? Let me see if I can provide a touch of perspective.

As is the case every year on the eve of MIPIM, there is a lot of talk about Mediterranean flair, the fantastic light, and the incomparable Cannes coastline. There will be talk of champagne, parties, and the awakening of spring. But the crisis and decline in new construction are also part of the reality this spring and will be major topics, at least among German participants.

Whatever the topic of discussion, the German real estate industry has long played a major role in the trade fair in the fashionable city of Cannes. In 2022, around 14 per cent of international guests were German, and they accounted for around 10 per cent of the stands.

One thing is clear: MIPIM is an important event for lots of real estate managers – as well as for investors, developers, financial institutions, and intermediaries. Noticeably, marketing representatives from both smaller and larger German cities – and their sub-exhibitors in particular – seem to feel particularly at home in Cannes. Berlin, Munich, Leipzig, Stuttgart, and Cologne: so many German cities and metropolitan regions are at MIPIM. But how much party spirit are these participants bringing with them on their trip to the south of France this year? And how much gloom and crisis will they have in their suitcases?

Strong end-of- year spurt in Berlin
Sometimes it’s worth looking at the fundamentals to understand the sentiment. On the one hand, there is no end in sight as new construction continues to bottom out. The list of insolvent developers gets longer every day. Some players who recently made a big impact will be gone entirely this year. On the other, there are a number of market segments that started 2024 with signs of optimism. The Berlin residential investment market, for one, has shaken off any talk of ongoing crisis, falling prices, and declining transactions. The Berlin market for residential and commercial buildings experienced a strong end-of- year spurt. The number of transactions increased to 184 in the fourth quarter of 2023, around 30 per cent up on the previous quarter (Q3/2023: 142). In the first quarter of 2023 there were only 106 transactions.

The market for multi-family homes also experienced unusually strong growth, particularly in terms of sale volumes. In Berlin, these reached their highest level for two years at EUR 1.1977 billion in the fourth quarter, which corresponds to an increase of around 48 per cent compared to the fourth quarter of 2022. Compared to the third quarter of 2023, sales climbed by around 120 per cent. These figures come from the most recent edition of “Zinshausmarktbericht Berlin” (“Berlin Investment Housing Market Report”), which is published every quarter and is based on data from the Expert Committee on Berlin Property Values and SCHICK IMMOBILIEN’s own calculations and was published in January 2023.

Time for optimism
So – as long as you focus on existing properties, including those in the Berlin residential investment market – there would seem to be no reason to go to MIPIM with a heaviness in your gut.

The European Central Bank’s (ECB) recent decisions could also provide latent optimism this year, as it can be assumed that the key interest rate will fall slightly before the end of the year, even if the two-percent inflation target is not reached. That would send a positive sign to the real estate market.

It is clear that the key interest rate will also have an impact on the all-important cost of borrowing. The peak seems to have been passed here, which could send a positive psychological message to the entire market. From a buyer’s perspective, the beginning of 2024 in particular has already turned out to be an exciting time with numerous attractive properties coming to market. Moderate interest rates and falling prices, combined with a large selection of properties, ensure increased affordability.

Strong demand for housing
And one last argument: We continue to see Germany’s growing population driving demand for housing. This creates attractive opportunities for institutional and private investors, especially in major cities, which are the main beneficiaries of immigration into Germany and have seen the sharpest increases in demand for housing.

The bottom line is that there is a good chance things will look up this year. And the industry? For some, this year’s MIPIM will provide the first feelings of spring. And as far as I’m concerned, I’ll definitely be packing a healthy amount of optimism in my luggage.

What do you think? I look forward to seeing you at MIPIM – you can find us at stand P4.C3 – or afterwards in Berlin.

News

Berlin’s Senate aims to introduce Faster Building Act in mid-2024

Christian Gaebler (SPD), Berlin’s Senator for Urban Development, Construction, and Housing, recently told the German Press Agency that the Berlin Senate’s new Faster Building Act is now expected by mid-2024. Previously, Governing Mayor Kai Wegner (CDU) had declared on 4 August 2023 that the law was due to come into force “this year”. Over the past few months, hundreds of comments, suggestions and proposals from associations and municipalities have been evaluated and sent to the respective administrations for feedback. Gaebler believes it is realistic that the new law could be in place by the summer, but added: “I can’t guarantee that we will have dotted every ‘i’ and crossed every ‘t’ on all of the implementing regulations by then”. The Faster Building Act was promised in the coalition agreement between Berlin’s governing parties, the CDU and SPD, who have been in office since 2023. The new legislation is intended to significantly accelerate planning and approval procedures in order to develop more housing in Berlin. In December, the Senate revised Berlin’s building code to make it easier to add extra storeys, convert attic floors, and build with wood. The problem with legislative proposals is that administrations take time to provide their feedback, which in the worst case could be up to six months, Gaebler explained. “In my view, the most important aspect of all this is having reliable deadlines”, Gaebler said. The Faster Building Act’s provisions include stipulations for shorter deadlines and faster procedures.

Rents continue to rise rapidly in Germany’s major cities

An analysis by real estate service provider JLL shows that rent increases in German cities are still accelerating. In total, JLL analysed around 35,000 rental offers and 41,000 sale listings. In the second half of 2023, asking rents in Germany’s eight largest cities – Berlin, Hamburg, Munich, Cologne, Frankfurt, Düsseldorf, Stuttgart, and Leipzig – rose by an average of 8.2 per cent compared to the same period of the previous year. The 2022 study reported an increase of 6.3 per cent. Over the past five years, JLL finds, annual rent increases have averaged around five percent. According to JLL, many prospective buyers have been priced out of buying a property, which is driving demand for rental units and pushing asking rents ever higher. Berlin and Leipzig recorded particularly strong annual increases, each registering double-digit rises in the period under examination. While asking rents in Leipzig rose by an average of 10.6 per cent, the figure for Berlin was 21.4 per cent. In the existing apartment segment in Berlin, the average increase was higher still, at 31 per cent. On average, rents in the capital are closing the gap with Munich, the most expensive rental market in Germany. Averaging EUR 19.42 per square metre, Berlin is the most expensive city after Munich, where rents average EUR 22.50 per square meter.

Signa’s construction projects in Berlin are insolvent

Having announced a halt to construction on several Berlin projects in November, the troubled Austrian real estate group Signa filed for bankruptcy for a number of these projects at the beginning of the year, reports the Süddeutsche Zeitung. The reason for the latest developments is “a cascade of insolvencies from top to bottom”, explains Gerhard Weinhofer, spokesman for the credit rating agency Creditreform. Late last year, the two subsidiaries Signa Prime and Signa Development Selection AG applied for insolvency proceedings and restructuring under self-administration after an out-of-court restructuring failed. Signa Prime owns several commercial properties in prime locations, including KaDeWe in Berlin and Elbtower in Hamburg. According to Creditreform, Signa Development’s portfolio comprises 39 construction projects. The insolvency application for the Berlin construction sites includes the “P1” development on Passauer Straße and the “Femina Palast” project on Nürnberger Straße, according to the Tagesspiegel. The Galeria Karstadt Kaufhof department store chain, which also belongs to Signa, has also filed for bankruptcy; after the third bankruptcy in four years, the chain is currently in discussions with potential investors.

Dear Readers,

As the year draws to a close, it is time to look back, but also to look ahead. One thing is clear: 2023 was not an easy year for many companies in the real estate sector. Valuation adjustments, insolvencies and cancellations frequently set the tone. The impact of interest rate hikes has clearly been felt.

However, we have also seen the federal government and federal states seize the political initiative – most recently in an ambitious 14-point programme that brought together many important ideas to sustainably boost the construction of new housing in Germany.

The bottom line is this: there is still reason enough to take an optimistic view of the future. Despite all the shortcomings, there are still opportunities: How is the European residential property market developing? What impact will inflation have on investments? Where could new residential property projects be developed? And finally: Why will things pick up again in 2024? Our experts address all of these questions and more in the latest WID newsletter.

We wish you an informative read and a happy and healthy Christmas and New Year!

JMS and HFR

European residential markets continue to offer plenty of opportunities

While the situation on the capital markets may have largely calmed down in the wake of the central banks’ rapid interest rate hikes, the economic environment nevertheless remains challenging. The dramatic increase in geopolitical conflicts, including military confrontations, is fuelling economic uncertainty, weighing on growth and affecting the investment behaviour of institutional investors. In addition, inflation remains too high and monetary policy has become much more restrictive. All of this is also having an impact on residential property markets. Higher construction and financing costs, competing asset classes with more attractive yields, and uncertainties regarding asset valuations are weighing on new construction and transaction activity. However, from a fundamental perspective, there is still a lot to be said in favour of residential property.

Globally, transactions in the residential property sector have declined by around 50 per cent this year, in Europe by as much as 60 per cent. The transaction market is cautious and restrained, waiting for an interest rate plateau – which now seems to be materialising. Beyond the headline declines, it is well worth taking a look at the transactions that did take place: they were more specialised, more informed. In the EMEA region, cross-border transactions only declined by just under 40 per cent, and Europe remains the number one destination for cross-border residential investors, accounting for around 70 per cent of transactions.

Rented residential market not expected to ease anytime soon
The decline in transactions highlights which residential subsectors in Europe remain relatively interesting to investors. The transaction volume in the student housing sector, for example, has only declined by just under 14 per cent. This supports the case for the resilience of the residential market in general and of niche uses in particular, as anti-cyclical purchases continue to take place in segments that are in constant demand. Even more relevant than the decline in transaction volumes, however, is the low level of construction activity, which is unlikely to lead to an easing of the market any time soon, particularly in urban centres. As rising demand due to ongoing urbanisation and demographic change cannot be met by a larger supply, this will tend to lead to further increases in prices and rents. In the current environment of rising financing and material costs, new construction starts are being further delayed.

The undersupply of housing has created a fairly comfortable situation for institutional investors. Despite the shrinking yield gap to bonds, institutional investors can benefit from the stable cash flows and attractive risk-adjusted returns of residential property, especially if the inflationary environment is considered. Consequently, investors will focus less on achieving the lowest possible purchase price and more on long-term positive rental growth, which is fundamentally supported by sustained strong demand, high construction and financing costs, and thus a decline in construction activity, coupled with increasing requirements for the incorporation of ESG criteria.

The housing market is undergoing a structural shift
Fulfilling ESG criteria involves coming up with answers to a social question that inevitably arises in supply-constrained environments. As, with the exception of Ireland, completions and project pipelines are currently shrinking, it is lower and medium income households in particular that are feeling the impact of the lack of supply. This presents the property industry with the task of implementing ESG criteria while also placing responsibility on investors. Above all, experienced market players benefit from their expertise in planning and management.

One opportunity is to look at the rising number of single-person households. Between 2010 and 2020, the number of single adult households grew at an above-average rate of almost 20 per cent in Europe. Single-person households tend to show greater demand for rental accommodation than other groups. Young, urban and single professionals in particular prefer to rent for a longer portion of their working life so that they can react more flexibly to job changes and changes within their private environment.

Europe remains resilient
It is this structurally strong demand in the rented residential segment that is bolstering the entire European residential market. The effects of war, inflation, interest rates and rising material costs do not change the fact that the imbalance between supply and demand is fuelling further rental inflation. Declining transaction volumes are only of limited significance, as investors continue to appreciate the attractive fundamentals of the housing sector as an asset class. Despite a lower yield spread towards government bonds, the residential property sector remains an inflation-proof and stable investment opportunity, provided the location and quality are right. On this score, cities such as Malmö, Vienna, Helsinki, Paris, the Randstad region and the Top-7 cities in Germany are particularly relevant. And it is important not to forget that single-person households are particularly widespread in Barcelona and Dublin.

Single-person households and demographic trends also point to two particularly interesting types of use: both senior and student living in Europe are benefiting from the structural social transformation caused by persistent urbanisation. Paris, London and Madrid in particular attract large numbers of international students, while Vienna and Stockholm are more focused on domestic student bases. The European residential property market therefore continues to offer opportunities; it is simply a matter of adopting a city-level approach to identify the best individual opportunities.

Inflation does little to ease the German housing crisis – or does it?

Rising interest rates are a cause for concern. Inflation data continues to show inflation stubbornly higher than the ECB’s two per cent target.

However, as inflation is likely to remain above two per cent for the foreseeable future, the ECB signalled that it is still too early to cut interest rates when it decided to put a hold on further interest rate adjustments at the end of October. Inflation would have to fall further for this to happen, the bank explained. Seen in this light, it is not surprising that many institutional investors have adopted a wait-and-see approach to investing in the residential market. In addition to inflation-driven construction cost spikes, financing has also become more problematic, with failed project developments and an increasing reluctance on the part of banks to provide construction financing only making matters worse. As a result, the number of completed units in the new-build sector in Germany has declined over the past three years.

The German government’s construction targets are dead in the water
The German government’s construction targets are now redundant, according to the unanimous assessment on the market. The German Housing Industry Association (GdW) expects that a third of the units that were due to be completed in 2023 and 2024 will no longer be built. According to estimates, the housing shortage is currently greater than ever before, with a deficit of 700,000 units.

Taken together, these developments mean that everyone in Germany who was already affected by the acute housing shortage will now also have to adjust to chronic excess demand in over the next few years. More and more people are therefore competing for less newly built living space and rents are rising as a result.

Great opportunities for institutional investors
And this is precisely where the opportunity lies for institutional investors looking to invest in residential property. However, in view of the gap between purchasing power and current rents in the new-build segment in Germany’s top cities, this group of investors is aware that unaffordable new-builds will neither eliminate the housing shortage in the rental segment nor represent an attractive investment from a risk/return perspective.

Properties with a maintenance backlog present opportunities
The only practicable solution is therefore to refurbish the numerous well-situated but vacant existing apartments in Germany’s towns and cities and make them habitable again. In smaller cities in particular, there are still countless properties with maintenance backlogs that have tended to be neglected by the professional property industry to date, as most players have focused on markets in the Top 7 cities or classic B-cities such as Hanover and Dresden.

Fund managers with development expertise
Against the current backdrop of declining residential property prices, it is therefore possible for fund managers with development expertise to purchase properties at favourable conditions and upgrade them with the right measures, resulting in a significant increase in value, which can be passed on to investors while maintaining rents at “affordable” levels. Thanks to this positive return on capital appreciation, institutional investors can achieve returns above those of fixed-interest investments in the current market without – as mentioned – having to raise rents excessively. This ensures affordable housing that costs only around half the construction costs per square metre compared to new builds.

My assessment: In the current market, with declining residential property prices, it is possible for fund managers with development expertise to acquire existing properties at favourable conditions and upgrade them with the right measures to increase the value of the properties while rents remain “affordable”. Institutional investors have the opportunity to invest in residential property in a market segment that combines steady cash flow and stable high demand for the product.

Investors need a transparent location analysis

There is no shortage of challenges on the property market. Which is why it is absolutely essential for investors to conduct a thorough location analysis before investing in a property. However, this is not so easy, as most studies on the impact of location factors on property values tend to focus on municipal or district level features. As a result, many investors are forced to fight their way through a multitude of analyses, which then need to be weighed against one another.

What investors actually need is an analysis of property locations that covers as many localities in Germany as possible – from micro-location to city level – and balances the full spectrum of relevant factors, including demographic trends, for example. This is the only way they can clearly understand the potential returns of a property in a particular location.

The valuation platform PropRate evaluated more than 106,000 property listings in Germany’s 80 largest towns and cities, including their districts, harvesting data from all major property listing platforms.

Striking north-south divide
The results are interesting: there is a striking north-south divide in German investment property markets. The city of Gelsenkirchen in the Ruhr region is, reportedly, one of the best destinations for investors, who can expect strong returns, especially in locations where properties are offered at low purchase prices and where rents are expected to develop dynamically.

There are also major differences between Germany’s top cities, with Berlin achieving the highest rating among the A-cities. The Munich metropolitan region, on the other hand, is considered unattractive, while Stuttgart also scores poorly. This result can be attributed to the fact that property prices are comparatively high in these economically strong cities, but are not proportionate to rents – comparatively low returns are to be expected.

Be sure to consider the microlocation
One aspect that investors should definitely consider is a property’s microlocation. Depending on the neighbourhood, they can expect very different returns, even within the same city. In Berlin, for example, ratings vary greatly: Wartenberg (a neighbourhood in the district of Lichtenberg) achieves a score of 3.41 out of a possible five stars, while Niederschönweide (a neighbourhood in the district of Treptow-Köpenick) only rates 1.79 stars. Anyone familiar with the diversity of the German capital will hardly be surprised by this – even within the same districts, neighbourhoods are sometimes so different from one another that you can feel as if you are in a different city when you turn a corner onto a new street.

So, what information do investors need to make an informed decision? Well, nothing beats an on-site inspection, and this should take place whenever possible. In order to pre-filter a range of offers or to make a post-viewing decision, investors should use an evaluation platform that uses as much data as possible to analyse the location. At a glance, this will allow them to see, for example, which cities and neighbourhoods have a particularly large number of properties for sale – because this provides a fairly reliable indication that buyer demand is subdued and sellers will need to be more flexible in terms of their price expectations. Analysing the data, a clear ranking of Germany’s top 8 cities emerges – the listed properties are distributed as follows: Berlin (16,528), Hamburg (6,635), Munich (5,821), Leipzig (4,093), Cologne (3,616), Düsseldorf (2,881), Frankfurt (2,571), and Stuttgart (2,138). However, within the cities, a majority of listings are not in the most populous districts, they are in the most popular ones – in Berlin, for example, this is Friedrichshain. Anyone using a rating platform should therefore make sure that it assesses as many factors as possible – because not all of Berlin’s districts are the same.

PropRate uses a proprietary algorithm that analyses all relevant factors, such as price trends, location features, asking prices, rental prices, property-specific data, and yields. The results are used to create a comprehensive location rating to compare the potentials of locations and properties. Investors can use a search engine to evaluate the properties based on this data.  And this is possible in real time – because those who can make quick decisions have a clear advantage.

Where there is shadow, there is also light

A time of crisis – a time of optimism? What at first glance appears to be a contradiction in terms is, at second glance, an accurate description of the current state of the property sector. Because despite all the negative reports, there is also good news that also needs to be given due attention.

But first, let’s take a step back. Any description of the current state of the sector must indeed begin with the crisis, which is primarily a crisis in residential construction and project development. According to forecasts, only around 245,000 units are likely to be completed this year; last year’s figure was already far too low to satisfy demand for housing – and miles away from the government’s target of 400,000 units per year.

What’s more, project cancellations are on the rise. According to a survey by the ifo Institute, 22.2 per cent of property development companies reported cancelled projects in October. One month earlier, this figure was 21.4 per cent. It is clear that a struggling construction and property sector represents a significant issue for the domestic economy on a number of fronts. And the housing shortage is fuelling rent increases and exacerbating the burden on households, especially in big cities – all of which is undoubtedly part of the harsh reality.

However, looking beyond our industry’s own backyard and often self-referential reporting that tends to outdo itself with negative headlines, there is still good news to provide us all with hope.

Construction costs are stabilising. As demand for construction weakens, experts are forecasting that construction prices will start to fall next year at the latest. In addition, federal and state governments are looking to simplify building regulations and building authorisation processes – and coordinate them more closely across state borders – which could also reduce costs.

Residential property prices are not in free fall. According to a new study from the Kiel Institute for the World Economy (IfW), prices for owner-occupied flats fell by an average of 1.5 per cent between July and September compared to the previous quarter, with strong regional differences and outliers. In A-cities such as Cologne and Berlin, prices are relatively stable.

The gap between purchase prices and rents is narrowing. While prices for owner-occupied homes and apartments have risen continuously in recent years, rental prices have stagnated. This trend has increasingly slowed down, and in some markets even reversed. For example, asking rents in Berlin rose by almost 19 per cent from 2022 to 2023, while rental prices also increased in other major cities. At the same time, demand is set to remain high in the long term due as the German population continues to grow. This trend suggests that investments in residential property will become more attractive again, both for owner-occupiers and buy-to-let investors – which will stimulate the property market as a whole.

Existing property is experiencing a renaissance. Existing properties – especially multi-family blocks – have been the subject of growing interest from investors in recent months. This is because investments in the segment offer a unique combination of advantages. Prices for existing properties have fallen in all Top 7 cities; in Munich and Stuttgart by almost ten per cent, to name just two. At the same time, existing properties cost around half as much as new-builds, proving ample reason to take a closer look at this asset class. Because:

The buyer’s market is an opportunity. It is a simple fact that rarely in recent years has the opportunity to invest in existing properties been as favourable as it is today. New opportunities are coming up all the time, especially for wealthy private an commercial investors, as long as institutional investors remain cautious. There is a significant supply of product coming to market again, which has not been the case for some while now. You could say that there is currently an opportunity to acquire existing properties at yesterday’s prices – with tomorrow’s rents.

Finally, it is important to look at the direction the key interest rate is heading, as this will sooner or later have an impact on building interest rates. The European Central Bank (ECB) has so far been successful in combating inflation and recently refrained from raising interest rates again. It remains to be seen whether this will be enough to reverse the trend in building interest rates. Nevertheless, the same applies here: cautious optimism is not out of place.

The bottom line is that there is not a crisis everywhere, and if you want to look for positive trends, you will find them. Or to put it another way: Where there is shadow, there is also light.

News

German Chancellor calls for more new development areas

Federal Chancellor Olaf Scholz (SPD) called for a radical shift in housing construction policy at an event organised by the Heilbronner Stimme on Sunday evening, reports FAZ. Scholz attributed the lack of affordable housing to a shortage of building land, rather than high interest rates. He proposed a solution: “Across Germany as a whole, we probably need twenty or so new city districts in the most sought-after cities and regions – just like those built in the1970s”. This represents a significant departure from traditional policies, which were, in part, designed to seal less land. Reiner Braun, CEO of the analysis company Empirica, offered a critical assessment: “We have been telling politicians for more than a decade that we urgently need more building land – so far largely without success”. Braun is by no means alone in recognising that the key lies not only in making increased use of previously developed and sealed areas (densification), but also in the development of entirely new areas. As densification is comparatively expensive, Braun explained, and the development of greenfield sites is less disruptive and less complex, modular construction could realistically be expected to deliver more affordable housing at rents of EUR 16.00-17.00 per square metre, rather than the standard EUR 20.00. Other industry representatives took up the Chancellor’s call and pointed to the new Seestadt Aspern district in Vienna as a positive example.

Signa halts work on all Berlin construction projects

According to Rundfunk Berlin-Brandenburg (rbb), the Austrian property group Signa has suspended all of its construction projects in Berlin, adding a new dimension to the crisis engulfing the company founded by René Benko. A range of prestigious projects, including the planned upgrade of the Karstadt store on Hermannplatz and infrastructure projects such as the redevelopment of the Bremsenwerk at Ostkreuz are all affected. The construction freeze applies to all projects in Berlin, regardless of whether they are still in the planning phase or construction is already underway, as is the case on Passauer Strasse and Nürnberger Strasse (City West). Since the summer, the financial crisis engulfing Signa has prompted an exodus of investors. For example, Commerzbank subsidiary Commerz Real pulled out of a contract for the construction of a 32-storey tower block on Alexanderplatz. As the scale of the crisis escalated, Benko relinquished control of the Signa Group at the beginning of the month and is said to have transferred his voting rights to the restructuring expert Arndt Geiwitz, who has been entrusted with getting the group back on track. There a number of factors driving the financial turbulence within the Signa Group, including rising interest rates, which triggered EUR 1.17 billion of devaluations to the SIGNA Prime Selection AG portfolio.

Residential property prices continue to fall in the third quarter

In mid-November, the Kiel Institute for the World Economy (IfW) reported continued price declines for German residential property in the third quarter. The latest update of the German Real Estate Index (GREIX), compiled in collaboration between IfW and ECONtribute, shows declining valuations in all housing segments. Compared to the previous quarter, prices for apartments fell by 1.5 per cent, prices for single-family homes by 3.2 per cent. and prices for multi-family homes by 5.9 per cent. Compared to the same quarter of the previous year, GREIX indicates even sharper corrections in valuations (prices for apartments down by 10.5 per cent; single-family homes down 12.1 per cent; and multi-family homes down 24.0 per cent). The number of properties sold also fell significantly, with around a third fewer sales across all market segments compared to the same quarter of the previous year. However, there are strong regional differences and outliers. For example, prices for apartments fell across the board in all of Germany’s Top-7 cities with the exception of Cologne, where they rose by 1.1 per cent. Berlin registered a moderate decline of 0.8 per cent.

Dear Readers,

News and industry media have been full of stories about the “crisis on real estate markets” since interest rates started to rise a year or so ago. There is no question that the “golden decade” is over, market data are weak and many prominent developers have already filed for bankruptcy. In new construction, there is indeed a crisis. In the market for existing properties, the situation is different. Prices for existing buildings have fallen noticeably. In major cities such as Berlin, the downturn in prices now appears to have bottomed out. But the current market situation does not have much to do with the crises of the past.

After more than ten years of a super cycle of steadily rising prices and falling initial yields on the residential investment markets, we are now experiencing a phase in which prices have corrected significantly and in which the money to finance acquisitions comes at a cost again. At the same time, demand for housing continues to rise unabated, and with it rents. There is no question of widespread vacancies and abandoned, unfinished new-builds, as was the case during the real estate crisis at the turn of the millennium. On the contrary, since new housing construction has come to a virtual standstill, the pressure is likely to continue to mount.

Back to the more recent past: the period before the latest cycle of interest rate hikes was by no means short of challenges for potential housing market investors. After all, in some cities price-to-rent ratios reached horrendous levels of up to 40 times net annual rent and more. For private investors, an entire working life can pass before their investment is actually amortised – and that’s without the cost of renovation measures over the years.

The time has now come for buyers to enjoy more favourable conditions – provided they have sufficient equity. For many experienced investors, the time is now ripe to re-enter the market.

Jürgen Michael Schick & Holger Friedrichs

The Ever-Evolving Real Estate Market and the New Role of the Asset Manager

In no time at all, the German real estate market has changed completely. A weakening economy, rising financing costs and ongoing uncertainty are currently dictating the market. Some industry players have little choice but to accept more expensive refinancing conditions for their projects, while others are even being forced to sell properties at discounts in some cases. All the more reason for real estate investors to act as active asset managers in order to identify and exploit truly rewarding opportunities in these challenging times. Whereas just a few years ago all you had to do was acquire a property in an attractive location and monitor its performance, new strategies are now necessary.

More selective acquisition strategies are what is needed
As positive as the mood in the real estate industry was just a few years ago, managing a portfolio has never been a walk in the park. Given the comparatively low initial yields, no investor could really afford to blindly acquire a “rotten apple”, which, however, is often what happened with larger portfolio purchases – with the very real risk of pushing the entire portfolio’s overall performance into negative territory. This is even more the case today: in the wake of recent interest rate hikes, real estate investments are no longer a sure-fire success. Asset management expertise is once again required, especially if investors’ return expectations are to be met. There is currently an oversupply of overpriced properties on the real estate market and many properties have not yet been properly repriced to reflect the current market landscape. It is important to sound out the market carefully, to buy selectively and, if necessary, to initiate redevelopment measures at an early stage – which is why active portfolio management is also more important today than ever before.

In the current market situation, investors are no longer quite so convinced by the security of “concrete gold”: According to CBRE, around EUR 13 billion was invested in the German real estate markets in the first half of 2023, around 64 percent less than in the same period of the previous year.[1] Given the current interest rate environment, there is a higher downside risk of leveraging when it comes to debt financing. In addition, it is not yet possible to predict how high interest rates will actually rise. As a result, investors are increasingly focusing on government bonds, which once again offer attractive yields and are regarded as risk-free. However, bonds do not offer investors the opportunity to benefit from potentially inflation-busting capital gains, which can only be achieved, to some extent, through real estate investments.

Finding creative solutions
To remain attractive in comparison to competing products, residential real estate investments should yield in the region of 4.5 percent or more per annum. However, such yields are unlikely to be achievable in high-priced, Class A locations. It potentially makes far more sense for investors to focus on up-and-coming secondary locations with high yield potential. But even in Class C and D locations, the risk premium needs to pay off for the investor. It is therefore important to be very careful and very selective when choosing assets and locations, and to avoid obstinately adding to already oversized portfolios. In this respect, smaller investment houses can exploit their advantage of greater flexibility for small-scale investments with a planned exit strategy, as they do not necessarily need to achieve large transaction volumes. Instead, they can put together highly individualised products, tailored precisely to individual investors’ wants and needs.

In addition to focussing on emerging secondary locations, investors with special expertise can also target the stock of state-subsidised housing, which offers the potential of both asset price increases and “social returns”. In many cases, investors are increasingly weighing up a range of ancillary factors, such as a good ESG record, which includes social criteria. Sometimes they will even accept a small yield discount, because an investment in a state-subsidised project, such as student housing or inclusive housing, adds value to a portfolio. However, such opportunities in the field of publicly funded housing are not so readily available, as the funding landscape in Germany differs from state to state and it can take several months to complete the application processing including the approval permit. This makes it all the more important to have a professional and experienced asset manager on board.

Conclusion: opportunities still exist in the current market
The current market situation is not easy, but it is by no means without opportunities. However, since no portfolio can develop on its own or automatically achieve a steady increase in value, active asset management and a high level of expertise in the selection of real estate investments are indispensable. For example, there is great potential in many locations beyond Germany’s high-priced metropolitan regions. Investment opportunities also exist, for example, in the field of state-subsidised and inclusive housing, although these require a high level of expertise. Overall, smaller and independent providers in particular can benefit from their flexibility in real estate investments. To make the best possible use of potential, it is best if a provider is able to offer services that cover all of the stages of a real estate investment – including investment, portfolio, asset and project management. Closely integrating these services gives investors access to bespoke solutions from a single source, allowing them to more quickly seize promising investment opportunities in an ever-evolving market. Clearly, a challenging market environment requires proactive and needs-based approaches to deliver success and create long-term value.

[1] cbre.de/insights/figures/deutschland-investmentmarkt

Making home ownership dreams come true: the road to real estate transfer tax reform

So far, the government has profited immensely from Germany’s real estate transfer taxes, which were raised in the wake of the real estate boom. However, instead of viewing this as a permanent source of revenue, politicians should be focussing on long-term goals – promoting home ownership and individual wealth accumulation.

Home ownership is a vital component in achieving broad-based financial security and avoiding poverty in old age. In international comparison, Germany’s home ownership rate lags far behind countries such as Norway and the Netherlands. We cannot afford to allow this state of affairs to continue.

There is a great desire for home ownership throughout our society, but it is often frustrated by seemingly insurmountable financial barriers. The hurdles facing would-be homeowners range from the knock-on effects of war and inflation to more direct factors such as rising interest rates and construction costs. In addition to these, however, it is primarily Germany’s excessive real estate transfer taxes that make purchasing residential property so difficult.

Real estate transfer taxes across Germany have increased more in some federal states than in others. Nevertheless, it has become a significant source of revenue across the board. Five federal states, namely Thuringia, Brandenburg, North Rhine-Westphalia, Schleswig-Holstein and Saarland, now have a real estate transfer tax rate of 6.5 percent – a figure that has almost quadrupled since 2005.

Even more pernicious is the mechanism of fiscal equalisation between the states, which actually favours increases in the real estate transfer tax. This has led to competition between federal states, which is not about fair tax rates but about maximising profits from real estate transactions.

In order to counteract this development, Federal Minister of Finance Christian Lindner has presented a promising draft of the real estate transfer tax system. Lindner’s proposed reforms would see reduced tax rates for owner-occupied residential property and even a tax rate of zero percent for first-time buyers. If it happens, this would trigger healthy competition between states and enable families to fulfil their dreams of owning their own home.

Now it’s up to the federal government to implement Lindner’s proposals quickly and with a minimum of bureaucracy. Promoting home ownership should not just be a political vision, but a practical measure to solve the current housing problem and prevent poverty in old age. Lowering the real estate transfer tax is the right way to achieve these goals and at the same time stimulate the real estate market.

As a real estate entrepreneur and managing shareholder of a brokerage firm, I am happy to lend my expertise and resources to advance this important step. Let’s work together to advocate a sustainable and fair real estate industry and help people turn their homeownership dreams into a reality and secure their financial futures.

The overlooked top-class investment

Residential real estate in Germany remains one of the safest long-term asset classes. It also offers excellent returns – if you invest where others aren’t looking.

What can investors who want to sleep well invest in today? Equities? Significantly overpriced, volatile and a pawn in geopolitics and interest rate policy. Bonds? Fixed-income investors are still feeling the pain of the massive – and totally unexpected – bond crash of 2022. And even if interest rates have risen slightly in the meantime, what’s the point of three percent when inflation is running twice as high? That leaves real estate – unless you seriously want to gamble with currencies, commodities or Bitcoin.

There are worlds between the different segments of the asset class. Commercial real estate, such as office, retail and hotel, is vulnerable to external influences, as the Covid-19 pandemic made abundantly clear. Apartments, on the other hand, almost always appreciate in value over the long term, and tend to do so at a reliable very rate. If you take the VDP index as an example, owners of German residential real estate have more than doubled the value of their assets over the past 20 years. The only exception was during the 2009 financial crisis, but even then, residential real estate lost just one percent of its value.

People always need a place to live, even in the midst of economic depression, political turmoil or pandemic. A home is one of the last things a person gives up voluntarily. Demand for housing is therefore very stable, and it is rising in line with population growth and, even more so, with rising living standards and the trend toward smaller families and single households.

German residential real estate in particular has been and continues to be in demand among institutional investors, especially as it combines several favourable factors: a high degree of political stability, growing demand, and structurally tight supply. Germany has positive organic population growth, plus high and increasing immigration. By contrast, it is simply not possible to get new construction to keep pace.

For these reasons, Germany’s housing shortage will continue to intensify for the foreseeable future, accompanied by mounting upward pressure on property prices. The current round of price increases will do nothing to change this picture.

Right now, the German residential real estate market offers plenty of highly exciting opportunities. These are mainly to be found off the well-beaten path, where not everyone is looking, away from the core markets. Demand for housing in Germany’s biggest cities is likely to remain high, but so are prices. Smaller cities and towns outside the catchment areas of the top seven are also much more attractive. This is because the gravitational pull of the biggest cities is weakening, and the countermovement toward secondary centres and more rural areas is strengthening. This is largely due to the fact that a growing number of people simply cannot afford to buy or rent in a big city, but is also connected to the emergence of a new understanding of quality of life. Working from home has become a major trend, making it less and less important to live within immediate reach of a major city. For this reason, disproportionate rent and price growth can be expected in certain Class B, C and D locations compared with the so-called top locations.

There is also great potential in multifamily properties with high vacancy rates. If, for a variety of reasons, owners are unable to profitably manage such properties, they often dump them on the market at a substantial discount. For other real estate companies, this represents an opportunity. With sound asset management, it is usually possible to eliminate structural deficiencies, overcome problems in the microenvironment and attract reliable tenants.

These are uncertain times for investors, and that will not change in the foreseeable future. But German residential real estate remains the most reliable asset class on the market.

This article also appeared in Börsen-Zeitung on 12 August 2023.

Between insolvency and a new dawn – mastering challenges and seizing opportunities!

Fears of recession are fairly widespread at the moment. Skyrocketing construction costs and rising interest rates are putting massive pressure on new construction in particular, causing substantial economic difficulties for property developers of all shapes and sizes, some of whom have even had to file for bankruptcy. There is no doubt that there is a crisis in new construction. Despite the very challenging economic environment, however, we should take a closer look at the extent to which we as a real estate industry are in crisis as a whole.

Recent real estate crises had different underlying factors
A quick recap of recent crises: Shortly before the turn of the millennium, the Fördergebietsgesetz, a law that promoted investments in eastern Germany, ended. There were far too many apartments on the market. As a result of the special write-offs designed accelerate the construction of new rental properties and the modernisation of old buildings, the market was flooded with more apartments than were needed. In addition, large numbers of people moved away from eastern Germany to work in the west. As vacancy rates soared in Berlin and the new federal states, average property prices plummeted from 1999 onward, especially in those areas.

The years 2007/2008 went down in history as the Global Financial Crisis held the world in its grip. The crisis was triggered by the colossal real estate bubble on the U.S. market. The bubble was fuelled by years of low interest rates, lax regulation of banks, a complete lack of regulation of shadow banks, and erroneous assessments by rating agencies. As a result, banks no longer trusted each other and new lending ground to a halt. By turning off the money tap, the crisis spilled over from the financial markets to the real economy and made it impossible to get loans – even for the soundest of real estate investments.

Real estate prices find a new equilibrium
And today? A dramatic and worsening housing shortage has Germany at its mercy. Unlike at the turn of the millennium, there are not thousands of empty apartments. Instead, we have a severe shortage of affordable housing in almost all parts of the country. Germany’s gross national product is stagnating, possibly declining slightly this year. This puts Germany at the bottom of the list of all industrialised countries in the world, not least because of the sharp rise in energy prices, which are hitting us hard. But we are a long way from a credit crunch on the scale of the Global Financial Crisis of 2007/2008. Loans simply became much more expensive very quickly last year and no longer match the yields that have fallen over the years.

Conditions today are therefore completely different from those of the last two crises. The current situation is in no way comparable with previous crises. The real estate industry is just coming out of a boom that lasted for more than ten years and ended about a year ago. Until then, prices headed in only one direction: up. The enormous demand for real estate came from all sectors: from private investors, family offices, institutional investors and owner-occupiers, all of whom profited from ultra-low interest rates. As brokers, if we had a problem, it was that not enough properties came to market. That is changing now.

From a long-term perspective, we see that the days of inflated price expectations are now behind us. What we are now seeing is the market rebalancing as supply and demand realign. After a period of restraint, we are now seeing buyers showing renewed interest in properties at more attractive prices. And they are increasingly buying again. At least, this is true for existing properties.  One example: In the residential investment market in Germany’s largest residential market, Berlin, the transaction volume for rental properties is 47 percent higher in the second quarter of 2023 than it was in the first quarter of 2023. By contrast, new-build properties are experiencing noticeably weaker demand because they are not as price-elastic as existing properties due to the extreme rise in construction costs.

Substantial rent increases ensure good returns
While hundreds of thousands of apartments stood empty at the turn of the millennium, we now have a glaring housing shortage today. The influx into Berlin and many other metropolitan areas continues unabated. However, hardly any new apartments are being built. This results in an even greater shortage. Consequently, rents are rising sharply. The time is now ripe for investors with a strong equity base to take advantage of the current opportunities and buy existing properties.

News

Adler Group resigns from Housing Alliance

Having joined other Berlin real estate companies, the Berlin Senate and other industry representatives as a co-signatory to the “Alliance for New Housing Construction and Affordable Housing”, the Adler Group has now announced it has left the alliance, DER SPIEGEL reports. The company’s exit is due to the recent rent increases it implemented that significantly exceed the framework set out in the alliance. In addition to new construction targets and agreements on tenant protection, the alliance also stipulated that private housing companies may only increase rents by a maximum of eleven percent over any three-year period. This was a voluntary concession on the part of the real estate industry, as the statutory leeway for increases in Berlin is actually 15 percent over three years, provided that any increase does not exceed the local comparative rent specified in the city’s official rent index. The Adler Group did not disclose the precise increases, but in several cases the company is said to have fully utilised the 15 percent cap. Of the approximately 26,000 rental apartments owned by the Adler Group at the end of 2022, around 17,000 are in Berlin.

Condominiums in Berlin are becoming more expensive again

According to the Greix real estate price index published by the Kiel Institute for the World Economy (IfW), the downward real estate price spiral in Berlin has come to a provisional end, reports the Tagesspiegel. The index is based on prices achieved in notarised property sales. According to the report, prices for condominiums in Berlin rose by 1.3 percent between April and June 2023 compared to the same quarter of the previous year. For the first quarter of 2023, the Expert Committee for Property Values, which also prepares market analyses based on notarised property contracts, had reported a decline in prices as well as a dramatic drop in transaction volumes and numbers. The committee also presented an evaluation of transactions concluded last year and identified a year-on-year decline in Berlin of 21 percent compared to 2021. Nevertheless, the average purchase price for condominiums rose by five percent to EUR 5,646 per square metre. Commenting on these figures, Ulrike Hamann, Managing Director of the Berlin Tenants’ Association, said: “Despite the decline in sales and transaction volumes, we do not expect rents to ease, as purchase prices for condominiums in particular are still at a high level”.

Berlin’s Faster Building Act to come before the end of 2023

Berlin’s governing mayor Kai Wegner (CDU) has announced that the Schneller-Bauen-Gesetz (Faster Building Act), which is included in the current CDU-SPD government’s coalition agreement, will be launched by the Senate this year. “The all-important thing is that we revive the housing market, that there are more vacancies, that there are more apartment listings”, Wegner said in an interview with 105’5 Spreeradio. To this end, he explained, the state’s building code needed be reformed to speed up approval processes and boost housing construction. In their coalition agreement, the CDU and SPD agreed on a new target of 20,000 new apartments per year, including 5,000 in social housing. The state-owned housing companies are supposed to build around 6,500 of these new apartments a year. Members of the “Alliance for New Housing Construction and Affordable Housing” are also to benefit from further incentives. The main goal, however, is to accelerate planning and approval procedures through shorter deadlines, faster procedures, use of Section 34 of the German Building Code (BauGB) for building permits and the examination of a possible presumption of approval for construction projects.

Dear Readers,

Is Germany’s existing residential building stock on the verge of a renaissance? There are at least a few indications and strong arguments that this is indeed the case. Apart from a few flagship projects, new residential construction is effectively dead across the board. The reasons are all too familiar: soaring construction costs, a sharp hike in financing costs, building regulations that can hardly be met on a break-even basis, and interminably long approval procedures. The goal of 400,000 new apartments per year originally set by the traffic light coalition of SPD, FDP and Greens is becoming increasingly remote.

Prices for existing apartment buildings, on the other hand, are lower than they have been for many a year. In major cities, prices have fallen by double digits in some cases since interest rates started to climb. A square metre of rented housing in Berlin now costs less than half of what it would cost to build a new building.

At the same time, rents in Germany’s biggest cities are far from falling – on the contrary, demand remains high and will not be satisfied anywhere in the foreseeable future due to a lack of new construction. This means that existing apartments also represent a long-term hedge against inflation. And they often have the potential not only to achieve capital gains, but also to achieve an enhanced environmental footprint via judicious refurbishment measures with modest capital expenditure.

Jürgen Michael Schick & Holger Friedrichs

How AI refines the search for the best residential locations

Digitalisation and Artificial Intelligence are starting to have a significant impact in more and more areas of daily life. These twin technologies are conquering new industries in rapid succession and providing high-quality insights that would have been unthinkable in the very recent past – due to a lack of data. In the real estate industry, for example, the potentials of generating added value through data analysis and Artificial Intelligence have become an indispensable pillar of investment management in almost no time at all.

Today, a comprehensive valuation not only analyses a property’s equipment and features, it also includes data on the surrounding area to a far greater extent and in much greater detail than was the case just a few years ago. Both the scope and quality of location-related data and the possibilities for evaluating them have improved enormously. Today, it is possible to determine much more precisely what makes a location attractive for specific tenant groups and, above all, how the respective location will develop in the future. As a result, investment managers gain important insights into where investments are particularly promising and how properties can best be developed. This makes the search for the best location much more precise.

Identifying attractive locations
A wealth of location-specific data on cities, districts and neighbourhoods, and even individual sites is now available. Data suppliers and online map services can already tell us everything we need to know about public transport, bus stops, e-charging stations, petrol stations, schools, green spaces, shops, restaurants, doctors’ surgeries, medical care centres, pharmacies, playgrounds and all of the other amenities that make a location attractive.

For instance, PATRIZIA’s database includes more than 250,000 data points for London and Berlin, 80,000 for Munich and 115,000 for Hamburg. In total, the database currently records more than 25 million data points – and more are being added all the time. This location-oriented data is then combined and enriched with key data on the real estate market and socio-economic factors. The analysis requires structured data collection and IT systems with sufficient computing power. Once the data have been collected and are available, the challenge is to continuously update and intelligently evaluate the accumulated database.

Spotting market developments more quickly
This all requires a proprietary analysis methodology with meaningful variables, such as the one PATRIZIA has developed for its investment management. Artificial Intelligence methods are superior to classic regression analysis in this respect, as they are better able to map developments in the real estate market.

Starting points for the analysis of residential real estate are, for example, the concept of the “15-minute city” from the French-Colombian urban planner Carlos Moreno, who suggested that a location is attractive if most daily necessities and services, such as education, work, mobility, shopping and leisure, can be easily reached within a quarter of an hour on foot or by bike. This accessibility – and thus the attractiveness of a residential location – can be determined on the basis of location-specific data. The key factor at this point is correctly weighting the importance of the individual criteria. That’s where input from local investment managers comes into play.

Artificial Intelligence plus investment experience
As a result, the search for the best location becomes much more precise. Depending on the criteria you select, it is possible to ascertain which tenant groups will be particularly attracted to the respective residential location and, consequently, how many rooms and what features they are most interested in. And since these data are now available over longer periods of time, it is possible to pinpoint specific trends in each city.

Thanks to automated analytics, investment managers receive assessments of each residential location in a matter of minutes. These can be compared with rental data to identify an overvaluation or undervaluation, measured by the attractiveness of the location.

The potentials of data analysis go far beyond the environmental assessment of residential real estate and can also be applied to other asset classes, such as offices and care homes. Data analysis can provide investment managers with a useful tool for identifying attractive investment opportunities, thereby enabling them to meet the increasing demands on the investment management of real estate.

Why residential real estate includes inflation protection

With its latest interest rate hike of 25 basis points at the beginning of May, the European Central Bank raised interest rates in the euro area to their highest level since the Global Financial Crisis. And there are no indications that the cycle of hikes will end anytime soon.

In principle, this is not good news for residential real estate investments: the higher the interest rates, the more difficult it is to enter the residential real estate segment. Above all, however, the uncertainty surrounding further interest rate developments means that potential buyers and sellers are unable to achieve their price expectations in the current market environment.

As a result, both private and professional transaction markets remain subdued. According to the real estate service provider CBRE, the transaction volume in the professional segment amounted to a weak EUR 1.9 billion in the first quarter of 2023, which corresponds to a year-on-year decline of 63 per cent.

At first glance, these figures – in conjunction with the recent rise in initial yields – might suggest that family offices, pension funds, fund managers and other institutional investors are backing away from real estate as an investment asset. This is, however, not the case. Instead, capital is becoming much more selective: business cases and investment opportunities are being scrutinised more carefully than ever before, and not every residential property will find a buyer. Nevertheless, a product that offers stability, value retention and a promising future will always meet with demand. Even in the case of revitalisation properties that are cheap to buy but expensive in terms of subsequent upgrading measures.

Effective inflation protection
In fact, there is one factor in particular that contributes to the long-term value stability of residential real estate investments: effective inflation protection. In the case of residential real estate with inflation-indexed rental adjustments, this is even guaranteed in the lease, in black and white, so to say. But what about conventional leases without such clauses?

For portfolio owners, one of the reasons for this high degree of value stability is the across-the-board decline in new construction projects in Germany – while demand continues to outstrip supply and determine prices. More importantly, however, rental prices never decouple from inflation in the long run: while all too often there is talk of the knock-on effects of inflation and its impact on employee wage demands, both service charges and net rents adjust gradually. Thus, properties with indexed leases offer the twin benefits of allowing adjustments for both existing tenants and new leases. This is especially true for those markets that are not subject to excessive regulation.

Therefore, one thing is clear to me: the current market environment offers favourable opportunities on a scale we have not seen since the Global Financial Crisis. Younger semi-professional investors in particular should take this situation into account and, for the reasons mentioned above, include real estate in their portfolios instead of allocating their money exclusively to other asset classes.

The urban measure of all things: the “in-between” city

When you think of London, what comes to mind? Big Ben, The London Eye, Buckingham Palace? Test passed! We can now try the same with Paris – that’s right, the Eiffel Tower, the River Seine, Arc de Triomphe. How about Berlin? I think we can all see the pattern here: Whenever we hear the name of a major city, we associate it with the city centre, including all its landmarks. Politicians, by the way, feel the same. When they talk about the “future city”, they talk about the centre. When they discuss the density and height of buildings, car-free zones or green facades, they mean in city centres. But firstly, the core city is not the city where most people live, and secondly, it is not the city of the future. In the future, that will be the “in-between city” – where the outer districts of the core city and the inner suburban ring intersect. At least that is what Thomas Sevcik claims. How does he arrive at his thesis? You will be surprised.

As a visionary, he loves to think outside the box: Thomas Sevcik
Whether Autostadt in Wolfsburg, LabCampus at Munich Airport or GreenwichPeninsula in London – they all bear the signature of Thomas Sevcik, who has made Switzerland his home. The co-founder of the strategy think tank arthesia has offices in Hong Kong, Zurich and Los Angeles and advises companies, organisations, cities and regions on repositioning. So, he clearly knows what he is talking about. He also loves facts: for example, two million people live in the Paris of tourists, while ten million live in the banlieues, the suburbs on the other side of the Boulevard Périphérique ring road. But we don’t have to look that far. We find a similar situation in Munich, Hamburg, Cologne and Berlin. So Sevcik’s call to focus on the “in-between cities” can’t be all that wrong.

Leveraging the potential of the “in-between city” – Zurich is showing the way
“In-between cities” – i.e. the urban areas that begin beyond Tariff Zone 1 and end before the classic dormitory towns – have a lot of potential because they are per se home to important infrastructure such as airports or ports as well as large office and logistics zones. So far, planners in Germany’s metropolises have not appreciated or exploited this, says Sevcik, who likes to bring Zurich into play as a successful counter-example. Zurich made an early start by developing a former wasteland between tram depots, marshalling yards, airport feeder roads and city boundaries with intelligent urban ensembles that score points with an exemplary social mix and a well-thought-out mobility and education infrastructure.

Politicians also need to embrace the “in-between city”
There are certainly interested investors and imaginative property developers in Germany. What Sevcik misses, however, are:

• More flexible building and zoning regulations that redefine the interplay of urban manufacturing, housing and culture and that allow for diverse combinations of functions.
• Clearer quality guidelines beyond specifications on distances and building heights – for example, with guidelines on cultural density, added health value and visual attractiveness.
• Planners who have the necessary experience with multifunctional complexes, mobility hubs and very large urban districts.

The pilot project, Innovation Corridor Berlin-Lausitz, with its multi-faceted mix of functions is like a ray of hope for the visionary Sevcik. He must also have liked the fact that the distribution and logistics manager Feng Xu applied for the office of Lord Mayor with the idea of a Greater Frankfurt Bund. His idea: Frankfurt forges a pact with the surrounding municipalities for a joint development plan – just as Greater London and Greater Paris have already done. Feng Xu did not become mayor, but that does not change the fact that, as Thomas Sevcik writes, “new ideas, new debates and new policies” are needed.

You can find the guest article “The core city is not the future” here

New construction is dead, long live existing buildings!

It is difficult to ignore the gloomy figures for new housing construction in Germany these days. Sharp rises in lending rates coupled with soaring construction costs have led to more and more developers, builders, as well as wealthy private and commercial investors, turning their backs on new construction – for now and the foreseeable future.

In general, the market for residential real estate has been very restrained in recent months. In fact, it came to a virtual standstill.

But something is happening. Only slowly, but it has now become clear that the market for existing properties is emerging as the nexus of activity for private and commercial buyers.

Above all, two main types of investors are attracted to existing properties. The first are those who pursue a consistent value-add strategy, which includes, for example, improving the fit-out of the properties, using space more efficiently with better floor plans, or even converting an unneeded shop space into a residential unit. In recent years, of course, energy-efficient refurbishments have been added to the list due to stricter environmental protection requirements – an increase in value that, despite the current uncertainties, certainly makes sense with a view to the years ahead.

In contrast, the other type plays the classic long game. Solid existing properties serve as a very long-term investment, especially for wealthy private investors and family offices, to generate solid returns over an extended period of time.

Both investor groups have one thing in common: they believe in the market for existing property as a market full of opportunities, and if one follows some of their arguments, they could both be right.

This is because an existing property combines several advantages. First of all, purchase prices in this segment have fallen in all of Germany’s Top 7 cities, in Munich and Stuttgart by almost 10 per cent, to name just two.

At the same time, existing properties cost about half of what new construction currently costs – and it is cheaper than it has been for years. Prices for apartment complexes have fallen by 25 to 30 per cent in large cities. For example, the price per square metre for a rented property in Berlin in 2021 was between €3,000 and €3,500; it is now between €2,000 and €2,500. At the same time, rental prices are pointing strictly in one direction. Especially in many large cities, rental prices are experiencing double-digit growth rates.

And due to the restraint of institutional investors, potential buyers are currently facing far less competition for real estate investments.

In summary, one could say that there is currently a window of opportunity to acquire existing properties at yesterday’s prices for tomorrow’s rents.

Added to this: investments in existing properties fit much better into the political-social mainstream than new construction, which is more problematic in this respect. In many cases, they contribute to many of the urban development goals we are all committed to. In this context, the strengthening of inner-city development should be emphasised, i.e. the designation of new residential and commercial spaces in existing areas and not through comprehensive new construction measures on greenfield sites “at the gates of the city”.

On top of all this, less land is sealed – an important climate adaptation measure in our already highly sealed cities. And existing properties are also more cost-efficient than new buildings in terms of infrastructure development. This does not have to be planned or built from scratch. It is simply already there, just like the people.

It is true that anyone who buys an existing building will probably need to have it renovated to improve its energy efficiency in the foreseeable future. Nevertheless, it remains the case that buying and renovating existing housing costs significantly less than a new building today.

My conclusion: the future belongs to investments in existing properties.

News

Berlin real estate market is all set for the challenges of climate change

The Savills Climate Resilient Cities Index has named Berlin the most climate resilient real estate market among 23 selected cities. The other top spots go to Toronto, Paris and Madrid. The study focuses on how 23 of the world’s largest, wealthiest and most populous cities are fortifying themselves against climate-related events and analyses a range of factors, including geography, the proportion of ESG-certified properties and public authorities’ climate risk planning. Temperature and precipitation changes over the past decade, elevation, groundwater volume and potential exposure to natural disasters were also considered. Although all cities still have work to do and Berlin is also affected by periods of drought, severe weather and heavy rain, the German capital picks up lots of points for its location, having the second-highest proportion of certified properties at 1.5 per cent, and its strong climate policy measures.

Real estate industry eagerly awaits consultation on Building Energy Act

Public uncertainty regarding the future specifications for heating systems and energy-saving measures for homeowners and property developers continues. On Friday, 19 May 2023, the German government debated the proposed Building Energy Act in cabinet. Whether the law is passed before the summer break, and if so, with what changes, no one can say for sure at the moment. The real estate industry in particular is following the deliberations with mixed feelings. According to the IVD real estate association, a successful energy transition in real estate depends on the new law being technologically neutral and lowering the hurdles for local heating networks and hydrogen solutions. After the adoption of the Emissions Trading Scheme ETS2 in the European Parliament on Thursday, 18 May 2023, the heating costs for buildings will in any case rise significantly from 2027. In view of the increased regulation of the real estate industry, IVD President Jürgen Michael Schick has called on politicians to focus on economic reality and appropriate funding measures: “We need the German government to balance the realities of construction and financing with its requirements for heating technology and energy-efficient refurbishments. Clear and reliable funding is also essential. Those who make demands must also ensure the right support is in place”.

Berlin property prices dip slightly, only three per cent planning to buy

In the first and second quarters of 2023, prices for condominiums, detached and semi-detached houses in Berlin fell compared to the annual average, as reported by the analysis and consulting firm Empirica. The price decrease was significantly slower than in Hanover and Hamburg, but still noticeable. In the previous quarter, a square metre in a free-hold apartment cost approximately €5,615. It now costs €275 less. House prices have also dipped, by an average of €126 per square metre to €4,054 per square metre. According to figures from the Dr Klein Trend Indicator, apartment prices in Berlin have fallen by 2.7 per cent and house prices by 2.24 per cent. Meanwhile, Berliners remain unimpressed as housing becomes slightly more affordable. According to a representative survey conducted by Berliner Sparkasse in February, only three per cent of Berliners are planning to buy real estate this year.

Dear Readers,

Germany’s largest private housing company, Vonovia AG, has publicly announced it is cancelling or suspending all of its planned new housing projects. This would seem to hammer the final nail into the coffin of the federal government’s self-imposed target of building 400,000 new apartments per year, which was already looking impossible to meet.

There have been some revealing reactions to the latest developments from across the political spectrum. Some political figures have even taken Vonovia’s decision as further proof that large private housing companies should be expropriated (or the government should at least hold blocking minorities of more than 25 per cent in large private housing companies).  Such moves, they argue, would be the only way to reverse this decision and ease the housing shortage. Of course, this begs the question: why, instead of coming up with ideas to improve the investment environment so that private-sector housing investments become worthwhile again – the primary and most urgent task of economic and construction policy –are some politicians issuing rallying calls for the nationalisation of private housing companies? And that’s to say nothing of the fact that municipal housing companies often manage larger housing portfolios than Vonovia and its peers. Perhaps more worryingly for taxpayers up and down the country, these calls are frequently accompanied by demands to ramp up the construction of new housing, even against all economic logic.

Of course, none of this means that we do not recognise that the private housing sector also has a valuable contribution to make to overcoming the housing shortage. We now face the challenge of finding solutions to deliver the urgently needed housing of tomorrow, despite the difficult framework conditions – and in collaboration with political decision-makers. Vonovia’s announcement is simply yet another wake-up call that we are falling far short of the targets.

Jürgen Michael Schick & Holger Friedrichs

Making real estate transactions more efficient

Real estate transactions in Europe have become increasingly complex over the past few years. Above all, there’s one thing anyone who wants to sell a property today needs plenty of: time. All across Europe, the complexity and, above all, the time required to conclude a real estate transaction – from bidding to closing – have increased significantly.

While in 2019 it took an average of just 165 days from the opening of a transaction data room to closing the transaction, in the first half of 2022 this had ballooned to 258 days – an increase of 58 per cent.

The above figures are taken from a new study called “Real Estate Transaction Barometer 2022” from the digital data room provider Drooms. For the study, Drooms evaluated more than 4,000 transactions from 2019 to 2022 and surveyed around 170 real estate professionals across Europe.

According to Drooms, transactions take the longest to complete in German-speaking countries. In the first half of 2022, from setting up a data room to signing on the dotted line took an average of 273 days in Germany, Austria and Switzerland. That represents a sharp increase on just a few years ago: in 2019, buyers and sellers took just 167 days. In the United Kingdom, a similar picture emerges: on average, the time taken to seal a real estate deal rose to 256 days in the first half of 2022 (2019: 160 days).

But why are real estate transactions taking so much longer today? Drooms asked real estate professionals for their opinions and this is what they had to say: 47 per cent cited country-specific – and thus fragmented – regulatory frameworks in the target markets as a decisive obstacle to cross-border real estate investments. A second major issue, a lack of market access and market knowledge, were key obstacles for 28 per cent of the survey’s respondents.

Delays and postponements caused by the coronavirus pandemic also played a role in transactions becoming more and more time consuming. During the pandemic, many deals were put on hold. Now, even as we learn to live with the coronavirus, the unstable economic situation is causing many buyers to take more time before they make a final decision. As a result, negotiations are taking longer and sales processes are becoming ever more complex. And this adds risk – especially on the seller side as more and more buyers use delays in the sales process to push for even lower prices.

What was always going to be a challenging situation is compounded by another recent development: more extensive ESG documentation requirements – and not just in relation to a property’s carbon footprint. Alongside energy audits and the need to supply extensive data on consumption and CO2 emissions, transactions are becoming more and more complex and taking longer as a result of extensive technical inventories. And that is to name just a few examples of factors that slow transactions down.

Moreover, real estate prices have become increasingly volatile. This makes time an even more decisive factor in the success of every investment. In a steadily rising market, this may not have been a problem, as time was not such a critical factor. While sellers could be certain that transactions would go ahead, buyers were happy to see the values of their future assets rise. In what has become an uncertain market, the parameters have changed. A few weeks, months or even years can now make a massive difference for both buyers and sellers.

One thing is for sure: quick, complete and transparent due diligence is more important than ever before – for both sellers and buyers. The state of a property’s documentation is thus becoming a decisive investment and time factor. Making the full range of essential data for the transaction process transparent and being able to present these data quickly and professionally, as well as complying with the necessary documentation obligations, requires, above all, a uniform data basis. All of the stakeholders involved throughout the investment process, and those in property management, need access to the same data. After all, chalk and cheese file formats and inconsistent drafts of contract are the death knell for a fast and efficient transaction.

Especially in a volatile market environment, closing a deal quickly and efficiently is key: delays can lead to price markdowns or even cause transactions to collapse completely.

Digital tools, solutions and platforms can help to collect all relevant information, update it continuously and store it in a structured way in a database. However, this is only possible if there are appropriate structures in place to collect uniform data that allows investors to conduct an objective assessment of all property related factors during the due diligence process, including sustainability risk assessments, environmental reports, certifications, expert opinions and permits. In any case, owners also have an interest in ensuring that their real estate portfolio is as transparent, measurable and comparable as possible.

Integrated document translation can also help with the international marketing of assets, aiding communication between international sellers and potential buyers during due diligence and negotiations all the way through to closing the deal. Used correctly, this reduces expenditure and minimises the amount of time needed to get a deal over the line. One thing is clear: anyone who sets up an effective and transparent documentation system will ultimately save money. A vital advantage in these troubled times.

Putting a figure on the utility cost catastrophe

Soaring energy prices are leading to a noticeable loss of prosperity at every level of society. The consequences are, however, particularly dramatic for low-income households. A new study from d.i.i. and the Cologne Institute for Economic Research (IW) quantifies recent price increases and makes recommendations for minimising their impact.

Energy price inflation, triggered by Russia’s war of aggression against Ukraine, has the potential to unleash major social unrest. For the first time since the end of the Second World War, energy costs have risen so sharply that the financial security of a significant portion of the German population is under threat. The government has provided aid and the energy markets have eased slightly in recent weeks, but the situation remains perilous.

The third “Wohnnebenkosten in Deutschland” (English: “Ancillary Housing Costs in Germany”) report from d.i.i. and the Cologne Institute for Economic Research (IW) underlines the dramatic scale of recent price developments with objective data. According to the report, advance payments for utilities such as heating and warm water have increased by an average of 48 per cent. In apartments that primarily rely on gas, advance payments are up by an average of 56 per cent. And, the report’s authors point out, this affects more than half of all apartments in Germany. Almost quarter of apartments rely on heating oil, which has also become significantly more expensive.

This has resulted in a sizeable additional financial burden on most households, which also means that an increasing proportion of Germany’s housing stock is now out of the financial reach of a growing number of households. Since low-income households are particularly hard hit, the study’s authors, led by Professor Michael Voigtländer, call for the state aid designed to cushion the impact of high energy costs to focus in particular on this group.

The study differentiates between different household sizes. Accordingly, on average, far fewer apartments remain affordable to both single households and families of four than was the case a year ago. Families, the authors’ note, are harder hit. In 2021, families in the bottom fifth of the income distribution could still afford 37 per cent of apartments on the market. Last year, the figure was only 28 per cent.

The authors list the theoretical options for households looking to adapt to the new situation: heat less, move to a smaller or lower quality flat, or cut other expenditure to pay their increased rental costs. However, they also acknowledge that, given tight budgets and limited supply, each of these options is a challenge, especially for lower-income families.

In the medium term, the researchers expect that rising ancillary costs will significantly increase the incentives for energy-efficient renovations. In order for this potential to be exploited, the authors call on politicians to introduce a more supportive regulatory and financing framework. For example, subsidies and grants should be made more transparent and the rules for sharing modernisation costs between tenants and landlords should be adapted to better reflect recent interest rate and construction cost increases.

What’s more, the authors encourage housing companies to be more consistent in acting to minimise the impact of increased energy prices on their tenants. This would include, for example, establishing a forward-looking procurement policy and setting up long-term framework agreements with utility companies.

Read the full study here (in German): Wohnnebenkosten in Deutschland (diirekt.de)

A value-based community is the key to creating more living space

The coronavirus pandemic, during which millions of people were forced to spend more time in their own homes than ever before, provided an emphatic reminder of just how important it is to make sure that as many people as possible have access to high-quality and affordable housing. Equally, housing as an asset is of paramount social importance. Given the urgent need to mitigate the impacts of climate change, the focus is now on creating housing that has the right energy-efficiency specifications so that we can achieve our climate policy goals on schedule. This in turn is a major challenge for tenants, businesses, the state and investors. The task is to balance the interests of all stakeholders and to strengthen the foundations of trust between tenants and landlords. Unfortunately, implementation is currently proving more difficult than many had hoped: new housing construction is stalling and energy-efficient renovations of existing buildings are way off track.

400,000 new residential units per year? In 2021, just 293,000 units were completed. The numbers declined again in 2022 – to as few as 280,000 units – according to the latest estimates. A review of the current situation is sobering: builders and developers are feeling the effects of strict sustainability requirements, which make renovating existing buildings expensive and time-consuming and make new construction projects less and less economically viable. In addition to ever more stringent climate policy requirements, the impacts of the Ukraine war – rising energy, construction and financing costs – are also fuelling the more general sense of uncertainty. Tenants are worried about their utility bills and prices on the investment market have not yet stabilised. This mixed situation has resulted in fewer transactions, standstill on construction sites, a reduced willingness to invest, and a noticeable reticence on the part of private buyers.

For residential property fund companies, this raises the question: How can we succeed in achieving our climate targets, creating more living space and, at the same time, growing the value of our property assets in the interests of our investors – while also doing maintaining the trust of our tenants? The answer can be a “value-based community” in which the diverging interests of all parties can be balanced to find the optimal compromise. Because without the ability to reach a common consensus, we as a society will not make progress on this crucial issue.

The success of every company in the residential property sector also depends on establishing healthy, long-term relationships with tenants, investors and authorities. At the ZBI Group, for example, we have anchored the interests of our stakeholders in our corporate identity, which obliges us to adhere to the principles of self-responsibility, solidarity and sustainability. We firmly believe that it is not only necessary, but also possible, to reconcile a “social return” with the pursuit of profit in the housing sector. If anything, current market events confirm our position: a growing number of investors are also increasingly integrating ethical and social standards into their investment strategies.

Now, our politicians must do everything in their power to establish an economically viable framework and make energy-efficient renovations economically attractive for all stakeholders. Taking a lead from Austria and the Netherlands, authorities in Germany should also make it easier and quicker to provide the necessary housing in this country, too.

After all, most of the housing we need already exists. It just needs an energy-efficiency upgrade. At the same time, however, the costs of refurbishment must remain socially acceptable and not be placed solely on the shoulders of the tenants. Although moderate increases are inevitable, everyone must pull together and play their part.

Housing companies are well-placed to build on existing sound foundations, such as their relationships with their tenants and their extensive expertise in property management. What the housing industry needs to do now is get involved, not close itself off to change. It needs to adopt a social and, at the same time, climate-friendly approach. It needs to act as an interface and mediator between authorities, tenants and investors. It needs to facilitate constructive, open dialogue and, perhaps above all, offer practical solutions.

The keys to success? Resilience and a keen eye for an opportunity

Every salesperson knows that getting to “yes” means getting past many “nos”. In many cases, rejections and objections to an offer will far exceed the number of expressions of interest. There is pretty much no “yes” without a “no”. All salespeople learn to deal with rejections professionally sooner or later. But not all people can deal with negatives as rationally as trained salespeople who see from their sales figures, for example, that only one in ten potential customers will actually buy. They know they most likely face nine “nos” before they arrive at a sought-after “yes”. This type of resilience is alien to many people. Today, especially in a phase of market correction, the repeated “nos” can easily wear on the nerves of both owners and brokers. This makes it all the more important to cultivate and strengthen the necessary resilience. This applies to everyone, whether in business or in private life, but especially in the entrepreneurial environment. The market will continue to adjust and what was selling like hot potatoes last year is no longer in demand.

I am convinced that it is more important than ever that companies – and everyone else, for that matter – develop a high level of resilience. In a professional setting, this means that our teams need to be both mentally and physically fit. This is an obligation for each and every one of us – as one aspect of managing our own lives. And it is an obligation for entrepreneurs, as they take responsibility for their employees. With the necessary mindfulness, it is possible to master the various challenges we all face.

Those who combine resilience with the ability to identify and exploit opportunities will find a great deal of potential in the current market phase. Naturally, both the mainstream media and trade press are by no means short on negative economic and political news. Negative scenarios are, after all, what the media does best. Of course, as an investor or entrepreneur, it is good to be risk-averse. Having said that, it doesn’t help to focus on risk to the exclusion of all other considerations. What tends to resonate and have the greatest impact on public opinion is what is known internationally as “German Angst”. And yet, there are countless opportunities to be found in today’s market.

The days of sellers being able to achieve record prices are behind us. We have passed the peak. But compared to the many years that owners often hold a property, property was worth significantly less in most years than it is today. In 2023, sellers are simply disposing of their properties at the second-best moment in time. For sellers, there are now plenty of opportunities to sell and reinvest. The real estate market is once again a source of attractive opportunities. And other asset classes, such as bonds and securities, are again also offering interesting returns.

Of course, investors can take advantage of what is now a buyer’s market. Buyers are no longer outflanked by 50 other prospective buyers. Prices are no longer as inflated as they were at the peak. Demand for housing is not letting up, while declining construction activity means that there is far too little new housing being built. The gap between rents and purchase prices is narrowing again.

High interest rates are also causing problems for buyers who need financing. But there are opportunities here, too. Today, if you want to take out a forward loan for 2024 or 2025, you will not pay an additional premium. The conditions for 10, 15, 20 and 25-year fixed interest rates are almost identical. And loans for high-yield secondary locations are easier to service than loans for acquisitions in good core locations.

With the ability to spot and exploit an opportunity and a resilient mindset, I am sure you will have an exciting and positive year in real estate, despite all the challenges!

News

Federal Minister of Building unveils new construction funding

At the end of January, Klara Geywitz, Federal Minister of Housing, Urban Development and Building, announced new construction funding for 2023. The new funding programme – Climate-Friendly New Construction – is designed to promote the construction of the next generation of energy-saving buildings. Starting in March, the Kreditanstalt für Wiederaufbau (KfW) will start to accept applications for funds from the EUR 350 million available to families who want to build their own low-emission homes. A further EUR 750 million are available for housing groups and cooperatives. In total, the available funding amounts to EUR 1.1 billion. The real estate industry is not exactly impressed: “The Federal Government is doing little to nothing to meet the actual needs of developers and investors. This is because the viability gap in new construction, which is growing ever larger as interest rates and construction costs continue to rise, cannot be anywhere near closed with this funding”, says Jürgen Michael Schick, President of the German Real Estate Association (IVD). In his opinion, the new funding only exacerbates the situation, as funds are linked to stringent conditions, such as satisfying the Efficiency House 40 standard and “Sustainable Building PLUS Quality Seal”, which makes new construction even less affordable for low- and middle-income families.

Property tax declaration deadline will be missed by many citizens

Despite getting more time to submit their property tax returns (the original deadline was extended from the end of October 2022 to the end of January 2023), the Tagesspiegel newspaper claims that large numbers of property owners are expected to fail to get their documents in on time. Nationally, only 50 per cent of property tax returns had been received by 8 January. In Berlin, only 49 per cent had been received by 16 January. As a result, updating Germany’s outdated real estate data will take longer than expected. There will be no further wholesale extension of the deadline. In view of the number of people who have failed to meet the deadline, tax authorities will initially adopt a less than confrontational approach. The Berlin Senate Department for Finance told the Tagesspiegel that in the first quarter of the year, property owners will be sent reminders to submit the required data. According to Finanztip, most federal states are expected to adopt a similar strategy. As a result, taxpayers are not likely to face late fees as long as they submit their property tax returns before the end of the first quarter. It is only once we move into spring that property owners will be asked to pay extra: a penalty of 0.25 per cent of the assessed property tax for every month or part thereof – which can be expensive, especially for valuable properties.

Two new social environment protection areas in Berlin-Mitte

Two more neighbourhoods are being added to the twelve existing social environment preservation areas in Berlin-Mitte. In the Badstraßen neighbourhood behind Gesundbrunnen station and the Müllerstraße Nord area around Afrikanische Straße in Wedding, property owners will no longer be able to renovate or modernise their properties without official approval. Berlin’s “anti-gentrification” laws are designed to prevent rent increases connected with unnecessary modernisation measures. Thanks to the social environment preservation areas, almost half of all tenants in Berlin-Mitte are now protected from displacement, said Ephraim Gothe, City Councillor for Construction, who warns of the significant potential for displacement: 95 per cent of households live in rented apartments and 70 per cent are currently paying less than EUR 6.00/sqm/month net rent. This shows that there are many long-standing leases, claims Gothe. Most of the apartment buildings in the new preservation areas have been untouched for 50 years, another sign of potential for modernisation. However, it is unlikely that any more social environment protection areas will be created in the near future, as only these two were well justified, Gothe explains.