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Dear Reader,

In a world increasingly dominated by social media, opinions are becoming more polarised than ever before. Issues are often presented as either snow-white or pitch-black. But we live in a highly complex world in which it is not a matter of quick answers but clever compromises, as perfectly demonstrated by Berlin’s Alliance for Affordable Housing.

By now, it should be clear to even the most die-hard optimists among us that Germany is not going to achieve its target of building 400,000 new housing units per year anytime soon. Many will dismiss the wide-ranging raft of measures and initiatives adopted in October as little more than actionism. In all likelihood, only a small number of these plans will actually be implemented – but firstly, even that would be an important partial success and secondly, the promotion of home ownership has moved a big step closer. We should by no means underestimate these latest developments.

Nevertheless, the housing industry is now faced with the task of finding solutions at a time of delayed construction projects and challenging financing conditions. Because any political tailwind, no matter how great, is useless if we can’t deliver the right products.

We hope you enjoy reading this latest edition of our newsletter.

Jürgen Michael Schick & Holger Friedrichs

The new forward deal for more living space

The entire construction industry will have to adjust to many an unpleasant new reality. The traditional forward deal no longer works. In the current crisis, developers are unable to rely on business as usual because of highly fluctuating costs. The solution? We need a “new forward deal”.

Property developers are undeniably facing a host of challenges right now. The ongoing coronavirus pandemic may have more recently taken a bit of a back seat due to new problems, but it triggered a severe crisis that has only been exacerbated by Russia’s war in Ukraine. In addition, the construction industry is short of materials and skilled workers.

To survive such hard times, developers need firm financial or entrepreneurial foundations. In other words, they need to fall back on the decent cushion that they have – hopefully – built up in better times. But in recent years, many new companies have pounced on the supposedly richly laid buffet of the German real estate industry. Some obviously didn’t anticipate a crisis – which is why the current situation is now catching these companies cold.

The prevailing scepticism towards forward deals is therefore hardly surprising. After all, investors find themselves having to ask whether the companies they are working with will even exist by the time the deal closes. Small and medium-sized companies will be swallowed up by better positioned developers – a consolidation of the market is imminent. It is already almost impossible for struggling developers to get a loan.

No relief for the housing market
Against this background, there is little likelihood of a housing construction boom. Yet there is an enormous need: Germany already has a serious housing shortage – and 500,000 apartments will be needed to house refugees from Ukraine alone, according to empirica. But new housing requires more than just an uptick in building permits. Even once a permit has been issued, it still takes an average of two years before construction begins. There is also a lack of suitable building land, especially in major cities.

The markets are uncertain – and not just in Germany
To make matters worse, Germany has also recently become less attractive to some foreign investors and developers. The once “safe haven” now finds itself with storms to contend with. And the decisions of investors from abroad are always influenced by a country’s energy policies. How we master the enormous challenge posed by climate change therefore has an impact not only on all of our lives, but also on how competitive we are on the international stage. Companies certainly have obligations, but they are not the only ones. Our political leaders must also create the necessary framework conditions.

Hard times for the forward deal
Anyone who signed a contract a year ago at a fixed price and with a clear scope of services must stick to it – no matter how much the situation on the markets has changed in the meantime. Over the last few years, forward deals boomed as investors sought to secure the scarce commodity that is real estate. But in times of rising interest rates, growing inflation and falling purchase prices, calculations are now often not worth the paper they are written on. Yesterday’s favourite deal has thus become far too risky – for developers and investors alike.

So, will we in future only see buyer and seller start to negotiate the price of a property after completion? That is a possibility, but it would be premature to shelve the forward deal entirely. Nevertheless, it must be adapted to the current situation so that the risk remains manageable. For example, the contracting parties could examine whether they can include additional parameters to restore certainty for both sides. On this basis, deals that serve the interests of both parties could again be struck in the early stages of a project. And preparations for a worst-case scenario should always be included in any calculations.

The days when market participants could rely on a constantly growing market to help them balance their books are definitely over. The subsidised real estate boom is over. The cost of money is rising and the market cycle is back. For experienced property developers, this comes as no surprise. What’s more, for developers whose experience has prepared them for the end of the upswing, we are now entering a phase of attractive opportunities.

The sleeping giant of equity release

There is a particularly promising approach to selling real estate that has long been familiar and widely used in the United States and Great Britain, but is quite rare in Germany. Equity release offers homeowners a way to unlock the equity tied up in their residential property – in other words, to turn their home back into cash – and without having to move out of their house or apartment. There is enormous potential in this concept, which has hardly even begun to be tapped in Germany. In fact, just one per cent of the market potential in Germany, estimated at more than EUR 300 billion, is presently being leveraged.

This currently under-developed market is, however, set to evolve rapidly over the next few years. For one thing, German homeowners will increasingly need equity release offers, primarily as a result of irreversible demographic trends. By 2036, according to data from the German Federal Statistical Office, a majority of Germany’s post-WWII baby boom generation will have reached or passed retirement age. There will be as many as 12.9 million retirees, including a large proportion who became homeowners during their working lives. With so many Germans in and entering retirement, there is clearly significant potential for new customers for equity release providers.

Throughout their lives, these homeowners have invested a substantial portion of their incomes in their own four walls. After retirement, however, they often find that they have a significantly smaller income at their disposal. At the same time, almost all of their equity is tied up in their own home. Last year, Deutsche Teilkauf conducted a survey to assess the extent of this situation in Germany. Accordingly, there are around 3.3 million senior households whose spending power has been reduced. Of course, by no means all of them are struggling to make ends meet. Some may just want to fulfil a long-held dream, while others will be interested in creating a buffer to deal with rising utility bills. Some will be hoping to free up equity in order to make their homes more “senior-friendly” and some will be eager to support their children or grandchildren.

At the same time, equity release can be an equally interesting proposition for those to whom none of the above applies. Anyone who wants to invest in as diversified a range of assets as possible should not have all of their equity tied up in a single property. This is especially true for homeowners who have invested much of their income and their entire savings in their own four walls during their working lives. This has little to do with risk diversification. Some baby boomers are simply likely to want to take advantage of the strong property price increases in recent years to realise gains in the value of their own property and invest the capital in other assets.

As a product, equity release also benefits from there being fewer alternatives than in the past for homeowners who want to generate cash from their property but don’t want to sell it outright. These days, for example, it is almost impossible for older homeowners to remortgage their homes. Since the implementation of the Housing Credit Directive in March 2016, the criteria used by banks and other lenders for their mortgage lending decisions have become much more strictly regulated. This has affected older borrowers in particular.

Wherever there is demand, there is supply. It is therefore not at all surprising that the number – and diversity – of equity release models has increased, albeit still at a low level. Since there are also models with transparent, fixed, one-time pay-outs, it is no longer necessary to rely on annuity models and thus on a “bet on death”.

From an investor’s perspective, too, there are strong arguments in favour of equity release models. Above all, investors can gain access to a real estate class that is otherwise difficult to invest in: occupied existing single-family homes – a market that it has been hardly possible to tap due to its small-scale nature and high acquisition costs. Moreover, this limited commodity is becoming increasingly rare, as more and more large cities are relying (almost) exclusively on the construction of multifamily housing.

Moreover, owner-occupied and mortgage-free single-family homes are widely regarded as highly resilient to market fluctuations and, thanks to their granularity, offer a high measure of risk diversification and an attractive risk-return profile to any investment portfolio. Thus, on both the supply and demand side, the best conditions are in place for this sleeping giant to slowly awaken. To achieve this, however, there is still a need to raise awareness of equity release models on all sides.

Rising energy costs justify lower purchase prices

Nothing affects the real estate market as much as rising interest rates. But they are by no means the only price-driving factor. In fact, investors can expect prices to fall further in the coming months, because energy requirements are rising in line with energy prices. Wherever there are future requirements for expensive energy-saving measures, owners will be left with little choice but to sell at a substantial discount, irrespective of which current legal standards they fulfil.

This is because the current crises have driven ancillary housing costs to an all-time high. The so-called “second rent” is becoming more and more expensive and is already a decisive factor in the rental and purchase of residential real estate.

Traditionally, ancillary housing costs were equivalent to about one third of a tenant’s basic rent. As recently as November last year, a study from d.i.i. Deutsche Invest Immobilien AG and the Cologne Institute for Economic Research (IW) reported “non-energy-related operating costs” of €1.00/sqm of living space and costs of €1.09/sqm for heating in many municipalities. That was before the highly dynamic developments during the course of this year. From July 2021 to July 2022 alone, the Federal Statistical Office the Federal Statistical Office reported that prices for energy products rose by 35.5 per cent. The inflation rate for electricity in July, for example, was 18.1 per cent. This leaves tenants facing additional costs of up to several hundred euros per month.

Energy-efficient refurbishment as a key selling point
Given to the recent rises in energy prices, prospective tenants will increasingly look at a building’s energy efficiency before they decide whether to sign a lease or not. Factors such as the age of the windows, the building materials, roof insulation, heating system and insulation of the facade will become more and more important. Structural vacancy in inefficient buildings will increase sharply (even with a housing shortage), as no tenant will want to or be able to bear excessively high service charge payments. The only way to compensate for this would be to reduce the tenant’s net rent. However, this would also result in a reduction of the purchase price, as the basis for calculating property purchase prices in Germany is the price-to-rent ratio, which is based on annual rental income.

What’s more, many tenants will be willing to pay a premium to live in a property that has undergone an energetic refurbishment or in a unit in an energetically refurbished building because they will appreciate the potential for operating cost savings. Certainly, many tenants are quite indifferent to how the rent is calculated. All they are really concerned about is the bottom line: that the total rental burden is not higher.

While owners of inefficient buildings will have to reduce their net rents in order to maintain the status quo and attract new tenants, owners of energy-efficient buildings will be able to at least hold the rents they charge, if not increase them, because there is such a short supply of energy-efficient housing. Thus, inefficient buildings will become increasingly difficult to rent out.

Expect purchase price discounts
For the same reasons set out above, we will see a decline in purchase prices for properties in need of renovation. The full extent of this decline will depend very much on the location and the respective condition of the individual property. Buyers and sellers will need to make sure they do their due diligence and make well-informed decisions. Some properties may have upgraded windows but old roofs or heating systems – or vice versa. Buyers are well advised to let their buying decisions be guided by the price-to-rent ratio – in other words, to set themselves a target of how many years it should take for the property to pay for itself.

As the latest real estate offers demonstrate, we are already seeing interest-rate-related discounts of around 25 per cent. Now we need to prepare for the energy-inefficiency-related discounts. As a rule of thumb, these will amount to up to 20 per cent for buildings with an average or poor energy balance, depending on the property’s location and overall condition.

Price reductions for less efficient heating systems
The biggest energy-efficiency (and therefore operating cost) factors are a building’s heating system, its roof and its facade. The greatest leverage for purchase price adjustments can be found in the heating system. The decisive factor here is the system’s energy source. Right now, the electric storage heater is experiencing a renaissance as governments decouple gas and electricity prices, which should make heating with electricity much more affordable.

Investors who buy properties with gas-fired central heating will need to include a new heating system in their budgets. Firstly, because otherwise their tenants will no longer be able to afford the operating costs, and secondly, because the switch to renewable energy sources has to take place by 2035 anyway. Prospective buyers should therefore first take a look at a property’s boiler room before even thinking about negotiating a price.

The simple fact of the matter is that rapidly rising utility bills will put ever-increasing pressure on basic rents. And if something doesn’t give, tenants will be overburdened by the total costs. If owners and buyers hope to keep a lid on rents, or even increase them, they cannot avoid measures to boost their buildings’ energy efficiency.

Who are the winners of the current crisis?

Interest rate hikes, hesitant buyers, anxious investors, energy crisis – the real estate industry has shifted from a seller’s to a buyer’s market at breakneck speed. As the dust begins to settle, the real estate industry’s winners and losers are emerging. The waves of cancellations at brokerage houses such as McMakler, Homeday and Ziegert, the insolvencies of platforms such as Realbest, agents such as Comfort, and developers such as Terragon, are harbingers of the further upheaval to come.

But as the crisis continues, who are the winners?

Demand for housing has rarely been higher than it is today. This year alone, one million people have arrived in Germany from Ukraine. Migration within Germany and within Europe is creating additional demand in what have long been extremely tight housing markets. For the first time ever, the population of Germany exceeds 84 million. At the same time, housing construction is in decline and the gap between supply and demand continues to widen as the number of new buildings falls. And we all know where that will lead: rising rents.

Property owners are unlikely to have any problems finding new tenants. Anyone who has succeeded in building up an attractive property portfolio in recent years without having to angage in any significant new construction is significantly less impacted by the current confluence of crises than developers who are grappling with spiralling costs, rising interest rates and declining demand from prospective buyers.

For the first time in years, rents will rise at a faster rate than purchase prices. For years it was the other way around, at least on the residential property market. Purchase prices had become completely decoupled from moderate rental price developments. Now prices are falling and rents are rising.

Today, prospective buyers are once again finding properties coming to market at the kind of conditions they have been looking for in vain for years. The “over-30” party is over. And I’m not referring to the age of the most sought-after properties, but the much-hyped rent-to-price multiplier. While some investors still prefer to do keep their powder dry and bide their time, others have been busy taking advantage of the new market environment to make favourable acquisitions. Without bothersome competition from too many other buyers. For investors, the market is now full of opportunities.

Brokerage houses are experiencing an increase in properties for sale. For many years, estate agents’ prime concern was the shortage of properties coming to market. In the housing market, real estate portals even often offered leads for private owners. Agents who struggled to acquire new properties paid dearly for their failings. Looking ahead, the shortage of properties should be a thing of the past. It is now more a question of acquiring properties at prices in line with the market. Real estate companies with strong advisory skills are more in demand than ever before.

With wave after wave of layoffs at many real estate companies, the market now offers opportunities to companies that have got their costs under control and are pursuing a clear growth strategy. At SCHICK IMMOBILIEN, we are excited by this opportunity to identify valuable talent and offer them crisis-proof jobs as long-term residential investment brokers. The shortage of skilled workers is now easing. In the long run, the current market shake-out will be good for the industry.

There are losers in every crisis. But there are also winners.

News

Berlin Alliance for Affordable Housing takes stock

Initiated by the Berlin Senate and comprising municipal authorities, housing cooperatives, real estate companies and industry associations, an agreement to launch the Alliance for Affordable Housing was sealed in June, as reported here at the time. On October 11, 2022, after more than five months of working together, members of the alliance came together for a meeting at the Berlin Chancellery. In order to meet the demanding challenges created by the current macroeconomic environment and the tense housing market, the alliance launched the “Alliance for Affordable Housing – Measures for a Construction, Investment, and Innovation Offensive”, which sets out 130 specific measures to accelerate approval procedures and give construction a much-needed boost. IVD President Michael Schick believes that the package is “not a great success”, as too many compromises had to be made to satisfy the interests of all parties. However, Schick also remarked, the alliance has laid the political groundwork for implementing the measures without major delays.

No respite in sight for the Berlin housing market

After years of rising residential property prices in Berlin, the trend remains unbroken despite inflation, increasing energy and construction costs, and rising interest rates. As can be seen from the IVD Berlin-Brandenburg’s real estate price report for 2022/2023, from October 2021 to October 2022, prices for condominiums increased by an average of 7.3 per cent in upscale neighbourhoods and 5.9 per cent in normal neighbourhoods. According to the report, a 90-square-metre apartment now costs an average of EUR 4,400 per square metre in upscale residential locations and EUR 3,600 in simpler locations. On year ago, the prices were EUR 4,100 and EUR 3,400, which means that prices in more sought-after locations rose by EUR 300/sqm and in less fashionable locations by EUR 200/sqm. The top addresses in Berlin-Mitte continue to be the most expensive at EUR 5,900 per square metre, followed in second place by Charlottenburg at EUR 5,500. The most affordable prices are found in Marzahn-Hellersdorf and Spandau at EUR 3,100 and in Neukölln at EUR 3,200 per square metre.

Social housing quotas in new construction push housing costs up

While conducting a study commissioned by Pandion to investigate the respective land development models and their impact on construction activity in the cities of Berlin, Düsseldorf, Hamburg and Munich, it became clear to bulwiengesa that the social housing quotas imposed by the cities have a significant impact on rents and purchase prices on the open housing market. For example, the surveyed cities require that least 30 to 50 per cent of newly constructed housing should be affordable units. However, the report explains, these quotas are impossible to fully satisfy: Despite subsidies to promote the construction of affordable housing, building costs are simply too high for developers. In privately financed housing, the required quotas would add up to 17 per cent to rents and up to 12 per cent to purchase prices. This is because subsidies only apply to the actual construction of the affordable units. The longer-term costs of the subsidised units have to be apportioned to the owners and residents in the open-market units. As a result, the report’s authors conclude, housing construction in Germany’s major cities will decline.

Dear Reader,

In the future, the main focus of government support for energy-efficient housing will shift from new construction to the renovation of existing buildings. At last, that’s what Germany’s coalition government would like to see. There is plenty of room for debate about the pros and cons, and there are good factual arguments on both sides. What is absolutely clear, however, is that new residential construction will lose out.

Perhaps the shift is due to the government secretly binning its goal of creating 400,000 new homes per year. Rising interest rates, skyrocketing construction costs, a bleak economic outlook, sluggish approval processes – the funding freeze is just one more negative factor in a very long list. This is regrettable in two respects: first, nothing has changed in terms of demand; second, real estate has proved itself to be a investment even in times of inflation. On the flip side, undeveloped building plots are likely to come back onto the market in the near future – for resourceful investors with a sharp eye on the bottom line, this also means new opportunities.

The articles in this issue show how, in spite of everything, we must and can continue to work toward greater sustainability in the real estate sector.

We hope you enjoy reading this latest edition of our newsletter.

Jürgen Michael Schick & Holger Friedrichs

The environmental footprint of real estate funds continues to shrink

Residential real estate is generally considered stable in value, even in times of inflation, and has long since proven that it is crisis resistant. In terms of sustainability, a large part of the industry is already on the right track. Whether developers or portfolio renovators – many are setting a course for ESG. Consequently, there are also more and more real estate funds with sustainability criteria that not only offer investors the opportunity to enjoy stable returns, but also present the chance to invest in environmentally and socially optimised properties. But how can you tell which funds tick all the right boxes?

The EU’s agreement on the European Green Deal was the logical consequence for many industries after Paris 2015. Since it was launched in December 2019, Europe has been working intensively towards the noble goal of net zero greenhouse gas emissions by 2050. To get there, the EU has set numerous interim targets, including for the real estate sector. For example, according to the latest proposals from the EU Buildings Efficiency Directive, the annual building renovation rate needs to double by 2030, the deadline for phasing out fossil fuels is 2040, there will be a new energy certificate from 2025, plus a mandatory renovation passport by 2025, all of which are designed to accelerate the carbon phase-out.

EU taxonomy provides investors with a road map
The transparency requirements and disclosure obligations for sustainable financial products are defined in the Sustainable Finance Disclosures Regulation (SFDR), which distinguishes between Article 6, Article 8 and Article 9 funds. According to the EU regulation, Article 6 funds are financial products that must disclose whether or not they take sustainability risks into account. Article 8 funds must transparently disclose sustainability features in their annual reports and are commonly referred to as “light green” funds. The designation “dark green” is given to Article 9 funds that aim for a positive sustainability impact or pursue an explicit sustainability goal as defined by the UN. Such investments, known as impact funds, must measure and demonstrate the degree of their impact.

New rules apply to all financial investment products as of 2 August 2022
From 2 August 2022, the new version of the Markets in Financial Instruments Directive (MiFID II) will come into force. From this date on, investors must be asked about their sustainability preferences whenever they are given financial advice. The question – after explaining the different levels of sustainability – will be something like: “Would you rather invest in a sustainable product or a less sustainable fund?”

Anyone who expresses a preference for sustainable products will then only be offered funds that also fulfil the specific criteria set out in the EU Taxonomy and meet the requirements of the MiFiD II Directive. Depending on the orientation of the fund, these requirements stipulate that a certain proportion of the fund portfolio must meet the same, particularly high requirements, as an “impact” product. Accordingly, the fund’s strategy will have to take into account the largest potential adverse sustainability impacts of its investment decisions. It won’t be enough to simply disclose information on specific environmental and social factors. Rather, tangible information will be required on specific environmental, social and labour concerns, including respect for human rights and the fight against corruption and bribery. Funds whose policies meet these requirements will be classed as Article 8 Plus Funds. In this way, the MiFiD Directive offers investors a sound basis for their decision-making and at the same time helps to prevent greenwashing.

The high bar for sustainability
No sooner had the SFDR been passed than the number of Article 8 funds skyrocketed. In order to ensure that these funds can actually be recommended to investors as sustainable investment products, Germany’s financial regulator, the BaFin, attempted to raise the bar significantly in its draft guidelines published in April 2021. The idea of Germany going it alone in this area has since been blocked and, at least for now, withdrawn. The discussion is ongoing and open-ended. For the time being, Article 8 Plus is defined via the MiFiD II Directive. Nevertheless, the issue of greenwashing cannot be dismissed out of hand. It is highly unlikely that the BaFin’s initiative will be the only one for Germany, especially since the regulation is by no means final. In the taxonomy for sustainable economic activities, the EU has prioritised climate protection. In the meantime, however, a final report on the social taxonomy has been published, placing the focus on corporate due diligence with regard to social and labour standards. This poses great challenges for asset managers of real estate funds in particular.

How can real estate meet ESG criteria?
Real estate fund asset managers can make a big difference with a consistent ESG strategy. They can, for example, invest in projects that use climate-friendly construction methods and low land consumption, or by regularly striving to optimise their portfolios. Positive environmental impacts can be achieved in new construction through densification of undeveloped areas or by adding extra storeys to buildings and converting attic spaces. Existing properties benefit from an increased use of renewable energies, the generation of solar power by photovoltaic systems, the use of rainwater, and a well-thought-out waste management strategy. Positive social impacts are achieved via the creation of affordable housing and sensible quarter and neighbourhood development with inclusionary and multigenerational housing as well as affordable housing units. Investors can find information on methodology, measurement, monitoring and evaluation in each fund’s sales literature and annual reports.

Article 8 Plus is a seal of approval for real estate funds
We believe that the real estate industry is going in the right direction. If investors prefer to invest in a real estate fund with sustainability features as of 2 August, they will be best served with an Article 8 Plus fund. This is because only funds that take account of investors’ sustainability preferences in accordance with the revised MiFiD II Directive may be marketed to this investor group from then on. In a way, 8 Plus proves that change is in full swing in the real estate industry – which is now offering products tailored specifically to these requirements.

Green funds: Late movers will lose market

Declaring funds “light green” or “dark green” in terms of the EU Disclosure Regulation continues to be a slow process. One and a half years after the regulation came into force with the aim of making ESG compliance more transparent for investors, fund providers are still reluctant to apply for authorisation as Article 8 or 9 funds for the majority of their products. The same is true of real estate funds. There are understandable reasons behind the industry’s reticence, but they are all inadequate.

Many are still hoping for clearer guidelines from the regulator about what a fund must bring to the table in order to be deemed “light green” or “dark green”. Cases of greenwashing in the media have damaged individual company’s reputations – and such debacles are to be avoided at all costs.

But if companies want to wait, they will have to wait a long time. There will be no reasonably comprehensive, binding criteria to define the exact meaning of “sustainable” for a few years at the earliest. The EU Taxonomy still only covers a relatively narrow band of economic activities. The broad and increasingly important field of social sustainability, for example, is still a blank regulatory slate. In the field of environmental sustainability, the first revisions have already arrived, and this will become more and more common over the next few years as technologies develop.

Short-sighted thinking
There are also quite a few who shy away from the impact that classification as an Article 8 or 9 fund could have on their returns. But this is short-sighted thinking. Sure – as a green fund you are subject to certain restrictions and your investment universe is reduced. Refurbishing building stock to make it more energy-efficient requires huge investment. All this has an impact on returns – even more so for “dark green” products than for “light green” ones.

But while some are dithering, others are forging ahead and staking their claims on the market. As early as last November, a survey from the investment company Empira found that only a quarter of investors will still be willing to invest in funds that do not qualify under Article 8 or 9 in the future. While some providers are sticking by products that are to be slow sellers in years to come, others are investing in the products that will be the standard a few years from now.

It’s not rocket science
These first-movers have recognised that they themselves are in the best position to assess which adjustments in their portfolio will have the most positive impact in terms of sustainability. They have developed scoring models with which to evaluate potential real state acquisitions and their existing portfolios from an ESG perspective. In the real estate industry, there are numerous starting points for environmental sustainability that are easy to define and quantify, such as a building’s energy efficiency or the share of renewable energies in the energy mix. Other criteria can be used to assess social sustainability, such as accessibility and social rent policies.

These companies have also defined how to apply sustainability criteria in the acquisition process and to the properties in their existing portfolios. In many cases, they have specified a binding roadmap, setting out how and when to improve the scoring of the buildings in their portfolios, for example through energy-efficiency refurbishments.

The providers already have access to the necessary data, and the development and institutionalisation of processes within the company is not rocket science. But anyone who puts off making the necessary adjustments for too long will have a hard time in the medium term, especially in a market where sustainable products are becoming the standard.

Making climate impact visible: pathways to the 1.5 °C building

Climate change is probably the greatest existential threat humanity has ever faced. By now, most people have realised that we finally need to tackle climate change with all available means. And the real estate industry has a key role to play, as it accounts for about one third of total CO2 emissions. But hardly anyone knows what environmental impact the operation of their own home or investment in residential property really has – and which mitigation measures are most efficient from a climate protection point of view.

Carbon efficiency is usually measured in terms of CO2 emissions in metric tons. But who has any idea what that actually means? A return flight from Frankfurt to Rome equates to about half a ton of CO2 emissions. But is that a lot or a little? And what impact does a metric ton of CO2 emissions have on climate change? It becomes even more difficult when you consider that the timing of CO2 emissions also plays an important role in the impact a ton of CO2 has on global warming.

Emission levels alone tell us very little
In the face of such complicated calculations, the impact of different levels of carbon emissions remains almost incomprehensible. And that’s despite the fact that the Paris Agreement even set a carbon emissions budget to give the world a 50% chance to limit warming to 1.5 °C. In order stand a chance of limiting global warming to a maximum of 1.5 °C, a little less than 300 billion tons of “permissible” emissions remain. The precise impact of one ton of CO2 emissions on the climate remains very, very abstract. In fact, setting such an apparently high budget actually tends to encourage a more careless approach and discourages them from taking personal responsibility for the climate. By the way, the correct physical unit for measuring global warming is not kilograms or metric tons, but degrees Celsius (°C).

Clarity counts
This is why new methods for illustrating climate impact are becoming increasingly important. The hot topic right now is “temperature alignment”. This approach takes the remaining emissions budget as the basis for an emissions reduction model and uses it to evaluate how much the planet would warm if the whole world had the same climate performance as the entity or portfolio under consideration. As a result, instead of just seeing that the operation of a particular residential property generates X metric tons of CO2 in period Y, temperature alignment allows us to understand whether the entity or portfolio meets the target of a maximum of 1.5 °C of global warming – or not.

Since these climate pathways or climate budgets are calculated for all economic entities, we can also compare the climate impacts of entire companies, industries, assets and asset classes.

Such transparency can be particularly important for the real estate sector, which, as a climate-intensive sector, will be strategically important for combating climate change. This applies equally to new buildings, where various scenarios and the resulting climate warming can be simulated at the planning stage, as well as to existing properties, where their climate impact can be made apparent via the emission intensity of the property.

Simulation makes mitigation measures more effective
What is the climate impact of the building I own or live in? Is it a 3.0 °C, a 2.0 °C or a Paris-compliant 1.5 °C building? If it doesn’t comply with the Paris Agreement’s target, it might be worth carrying out an energy retrofit. But where should you start? Temperature alignment offers a solution for this as well, because it can also be used to simulate a wide range of renovation measures. The climate impact of an individual measure depends not only on the CO2 savings it delivers, but also on the timing of the measure and the order in which a package of measures is implemented, because, after all, it is seldom possible to remedy all deficiencies at the same time. What counts for the climate is not the emissions on some future day X, but the sum of the emissions over the entire period up to that date.

With just a few clicks of the mouse, temperature alignment-based metrics allow us to determine which measures would be the most effective in order to make the renovation as efficient and environmentally friendly as possible – including from an economic perspective. It may be a new heating system that transforms the building from a 2.5 °C to a 1.5 °C building, or it may be new facade insulation – or both, but in which order? Using temperature alignment in any simulations certainly makes such decisions easier than ever before.

The translation of emissions into °C thus enables property owners to specifically address the impact of their properties on global warming and take prompt action to position their properties for a long-term and 1.5 °C compliant future. Try it out for yourself.

Does the decline in new construction provide a boost for existing properties?

Interest rates on construction loans are rising, material costs continue to increase, and there is a shortage of available financing. As a result, a host of new construction projects are being rescheduled. Numerous construction projects are even being cancelled completely given the challenges of the current market environment. Banks are demanding more equity from developers. Some institutions are now subjecting the credit rating of the general contractor to the same intensive scrutiny as they do to the credit rating of the developer. On top of all that, it is also becoming increasingly difficult to achieve the critical 50 per cent sales quota that is required for many construction loans. In parallel, some institutional investors are withdrawing from the market completely, or at least thinking about reducing their real estate quotas. Since it usually takes institutional investors some time to implement major investment strategy realignments, they are often the investors who miss the best time to re-enter the market or buy newly attractive assets, while private and commercial players can be much quicker to discover opportunities as they emerge and have the real estate market more or less to themselves.

For all the reasons listed above, a significant number of building plots are currently coming back onto the market. This is not primarily in order to sell them on at a profit, but because the owners’ original plans can no longer be executed. As a result, there is currently far less new construction than would be necessary. At the same time, housing markets in Germany’s major cities remain tight. Demand for rental apartments remains high. However, completions of new buildings are set to decline noticeably for the reasons mentioned above. The noble wish of Germany’s “traffic light” coalition government to support the development of 400,000 new apartments every year is unachievable.

What does this mean for owners and sellers of existing properties? As the market shifts, this will be increasingly felt in the residential investment market. The impact of higher interest rates will be impossible to ignore. There will be no way to achieve the kind of excessive fantasy prices the market has become used to in recent years. In the third and fourth quarters of this year, we will see just how stable the market for rental properties is and how great the pressure on prices will actually become. Even if some buyers adopt a “wait and see” approach for the time being, apartment buildings and residential complexes will remain in demand. Whether and to what extent there will be price corrections also depends on the location and quality of each property.

The decline in new construction – and you don’t need to be a prophet to see this – makes a sharp price correction for existing properties rather unlikely. Of course, profitability criteria prevail for most investors. Apartment buildings and residential complexes must remain profitable as the market environment evolves. Given the strong demand for housing in tight housing markets, the decline in new construction at the same time provides a boost to the market for existing properties.

In 2022, the real estate market is, therefore, also a market full of opportunities.

News

Berlin’s Senate launches the Alliance for New Residential Construction

The shortage of available (and affordable) housing on Berlin’s residential real estate market has prompted the city’s Senate to launch an alliance with municipal districts, cooperatives, real estate companies and industry associations. The alliance’s members all signed a 22-page agreement at the end of June and committed to the goals of creating 100,000 new apartments by the end of 2026, significantly simplifying building permit procedures, and easing the housing burden for low-income households. The necessary development plans should be in place within three years, and funding of 740 million euros per year has been earmarked in the Senate’s budget for 2022 and 2023 to promote social housing. The major housing companies, including Vonovia, also promised to ensure that 30 per cent of all re-rentals go to tenants with housing entitlement certificates. Franziska Giffey (SPD), the governing mayor, expects more signatories to join in the next few months.

Heating costs could increase by more than 50 per cent in Berlin

This year, the housing industry expects heating costs to rise by more than 50 per cent. Maren Kern, board member of the Association of Berlin-Brandenburg Housing Companies, assumes that heating costs will continue to rise significantly. According to Kern, the federal government’s taxable, one-off heating grant of 300 euros is nowhere near enough to help households cover the imminent increases. The government’s hardship fund is a first step in the right direction, she said, but she also appealed to tenants to follow their housing company’s recommendations and make voluntary advance payments for heating costs, or to start putting money aside themselves. Meanwhile, Georg Friedrichs, the head of Gasag, Berlin’s largest utility company, has appealed to households in Berlin to reduce room temperatures whenever possible in the autumn. According to Friedrichs, just one degree Celsius less will reduce a household’s energy consumption by seven per cent.

Social Democrats (SPD) propose new instrument to boost homeownership rate

After Federal Finance Minister Christian Lindner (FDP) scheduled initial consultations on reforming Germany’s real estate transfer tax system to give the country’s federal states more freedom and thereby make it easier to buy and sell real estate, the SPD is working on other instruments to promote homeownership. Kevin Kühnert (SPD) is pushing for a state programme to replace equity in the purchase of residential property. The aim is to enable households with stable incomes but without large financial reserves to buy their own homes. Jürgen Michael Schick, President of the German real estate association IVD, has welcomed this initiative. The largest hurdle for many potential buyers is having a big enough deposit for a home, which is why young families in particular often need to rely on inheritances or support from their parents. As interest rates on construction loans have risen, it has become virtually impossible for people to build their own homes from their regular incomes alone, according to the IVD.

Dear Reader,

The issue of the municipalities’ powers of pre-emptive purchase is once again making waves throughout the industry. At the end of 2021, the Federal Administrative Court in Leipzig ruled that authorities may only exercise their right if there is actually a deficit or defect within the meaning of the German Building Code – and not merely the presumption that the future owner might want to increase the rent, for example, after an energy efficiency upgrade.

However, it was always unlikely that the ruling would restore peace in this matter. In February, parliamentarians from the left-wing Die Linke party introduced their own, admittedly futile, bill to more clearly define municipalities’ pre-emptive purchase rights. The draft that followed three months later from the Federal Ministry of Construction went even further than the proposal from Die Linke: The public good should provide sufficient grounds for a pre-emptive purchase. This issue will therefore continue to preoccupy housing investors for a long time after the Leipzig ruling – presumably in an even more extreme form than before. By contrast, the programme to upgrade buildings to make them more energy-efficient is expected to be dealt a real blow as a result of the many so-called avoidance agreements that are expected to be concluded in order to avoid pre-emptive purchases.

We hope you enjoy reading this latest edition of our newsletter.

Your Jürgen Michael Schick & Holger Friedrichs

Portfolio purchases become a risk factor

Strong demand from professional investors for German residential real estate has been increasingly served by large portfolio transactions in recent years. 2021, which chalked up a record transaction volume of €49.8 billion (source: JLL), stands out in particular, as almost half of the total, €23.5 billion, was attributable to Vonovia’s acquisition of the Deutsche Wohnen portfolio. After all, portfolio transactions are the only way to manage the tens of thousands of residential investments per year. The question is whether this is the best acquisition strategy for investors. I have my doubts.

The advantage of portfolio transactions in the housing market is obvious: apartments are granular assets. Combining several smaller units into a larger overall package reduces the time and effort required to process individual transactions. At the same time, the diversification effect reduces the larger portfolio’s exposure to risk: One or two “bad apples” in the cart are no big issue and are accepted as a minor inconvenience.

The risk of stranded assets puts a kink in the portfolio calculation
But will this calculation still play out in the long run? Yield compression in recent years has ensured that there is hardly any cushion to offset any losses from individual properties. Every transaction is calculated with a very sharp pencil; price-to-rent ratios of thirty or forty times annual rental income are no longer unusual, even in portfolio transactions. The write-off of even a single property can destabilise the planning of any large investment.

And this may be precisely what is happening more and more frequently. Because in view of the debate about sustainability and environmental protection, it is no longer just a question of temporary rent reductions or minor repairs, but of “stranded assets,” or properties that no longer meet the standards of tenants and investors and are therefore no longer marketable. Such total losses are almost impossible to compensate for in the long run.

Investors who closely analyse every single investment from the outset and steer clear of large portfolios with combined risks that are difficult to identify are certainly at an advantage. This is especially true for smaller transaction managers. The prerequisites, however, are market access, networking within the industry, and in-house residential real estate market expertise. The greater effort is worthwhile when applied over a correspondingly long holding period, as it is only incurred once, while risks increase over time.

Large-scale investors and asset managers will continue to rely heavily on portfolio acquisitions. This will be a matter of necessity, because those who take too long to analyse, consider and negotiate will quickly be outflanked by the competition in a bidding war. Fortunately, those who can afford to make a narrow and precise selection on an individual transaction basis, can build up a portfolio entirely free of any “bad apples”.

ESG – Where there are no certification standards, there must be property management standards

More than 13 years after the first “green building” certificate was issued in Germany, the industry seems further from a uniform sustainability standard than ever before. Investors and property developers can decide for themselves whether they prefer a European certificate or an American one – or to get both certifications to be on the safe side. Each of these certificates, in turn, has different quality levels such as Silver, Gold and Platinum – whereby the Platinum standards of 2015 are not even equivalent to Gold awards under the same systems today.

Status quo: Property managers have the “burden” of making decisions
Although these certificates and systems are based on a wide range of sustainability criteria, they do not form a framework or guideline that property managers in German-speaking countries can follow. The framework that does apply is the Disclosure and EU Taxonomy Regulation, which has been in force since the first of January this year. Now, one could claim that these regulations are only directed at funds or, at a stretch, asset managers. But the real impact is achieved in the daily work on the ground and in the properties, which is why property managers also need to take note. Ultimately, it is up to property managers to decide to what extent to implement ESG measures in order to achieve defined sustainability goals, both in everyday life and as elements of an overarching corporate strategy. Property managers are therefore free to choose whether they want to fulfil only the necessary minimum or whether they want to stay one step ahead of tomorrow’s regulations. However, it remains to be determined to what extent a property manager who acts less sustainably can meet the requirements of increasingly ESG-oriented investors.

Legislation in itself does not create uniformity
Given this confusing constellation and the largely voluntary nature of more complex sustainability measures, it is not surprising that initiatives such as GRESB and ECORE have set themselves the goal of ensuring the comparability of even the most diverse real estate portfolios in terms of sustainability and thus, ultimately, of allowing the work of property management to be evaluated more transparently. In addition to the various certifications, other regulations such as the aforementioned EU Taxonomy Regulation also play their part. However, apart from the fact that these are two distinct systems with partial overlaps, many investors have chosen to analyse just one set of criteria.

But although each new catalogue of criteria and each revision of existing regulations provides further differentiation, surprisingly such refinements also create stimuli for a long-awaited policy framework. The different certification systems and initiatives demand, at least in part, a uniform data basis, including reliable figures on current consumption and waste generated. Ultimately, these criteria and databases can be applied parallel to the Global Reporting Initiative (GRI), the German Sustainability Code and the Corporate Sustainability Reporting Directive (CSRD), for example, in order to develop a suitable strategy and implement it efficiently. But of course, someone has to do the upstream work and define and clarify the available adjusting mechanisms and influences.

Data management enables both: individualisation and standardisation
These data, often uncollated and at best stored in Excel tables at property level, have been collected and maintained by property managers for years now. These databases are becoming more and more extensive, in part as a result of the installation of smart metering systems, but also due to the fact that many properties can now be compared over a period of years. The practice of concluding framework agreements with operating companies to bundle services also helps to increase the standardisation in daily management workflows. At the same time, such an approach allows for greater flexibility in investor reporting. If the data can be retrieved at the push of a button, they are easier to adapt to the diverse requirements of individual investors and systems.

In other words, the expansion of digitalisation and transparency in property management ensures that processes are not only documented but constantly optimised. This means that best case scenarios at property level can be beneficially applied across the entire portfolio. In this way, we are approaching standards in property management and shaping the framework for action across the entire industry.

Dear Investors, welcome to Hattersheim!

A potential transaction volume of €100 billion in Germany – this confident, but by no means far-fetched, forecast made brokerage houses sit up and take notice in early October 2021. The remarkable results posted on the German investment markets are largely attributable to the residential segment. According to CBRE, residential real estate has established itself as the strongest asset class, chalking up almost €21 billion of transactions in the third quarter of 2021. And this impressive total is by no means solely a result of the large-scale portfolio sales that have dominated recent media coverage. No, it is an outcome that owes much to the fact that investors with a high proportion of commercial space in their portfolios have been prioritising diversification.

However, while in the office segment it is primarily Grade-A properties in prime locations that have proven their stability, this is by no means the case in the residential sector. In particular, the inner cities of Germany’s largest cities are exhibiting signs of overheating and yields in the core segment have fallen to an all-time low of 2.24 per cent. In peripheral districts, in contrast, both absolute purchase prices and rental prices – measured against household income – are still relatively low. In addition, for some years now there has been a migratory trend from the urban core to the suburbs and exurbs, and rural communities on the edges of major cities have benefited the most.

However, this creates a fundamental problem. International investors are still drawn to real estate assets in Germany because of the high level of security they offer. An investor from the Asia-Pacific region or the United States who is looking for a “safe haven” in the German residential market is more likely to find an attractive investment opportunity in an exurban location such as Hanau and Hattersheim than in Frankfurt’s Westend. Why? Because such locations exhibit constantly positive market dynamics (without overheating tendencies) and, consequently, a much better overall performance. However, many investors are not even aware of these market opportunities – or that these cities even exist. As a result, most institutional investors, who according to Savills now account for 49 per cent of the investment market, continue to allocate much of their capital to the supposedly safe Top 7 cities.

Then there is a possible perception bias: In terms of ESG in the residential segment, the focus is all too often on forward deals for new properties built to the highest energy efficiency standards. However, modernising and upgrading the millions of properties in Germany’s existing building stock is an equally important lever as we strive for a major positive impact on the environment and climate. Thus, if investors align their investment strategies appropriately, they can also achieve their ESG targets via investments in the existing property segment.

My conclusion: The real estate industry needs to do more to establish better networks and explain the benefits of its products, especially in the residential sector. In particular, markets in regional centres have so far been largely ignored by institutional investors – and conversely, many local players do not have adequate connections to international investment and asset managers. As a result, fund solutions will come to dominate for years to come, bundling properties into portfolios. However, it also remains to be seen whether direct ownership will increase in the long term, and whether, a few years from now, property viewings will kick off with the words: “Ladies and Gentlemen, welcome to Hattersheim.” For investors who have specialised in these markets for years, the positives would be tangible.

When the “traffic light coalition” is more left wing than Die Linke – the quarrel over municipal pre-emptive purchase rights in urban conservation areas

If you take a stroll through Berlin’s 72 urban conservation areas, you will rarely come across any blots on the cityscape. Of course, architectural tastes differ, but you’d be hard pressed to find buildings in really deplorable conditions in the sense of neglect or disrepair. And yet Berlin’s districts have exercised their pre-emptive rights to purchase apartment buildings in urban conservation areas on 77 occasions since 2017. In an additional 292 cases, municipal authorities have concluded agreements with buyers, which means they never had to exercise their pre-emptive rights at all. Wrongly, as the Federal Administrative Court ruled in late 2021 in response to a specific case from Berlin. The highest administrative court in Germany ruled that municipalities may not exercise their pre-emptive purchase rights on the basis of the mere presumption that the future owner might use the property in a way that undermines the objectives of the conservation area, i.e. because the future owner might want to exploit the potential for rent increases or might come up with the “absurd” idea of upgrading the property to make it more energy-efficient. The Federal Administrative Court was crystal clear: mere presumption of future misuse does not constitute a deficit or defect within the meaning of the Federal Building Code (BauGB). To come to this conclusion, one actually only has to be able to read. Because the law clearly defines the limits of municipal pre-emptive purchase rights.

In the world of law, the wording of a legal provision offers just one route to reaching your goal. Berlin’s district and administrative courts, however, preferred to rule in accordance with what they assumed was the purpose of the pre-emptive purchase provisions, namely to protect tenants from displacement. Berlin’s planning authorities clearly considered the clarity of the law to be an editorial oversight and were convinced that they had a right to exercise their pre-emptive purchase powers in this way.

Within seconds of the Federal Administrative Court’s ruling, demands for new legislation started to intensify. After all, negotiations between Germany’s new coalition partners at the federal level had already agreed to launch a review into the very same issues. Hot on their heels, the left-wing parliamentarians of Die Linke announced they would present their own bill, which they did in mid-February 2022. Die Linke’s proposal would restore the previous practice by allowing municipal authorities to exercise their pre-emptive purchase rights or enforce stringent restrictions on the basis of the mere presumption that the future owner might use the property in a way that has a negative impact on the conservation area. Although Die Linke’s proposed bill, as an opposition motion, has no chance of success, it has at least served to light a fire under the traffic light coalition. A few days ago, the Federal Ministry of Transport, Building and Urban Affairs launched internal consultations on its own bill, which is even more radical than Die Linke’s proposal. In short, it stipulates that pre-emptive purchase rights may be exercised solely on the basis of the public good. Die Linke’s politicians probably never imagined that the traffic light coalition’s proposals would be more left wing than their own.

At this moment, it is not possible to say what will happen next with any real sense of certainty. However, as a result of a public hearing of the Bundestag’s Building Committee on May 9, 2022 to seek expert opinions on Die Linke’s proposal, it seems likely that new legislation is on its way. The SPD and the Greens in particular want municipalities to have pre-emptive purchase rights, even where there is no anecdotal evidence of a realistic threat of displacement. Taking a sober view, it would seem that the impact of an additional pre-emptive purchase right would be quite manageable. After all, Germany’s tenancy laws already offer tenants significant protection from displacement. Nevertheless, problems could arise in relation to climate protection, especially where owners have already concluded so-called avoidance agreements (Abwendungsvereinbarungen) with local authorities. These agreements usually require the new owner to preserve the building’s current condition for decades to come. Thus, the owner has little scope for energy-saving or other modernisation measures. In some cases, the agreements even contain rent ceilings, which has nothing whatsoever to do with urban development. The entire discussion about pre-emptive purchase rights is a nuisance. Nonetheless, it does create an opportunity to resolve the conflict between climate protection and social compatibility goals. The job now, however, is to complete the consultation process agreed upon in the coalition agreement and demonstrate the benefits of such a pre-emptive purchase right for the general public.

This article was first published in Das Grundeigentum.

News

Discussions about the pre-emptive purchase rights

In the wake of a landmark decision by the Federal Administrative Court on November 9, 2021 to outlaw municipal authorities’ exercise of pre-emptive rights to purchase properties located in conservation areas, politicians have decided that new legislation is the answer. As a reaction to the initiative of the federal states of Berlin, Bremen and Hamburg, the Bundesrat is making a strong case to tighten the wording in the relevant sections of the German Building Code. The restoration of municipal pre-emptive purchase rights was also discussed in a public hearing of the Committee for Housing, Urban Development, Construction and Municipalities at the beginning of May. The plans of Federal Minister for Housing, Urban Development and Building, Klara Geywitz (SPD), have met with criticism throughout the real estate sector. According to the real estate association IVD, a municipal pre-emptive purchase does not create any added value: a public landlord is per se no better than a private landlord. And, as the IVD points out, tenancy law already protects existing tenants anyway. The IVD is clear: Rather than discussing a new version of pre-emptive rights, politicians should focus more on new construction.

Still no agreement on the Berlin rent index

In April, the District Court of Spandau issued a ruling on the 2021 Berlin rent index in which demands for rent increases were rejected. The judges ruled that the 2021 Berlin rent index did not fulfil the criteria of a “qualified rent index”. The case related to the second consecutive update to the index, which was deemed invalid. The District Court of Wedding, on the other hand, issued a ruling in support of the 2021 index. Two such contradictory judgements in such a short space of time have created legal uncertainty – and dented confidence in the rent index. Without a valid index, the rental price brake (Mietpreisbremse) cannot be applied. The IVD criticised the legal foundations of the latest update to the rent index as early as 2021. Even with the District Court of Wedding approving the 2021 rent index, the question remains as to how the state of Berlin can produce a lawful and reliable rent index in years to come.

Real estate transfer tax reform

Federal Finance Minister Christian Lindner (FDP) has given the starting signal for real estate transfer tax reform. From the initial consultations, it is clear that politicians are striving to lower the hurdles for acquiring real estate. Plans include giving the federal states the power to reduce the real estate transfer tax rate to zero. It is hoped that this would relieve the burden on private first-time buyers. Michael Schick, President of the German Real Estate Association IVD, welcomed the plans: Especially for young people, any dreams of owning their own home often come to nothing because their savings are not enough for a deposit and to get a mortgage. For this reason, the IVD believes that the proposed reforms are an important step in the right direction and could give middle-income households access to home ownership. In order to further promote sustainability, the IVD also advocates a real estate transfer tax refund for energy-efficient renovations.

Dear Reader,

Germany’s “traffic light” coalition (SPD, FDP and the Greens) is now just under two months old, and for the first time the ability of the German government and the real estate industry to engage in meaningful dialogue appears to be under serious scrutiny. Across the industry, everyone is talking about the abrupt end to KfW subsidies for energy-efficient new-build properties, a topic that is also the focus of our current newsletter. This non-transparent procedure not only ensures that many individual projects are having to be recalculated – it also slows down the long overdue, and much heralded, new construction offensive. It is therefore appropriate for the real estate industry to take a clear position, because honest criticism is also an important component of a dialogue between equal partners.

At the same time, the real estate industry can’t afford to go into a state of shock or decide to restrict its sustainability measures to the bare minimum. The trend towards more environmental and socially responsible real estate is irrevocable. The best possible response is therefore most likely a resounding “the time is now!”

Read on to find out more,

Your Jürgen Michael Schick & Holger Friedrichs

Why prices don’t tell the whole story

Every day, we are bombarded with the latest reports about record property price increases. There is a tangible price hysteria, and not only in the media, but also among professionals within the real estate industry. The impact of this hype can be seen, for example, in Leipzig – where price increases seem to magically entice more and more investors, who drive the price rally ever higher. And, as the financial viability of a large proportion of new residential construction is calculated on the basis of projected asking rents, investors’ expectations are accordingly ambitious – and optimistic.

The problem is that these forecasts assume an increasing shortage of available housing. However, it is questionable whether this will be the case, especially as a growing number of families are already migrating to the exurbs around Leipzig, and the number of young adults has been rising more slowly of late. In addition, the volume of new apartments being approved and completed over the last few years is higher now than it was just a few years ago. This could mean that the existing demand is more than being met and the market is becoming increasingly saturated.

This in turn creates added investment risks, although on paper the Leipzig market has been growing faster than most cities. Dresden offers a more cautionary tale: Asking rents are no longer rising, and the number of households is constant. New construction, however, continues at a high level.

It is now high time for a new way of thinking: The real estate market should be analysed on the basis of truly relevant data – not just prices.

The latest price data doesn’t really tell us anything
This is because current prices say very little about future developments. They have more in common with taking a glance in the rear-view mirror. All they do is reflect the averages of the past. Whether purchase prices or rental prices, they are only ever based on past transactions and leases.

Tomorrow’s supply and demand, however, are rooted in today’s developments. Long-term investment decisions, therefore, should not be based on prices, but trends that can be derived from existing secondary data.

Key point of reference: the development of household figures
“Where and how do I want to invest?” is the crucial question for investors. It is particularly important to look at the right data. The key point of reference for residential real estate investments is an analysis of growth in the number of households. Although cities and communities with growing populations offer the potential for rising demand and property price increases, it is developments in the number of households that will primarily determine the strength of future demand.

Even shrinking cities can experience growing demand. Which is why, in a second analytical step, questions need to be asked about demographic and economic development in order to determine which properties will be in particular demand in the future. If a city’s senior population is set to expand, demand for senior housing and assisted living facilities will also increase. Investors need to ask themselves: Am I investing in a city that offers large numbers of well-paid jobs? Is there likely to be greater demand in certain market segments due to income distribution?

Can any meaningful conclusions be drawn from commuter patterns? And what do these say about (over)dependence on major employers or sectors, and thus about possible cluster risks? Depending on the location, there are different potentials for successful investments – beyond the pure market price consideration and also beyond the much-discussed A and B cities.

Professional investors should do more than simply chase the latest price trends. After all, there is a great deal of relevant data available which, in contrast to property and rental price data, allow investors to reliably analyse and forecast a given market’s true potential. All it takes is for these data to be studied more intensively and used more sensibly.

Where the real value is – the Ruhr region

Germany’s residential real estate investment market set a new record last year. According to the latest analysis from JLL, the transaction volume climbed to €50 billion – almost three times the previous five-year average. This is, of course, largely a result of Vonovia’s takeover of Deutsche Wohnen, but even excluding this €23.5 billion transaction, the volume was significantly higher than in previous years.

Residential investments in Germany are popular among both private and institutional investors from Germany and abroad because, on the one hand, they are regarded as a safe haven and, on the other, they generate relatively stable and predictable returns. It is still remarkable how strongly transaction activity is concentrated in Germany’s Big Seven cities. Last year, the seven largest cities accounted for 69 percent of transactions (41 percent when Vonovia/Deutsche Wohnen is excluded), even though they are home to only 12 percent of the population.

Germany’s “largest city” is often overlooked
In particular, what could be classed as Germany’s “largest city” is often overlooked: the Ruhr region. In North Rhine-Westphalia, supra-regional investors largely tend to focus on the Rhine region. The band of cities to the northeast, which are home to five million inhabitants, six DAX and MDAX corporations, five universities and one of the largest inland ports and logistics hubs in Europe, on the other hand, is predominantly left to more local portfolio holders.

The causes lie more in the image of the former coal mining region and the fact that many market participants are simply unaware of the region’s attractive investment opportunities. There is no question that the major challenges facing the region are undisputed: Ongoing structural change, above-average unemployment, people moving away, indebted municipalities. A number of Ruhr cities have become regular fixtures in the lowest places in city rankings.

But first, this is not representative of the entire Ruhr region. In many places, “it’s better, much better, than you think”, as Herbert Grönemeyer once sang about his hometown of Bochum. As everyone must know by now, many years have passed since the sky over Bochum was last clouded by coal dust. And second, there are less attractive locations and neighbourhoods in other major cities, too – with the difference being that an individual district in Berlin is equivalent to an entire independent municipality in the Ruhr region.

A heterogeneous agglomeration calls for local knowledge
The Ruhr region is an extremely heterogeneous agglomeration – with both attractive and less attractive residential locations. Yes, there is Duisburg-Marxloh. But there are also the southern districts of Essen, the “secret capital” of the Ruhr, which have little or nothing in common with the usual Ruhr clichés. Incidentally, property and rental prices have also risen sharply in Essen over the last few years – with no sign of migration or vacancies.

The Ruhr region is not Munich. If you want to be successful here, you have to carefully analyse the individual districts and know your way around. But that’s exactly where the charm lies. While investors in Berlin and other A-cities are lining up to buy existing properties at 30 times the annual net rent or more, resourceful investors between the Ruhr and Lippe rivers can discover residential properties in stable, decidedly middle-class neighbourhoods that are available at 15 times the annual rent – and without investors from Germany and abroad doing their best to outbid one another. Thus, acquisition yields are not three percent, but six to seven percent.

This is also confirmed by Schick Immobilien’s German Residential Investment Market Report 2020/2021, according to which, the average price-to-rent ratio for a multi-family building in the largest cities in the Ruhr region was between 11.7 (Gelsenkirchen) and 16.8 (Essen) in 2020. These are average values, mind you, which can vary considerably from district to district. By way of comparison, the average price-to-rent ratio in Berlin and Frankfurt is 29, and in Munich it is a high as 43. So, if you do your due diligence, know your way around a bit and don’t let yourself be blinded by established bias, you will find the kind of high-performance investments “deep in the West” that simply do not exist in Germany’s A-cities.

Incidental costs are by no means an incidental matter

Rising rents are a major social time bomb, especially as a growing number of Germans feel they can no longer afford adequate housing. “Affordable housing” is, therefore, among the key planks of the coalition agreement between Germany’s three governing parties.

In the discussion about housing costs, people tend to focus on the “cold rent”, while charges for services and utilities are relegated to a subordinate role. Yet these ancillary costs represent a significant portion of a household’s total housing costs, as a recent study confirms. According to research conducted by the Cologne Institute for Economic Research (IW) on behalf of d.i.i. Deutsche Invest Immobilien AG, ancillary costs amount to just under a third of the cold rent on average in Germany, and as much as half in some regions.

Reducing the “second rent”
Thankfully, there is significant potential to reduce these ancillary costs, in particular in relation to what are commonly referred to as “warm operating costs”, which include expenses for heating and hot water. According to the IW report, these account for more than a third of total ancillary costs. At the same time, the study reveals that these costs are almost nine percent lower in apartments built after 2000 than in older buildings. Better insulation and more modern building technology have a positive impact on both the environmental footprint of an apartment and the costs for its occupants.

Savings can also be achieved in “cold operating costs”. In terms of items such as building cleaning and garden maintenance, savings can be generated by optimising existing utility and service contracts. It can be well worth checking whether certain contracted-out services are needed at all and, in some circumstances, concluding contracts with new providers can lead to lower costs.

A win-win situation for owners, tenants and the environment
Oil and gas prices rose sharply in 2021. What’s more, this trend looks likely to continue over the next few years. Carbon pricing will also cause heating costs to rise. As a result, it will be increasingly important to make sure that older buildings are retrofitted with the latest and most energy-efficient equipment. This is because energy-efficient refurbishment can significantly reduce ancillary costs. Owners can partially refinance the investment via various federal, state and local subsidy programmes. Lower ancillary costs also create potential for increasing cold rents without increasing the burden on tenants. Last but not least, renovations increase the resale value of the building. And they improve its rentability, as potential tenants are increasingly focusing on ancillary costs in addition to the basic rent.

The developments outlined above will increasingly sharpen the focus on ancillary costs over the next few years. Energy-efficiency refurbishments are therefore the best response to the growing pressure exerted by both markets and regulators. They ensure a win-win situation for all stakeholders: owners, tenants and, last but not least, the environment.

Promote what needs promoting

The real estate year started with a slap in the face for many private and professional property developers. The completely unexpected halt to applications for the KfW programmes for energy-efficient building refurbishment and new construction funding caused quite a stir. 24,000 applications that had been submitted but not yet approved were left hanging in the balance. More than 20,000 new buildings to efficiency standard 55, around 3,000 new buildings to the EH40 standard and around 700 conversions were affected. The response from the real estate industry was unanimous. This was no way to achieve the ambitious housing construction targets on the one hand, or the new German coalition government’s climate protection targets on the other. As a result of the great public and media pressure, Economics and Climate Protection Minister Robert Habeck was forced into a U-turn and withdrew the sudden funding freeze.

However, Habeck’s plans for a stripped-down programme, which have subsequently come to light, are no less serious. Based on what we know so far, the Green Party’s former leader is planning to cut subsidies under the Efficient House 40 (EH40) new-build programme in half. He also wants to introduce a cap of one billion euros. A subsidy program with a one-billion-euro cap is likely to be exhausted after little more than a year.

With these announcements, the German government’s goal of creating 1.6 million new apartments in this legislative period is becoming a distant prospect. Many developers are already forecasting significant cost increases, which will drive rents up accordingly. Various calculations show that without EH40 subsidies, rents for social housing would rise by €3.00 per square metre and more. If the subsidy were halved, as Habeck is now planning, rents would rise by at least €1.50 per square metre. The result of slashing subsidy programmes for affordable housing couldn’t be more obvious: If housing is to be built – and built in an environmentally-friendly way – developers need a permanent and adequate funding framework. Policymakers must promote what needs promoting. During the first weeks of the new year, a great deal of trust has been squandered. In terms of housing policy, the most important task facing the new government is to quickly regain that trust. Otherwise, by the end of the current legislative period 1.6 million new homes will be little more than a pipe dream – and the legislative period has only just begun. The chaotic funding freeze, the halving of the EH40 programme, and the unrealistic cap must all be taken off the table as quickly as possible.

News

Geisel calls for rent freeze in Berlin

Berlin’s housing market remains tense. Affordable housing is in short supply. In response, the “Alliance for New Housing Construction and Affordable Housing” met for the first time in late January. The Berlin Senate wants to create more affordable housing and boost new construction in cooperation with the district authorities and the housing and construction industries. Andreas Geisel, Senator for Urban Development, Construction and Housing, has called for a voluntary, five-year rent “freeze” on the part of the housing companies. However, he wants rent increases to be linked to the rate of inflation, rather than a complete freeze. In return, he will make it easier for developers to get new construction projects up and running by guaranteeing faster building permits. The IVD Berlin-Brandenburg is keeping a close eye on the proposals and has already warned against embarking on the wrong path of too much regulation, especially in the wake of the failed rent cap.

Right of first refusal – a common concern in Berlin, Hamburg and Munich

It was only in November that Germany’s Federal Administrative Court instructed state authorities to stop exercising their right of first refusal as an instrument against potential speculation – a success for property owners. Now the mayors of Germany’s largest cities are following suit: In response to the Federal Administrative Court’s ruling, Berlin, Hamburg and Munich have launched an initiative to strengthen municipalities’ rights of first refusal. The mayors say they want to safeguard the supply of affordable rental housing and protect social preservation areas from speculative real estate companies. Together, the three mayors have called for an expeditious solution and a new regulation governing their rights of first refusal from the federal government. According to the IVD, such a reaction was to be expected. But the efforts to secure new legislation comes at the expense of urgently needed new construction.

Berlin increases housing benefits

The housing benefit reform of 2020 calls for the regular adjustment of housing benefit. This provision is intended to ensure that housing benefit recipients do not suffer a decline in household purchasing power. Adjustments are calculated in relation to the date the housing benefit reform was passed (January 1, 2020). As a result, low-income households who might otherwise lose their entitlements as their incomes increase can continue to receive housing benefit. From January 1, 2022, housing benefit recipients in Berlin will receive an average of €10.00 more per month. Almost 19,500 households in Berlin are affected by this regulation, including many pensioner households – almost half – and families. Clearly, as an alternative to stronger regulatory measures, targeted financial support can effectively mitigate the increasing burden of rising housing prices.

Dear Reader,

ESG is on everyone’s lips – and will soon be in our hands and under our feet. More and more companies are having to publish sustainability reports and more and more investors are actively deciding on the allocation of their investments based on sustainability criteria. This makes it all the more important for owners with older properties in their portfolios to get up to speed. At the same time, it is also worth taking a look at younger investors, whose tendency to regard real estate as one more item in their investment shopping basket should not be underestimated – even if there is always a right time to make an exit, whether in terms of future returns or in view of impending regulatory intervention, that should not be missed.

We hope you enjoy reading this latest edition of our newsletter and wish you a peaceful and healthy end to the year.

Jürgen Michael Schick und Dr. Josef Girshovich

The energy-saving potential of new construction

Sustainability and ESG (Environmental, Social, Governance) criteria are playing an increasingly central role in both private and institutional investors’ strategies in the German residential market. Among the key factors determining a growing number of investment decisions are environmental-friendliness and climate change mitigation – and, as a direct result, energy efficiency. As a recent study by the Empira Group has confirmed, it is easier to achieve this goal via new construction than by retrofitting existing buildings. Although “grey energy”, i.e. the emissions associated with the production, transport and storage of materials and during construction, is not included in the study’s analyses, this becomes increasingly irrelevant over the correspondingly long service life of the property. In addition, new construction can take advantage of the latest and most efficient technologies and processes. New residential construction thus offers the greatest potential for protecting the environment, particularly in the long term.

Energy consumption in the residential sector has hardly fallen
European climate protection targets are extremely ambitious: the EU is aiming to be as close to zero-carbon as possible by 2050. In order to achieve this goal, the real estate and construction industries will need to make a major contribution over the next few years and decades. After all, the housing sector is responsible for a significant proportion of energy consumption and CO2 emissions. In Germany alone, private households account for a quarter of total final energy consumption.

In recent years, the amount of living space per capita in Germany has increased significantly. At the same time, the average household size has been in constant decline. And single-person households consume more energy per capita for lighting and heating than multi-person households. Ultimately, such trends have meant that, in recent decades, energy consumption across the real estate segment has hardly fallen compared with other sectors, despite the implementation of more energy-efficient technologies.

Energy footprint – unrenovated buildings vs. new construction
First and foremost, if we want to substantially reduce energy consumption in the building sector in Germany, we need a more efficient approach to generating and supplying heat energy. Indoor heating and hot water are currently responsible for 87 per cent of energy consumption in the residential sector. On the one hand, we need improved technical and usage-related measures. On the other, the substance of our buildings also holds the key to improving the nation’s energy balance. In Germany, the fact of the matter is that much of our building stock is outdated.

The Empira study shows that unrenovated, pre-war buildings in Germany consume an average of 151 kilowatt hours of energy per square metre per year for heating and hot water. By comparison, the energy consumption of new buildings constructed from 2002 onwards and in compliance with current technical standards is 89 kilowatt hours per square metre, a full 59 per cent lower than that of unrenovated, pre-war buildings.

Logically, this analysis leads us to conclude that the total operating energy for the German residential sector could be significantly reduced in the long term if we can only accelerate the construction of new housing.

Private investments in the German housing market can drive the trend toward a sustainable real estate industry
Over the next few years, it will be important to act in line with EU climate targets, especially in the private sector, and to shift the focus of our efforts towards replacing new buildings rather than steadily refurbishing older buildings. To date, new residential construction activity in Germany has been far too sluggish: In 2018, only 3.47 apartments per 1,000 inhabitants were constructed, in contrast to 6.48 in Austria. Many of Germany’s other neighbours, including Belgium, France and Poland, also built considerably more apartments. The advantage of the private real estate sector lies primarily in its ability to act more flexibly and with greater speed than the comparatively cumbersome public sector. Of course, it does not make sense to replace every single pre-war apartment building with a new building. Each location and property must be assessed individually before any decision is made as to whether retrofitting or replacement makes more sense.

Green Real Estate Investment Funds – Waiting is not a realistic option

For the good of mankind as a whole, we all need to pick up the pace when it comes to protecting the environment. Unfortunately, the real estate fund industry has so far proved itself reluctant to make binding commitments. To date, companies across the industry have declared only about one-fifth of their funds as products under Articles 8 or 9 of the EU Disclosure Regulation.

We urgently need a binding commitment from funds to prove that they are taking sustainability criteria into account. After all, the real estate sector is responsible for around one third of greenhouse gas emissions. Classifying funds as “dark green” or, at a minimum as “light green”, in the sense of the regulation, would provide investors with a valuable point of orientation, more capital would flow into ESG-compliant products, and the decarbonisation of the industry would be given a welcome boost.

Many fund companies justify their reluctance to commit themselves by pointing to the fact that the current criteria are so “fuzzy”. In my mind, that is a weak argument. It will be years before regulators have come up with water-tight definitions of sustainability for the widest possible range of economic activities. Meanwhile, technological advances will mean that previously defined criteria need to be revised. Waiting for a “finished” set of rules that will never exist would be fatal in our fight against climate change.

And the same applies to the fund companies themselves. Because while they are twiddling their thumbs, the market is creating facts. More and more investors are already demanding that investment products identify themselves as sustainable – and are allocating billions to these products. Fund companies that fail to commit are already increasingly being left out in the cold.

If you want a job done properly, do it yoursel
Fund companies should really be in the best position to develop their own criteria for the sustainability of their investments. These would involve energy efficiency standards for buildings and the use of renewable energy sources. They should also include criteria for social sustainability, which are currently less bindingly defined than their environmental counterparts. And social sustainability is what the real estate industry is all about anyway, because buildings have such a strong influence on the well-being of the people who live and work in them and have such a significant impact on the urban environment – in both positive and negative terms. It is also important to determine how ESG screening will be integrated into the real estate acquisition process and how it will be applied to property portfolios. If a fund identifies properties in its portfolio that do not meet the criteria, we need rules on how they can be made sustainable or whether they should be sold.

A well-developed ESG strategy is also the basis for meaningful ESG reporting. This not only enhances investors’ perceptions of a company, it also reduces the risk of not being able to live up to the sustainability promises the company has made.

In any case, fund companies can’t afford to wait for regulators to lead them by the hand. Change is coming one way or another – and it would be far better to help create the rules than to be overtaken by reality.

Why young investors shouldn’t forget the “one-third property” rule

You should invest one-third of your money in stocks, one-third in cash, and one-third in property. This classic, and oft-repeated wisdom was almost second nature to earlier generations, not least stock market greats like André Kostolany. Nowadays, however, the “one-third property” rule in particular seems to have been increasingly forgotten by younger investors. Why is that?

New investors take the market by storm
The robust stock market boom in the wake of 2020’s Corona Crash and the community-building of groups such as wallstreetbets have had an extremely satisfying side effect. It is almost impossible to remember a time when so many young people were so passionate and focused on the available options for investing their own money. Technology stocks and “growth stocks” have proved particularly popular – and the same can be said for cryptocurrencies, which seem to be increasingly gaining acceptance as an alternative to gold or traditional currencies.

On the back of such investment strategies, lots of investors posted solid returns over the course of 2021. But many portfolios run the risk of are not being sufficiently diversified across different asset classes. In particular, achieving the right proportion of real estate often seems like a problem. While a number of private investors already own their own homes and therefore have a substantial real estate allocation among their total assets, a large number have so far devoted little attention to the qualities of real estate as an investment product. However, several inherent features have always made real estate an attractive portfolio hedging instrument: low correlation with the overall performance of stock markets, low volatility and (similar to stocks) a high level of protection against inflation.

Different investments have different specific features
However, the above advantages do not apply equally to all forms of indirect real estate investment. Consequently, it is important to understand the potential advantages and disadvantages of individual investment vehicles. In many cases, investors include real estate stocks (or real estate ETFs) in their portfolios. However, these not only correlate fairly closely with developments on the real estate market, they also mirror the frequent ups and downs of the stock market to some extent. As a result, shares in listed real estate companies may at times trade at a discount to their book value, i.e. the fair value of the portfolio of property they own. In the case of real estate crowdfunding, which is also popular, annual returns are secure in that they take the form of a fixed interest rate – but investments are usually structured as subordinated loans or bonds. In such cases, investors do not benefit from any increases in the value of the properties they indirectly own, nor do the investment products themselves offer reliable protection against inflation. In addition, investors run the risk of losing their entire investment if the property developer has to file for bankruptcy or the project runs into difficulties.

Funds – analogue or digital?
A traditional real estate mutual fund, in comparison, offers the opportunity to benefit from rising asset values, combined with a lower correlation with developments on the stock market – plus annual distributions. Nevertheless, it is largely Gen Xers and Baby Boomers who invest in property funds. Among younger investors in particular, funds frequently have a somewhat fusty image, triggering associations with bank counters and stuffy investment advisors in suits and ties.

Nowadays, however, it is also technically possible to tokenize fund investments (and loans). Real estate assets can be deposited in digital form as security tokens, which are subsequently stored in an investor’s wallet and – at least in theory – can be transferred as freely and in as decentralised manner as cryptocurrencies. Unlike Bitcoin, though, the token always has an intrinsic value, which is why it is likely to be much less volatile. Currently, a legal framework is being developed in Germany to make this form of “virtual” real estate investment freely tradable. If successful, this will allow the real estate fund industry to reinvent itself and become more attractive to a new generation of investors.

ESG moves to the top of the agenda
Another aspect that is gaining in importantance, especially among younger investors, is ESG (Environment, Social, Governance). Accordingly, investments should not have a negative environmental or social impact. Then there is “impact investing”, which goes even further and focuses on the positive impact and added value of an investment. In the real estate sector, too, a growing number of fund managers are choosing to develop sustainable products and include them in their portfolios. And this is about more than merely ensuring that new properties are built to the highest KfW energy-efficiency standards and are more environmentally-friendly in day-to-day operation. There is also the question of how densification projects in already built-up areas can be delivered as efficiently as possible. Social aspects are equally important. After all, the issue of affordable housing is one of the most pressing issues of our time and is of major relevance to society as a whole. And that is precisely why some fund managers have already started to include subsidised housing units in their portfolios, with very tangible economic benefits: rent-capped and subsidised rental housing is almost always guaranteed to be fully leased – which in turn guarantees stable cash flows for investors.

Prices for multi-family apartment buildings continue to rise

New report on the German multi-family investment market:
B and C cities gain momentum
Multi-family properties hold their value despite the pandemic and the new regulations on the horizon

The good news is that the volume of transactions involving apartment buildings in Germany remains stable. At EUR 22.8 billion, the transaction volume in 2020 was around 1.1 per cent down on the previous year’s figure, compared to an 8.4 per cent rise in 2019. Shrugging off the impact of pandemic-related restrictions, 2020 scored the second-highest transaction volume on record. This is one of the key findings in the recently published second edition of SCHICK IMMOBILIEN’s residential investment market report. This comprehensive study analyses the latest developments on the multi-family investment market in Germany’s 50 largest cities and is based on data for transactions involving multi-family and mixed-use residential and commercial buildings – apartment buildings – from municipal appraisal committees.

Berlin remains by far the biggest apartment building market
According to the SCHICK IMMOBILIEN research, the number of transactions concluded in 2020 declined by about 5.9 per cent compared with the record figure for 2019. The study’s analysis of data on 12,666 transactions concludes that the largest declines were registered in Germany’s Top 7 cities, where the number of transactions dipped by 8.7 per cent to 3,074. Berlin registered by far the most apartment building transactions in 2020. The German capital successfully bucked the national trend. Despite new regulations, rent caps and the expropriation debate, the volume of transactions rose by 6.7 per cent to EUR 5.15 billion. In Munich, Hamburg, Frankfurt, Cologne and Düsseldorf, transaction volumes were down, in some cases by double digits. Only Stuttgart recorded a significant increase of 35 per cent.

Transaction volumes in Germany’s Top 7 cities in 2020 (in EUR bn)

Growth in B and C cities
Germany’s B cities enjoyed a 2020 that will live long in the memory. The number of transactions increased by 0.7 per cent, while transaction volumes rose by 18.5 per cent to EUR 6.3 billion. Above-average demand for multi-family properties was registered in Wiesbaden, Nuremberg, and Bremen. Of the 14 surveyed B cities, Bochum, Essen, and Duisburg recorded declines. These figures illustrate that the focus of multi-family investment has shifted from Germany’s Top 7 cities to its B cities.

Transaction volumes in Germany’s B cities in 2020 and year-on-year change

City	2020	Change
Dresden (EUR mn)	1,217.15	+33.0%
Leipzig (EUR mn)	935.9	+1.0%
Nuremberg (EUR mn)	606	+70.2%
Hanover (EUR mn)	474.1	+10.3%
Dortmund (EUR mn)	473.9	+25.2%
Wiesbaden (EUR mn)	429	+71.5%
Essen (EUR mn)	422.2	-6.8%
Duisburg (EUR mn)	348.4	-6.4%
Mannheim (EUR mn)	337	+25.7%
Bonn (EUR mn)	254	+5.4%
Bremen (EUR mn)	233.8	+57.9%
Karlsruhe (EUR mn)	234	+4.9%
Münster (EUR mn)	204.8	+7.6%
Bochum (EUR mn)	145	-19.0%

Prices continue to rise
Strong demand for apartment buildings caused prices to rise again in 2020. The median purchase price for an apartment building in 2020 was EUR 2,104 per square metre of living space, an increase of 10.5 per cent. Nevertheless, the range of purchase prices is particularly broad with buyers in Dessau, Gera and Gelsenkirchen paying around EUR 750.00 per square metre, while properties in Munich (EUR 7,300/sqm), Frankfurt (EUR 4,395/sqm) and Wiesbaden (EUR 4,005) sold for the highest prices.

Depending on the city, location and condition of an apartment building, achievable gross initial yields ranged from 8.6 per cent to 2.3 per cent, with price-to-rent ratios anywhere between 11.67 and 43.0. Rents for existing apartments increased by an average of 2.9 per cent across the study area. It is notable that rents in the Top 7 cities (+2.7 per cent) rose at a slower pace than rents in the B cities (+2.9 per cent). Buyers of multi-family properties can expect the greatest potential for rent increases in Lübeck and Karlsruhe, where existing rents rose by 5.9 and 5.3 per cent respectively. The peak rent for a newly built apartment averaged EUR 15.36/sqm. This represents a 2.9 per cent increase over 2019. Vacancy rates of 0.2 per cent in Munich and Frankfurt, 0.3 per cent in Freiburg and 0.4 per cent in Münster confirm the particularly strong demand for rental housing in these cities.

The research also confirms that the pandemic has had a minimal impact on the multi-family investment market, which has proven extremely robust. And the trend toward higher prices has continued in recent months with initial nationwide data for 2021 indicating that the number of transactions in the multi-family property market is again set to climb slightly this year as transaction volumes increase due to rising prices.

Prices for multi-family properties in the ten most expensive cities in 2020 (in EUR/sqm)

Would you like more information? Then drop us a line to info@schick-immobilien.de and we will send you a copy of the hot-off-the-presses “Zinshausmarktbericht Deutschland”.

News

Pre-emptive purchase rights ruled illegal

In a sensational ruling, the Federal Administrative Court has quashed Berlin’s policy of pre-emptive purchase. According to the Court, the assumption that the sale of an multi-family property in a designated neighbourhood protection area after the stipulated seven-year period could lead to the displacement of tenants does not provide sufficient justification for Berlin’s building authorities to exercise their pre-emptive purchase rights. The new judgement is a clear victory for many property owners in Berlin. In addition, many of the Abwendungsvereinbarungen (“aversion agreements”) concluded between district authorities and property owners will now also be subject to scrutiny. The ruling will have two consequences: In the short term, authorities will make less frequent use of their pre-emptive purchase rights. In the long term, federal lawmakers are likely to revise the existing legislation and will probably even strengthen municipalities’ rights of first refusal.

Tax on inhabited housing under discussion

The debate surrounding proposals to levy a tax on inhabited housing is intensifying. The tax, levied on rental income, would be payable on capital gains from rental real estate. The tax has history and was previously in force between 1923 and 1944. Now, Berlin’s politicians are calling for it the tax to be reinstated as an alternative to the expropriation of housing companies owning more than 3,000 rental units in the city. A tax on inhabited housing would impact all owners and landlords, irrespective of the number of housing units they own, and would also have a significant impact on loan-to-value ratios and current mortgage financing practices.

Berlin aims to build more

The three potential coalition partners in Berlin are still haggling over the political details of the new Senate, but they are already sending out clear signals about residential construction and look likely to introduce a percentage cap on the construction of new condominiums. Accordingly, at least two-thirds of all new apartments will have to be built for the rental market. The Green Party and left-wing Die Linke have even called for a rental housing quota of 80 percent. In addition, they want 50 percent of all new apartments to be rent-controlled and subsidized. Combined with ongoing discussions about new construction in Tegel,

Dear Reader,

Inflation, rising prices and new regulations – landlords and property owners already have enough on their plates, but the real issue that will dominate the residential real estate sector over the next few years is sustainability. Anyone who owns and rents out a property will have to keep a closer eye on the carbon footprint and energy-efficiency of their buildings and individual residential units. This raises many questions, and not just financial ones. Where can landlords and owners turn for support with their energy-efficiency refurbishments? Which measures are mandatory and which simply make good business sense? And what can owners of older properties do? You can read the answers to these questions – and, of course, interesting facts about inflation, rising prices and new regulations – in this latest WID newsletter.

Read on and stay informed!

Jürgen Michael Schick and Dr Josef Girshovich

The homebuyers of tomorrow

There’s no way of sugarcoating this: landlords are not particularly popular in Germany. Landlords are widely regarded as merciless profit maximisers, a perception that is also widespread among the country’s politicians. In reality, however, the clichéd image of landlords rarely corresponds in any way with reality. Around 60 per cent of German rental apartments are owned by private buy-to-let landlords. In fact, there are around seven million landlords in Germany and these come from a broad cross-section of the population and from all age groups. Landlords also mirror the overall structures of German society in terms of asset and income distribution. Against this backdrop, it is therefore all the more interesting that there have been certain shifts among investors in recent years. Extrapolating these trends provides valuable information on developments in the landlord landscape in years and decades to come.

Real estate investors are getting younger

It is noticeable that landlords are entering the rental apartment market at an ever earlier age. We, for example, are seeing a growing number of investors under the age of 30 buying rental apartments. Understandably, younger professionals may only have been in their jobs for two to three years and will likely have smaller budgets at their disposal. Nevertheless, low interest rates mean that long-term financing remains accessible and affordable. With a deposit of around ten per cent, it is possible to buy an entry-level rental apartment for around EUR 200,000 to 250,000 that will often even generate monthly returns from day one.

Mortgage banks, savings banks and insurance companies like it when young people decide to invest in rental real estate – even more so than when young people decide to fulfil their dream of owning their own home at an early age. After all, what many people may not be aware of is that banks commonly distinguish between mortgages for buy-to-let investors and for owner-occupiers. And the fact that banks make this distinction is quite understandable: owner-occupied homes are, above all, a consumer good, while rental apartments are first and foremost an investment asset.

New joint mortgage models

Irrespective of the average age of homebuyers, there have also been some changes in the people coming together to buy property in recent years. Typically, real estate buyers have long been older couples on higher incomes looking for a tax-efficient investment to fund their retirement and deliver healthy returns on their equity. In most cases, these traditional buyers have been able deploy significant cash reserves having received maturity benefits from life insurance policies or home savings contracts.

Make way for granny and granddaughter, sisters, business partners

Just as our society has become younger and more modern in recent years, the range of people coming together to buy residential real estate has also changed. A growing number of women, for example, are buying collectively to establish an independent financial foothold, while more and more sisters are investing in rental apartments and thereby doubling their equity. It is not uncommon to see multigenerational investments as well. When grandmothers buy an apartment with their grandchildren, this can create significant benfits in terms of inheritance and tax law.

Increasingly, colleagues and acquaintances are joining together to form civil law partnerships (GbRs) in order to jointly invest in property. One major advantage of such an approach is that if one of the partners leaves at a later date, it is the shares in the GbR that are sold rather than the property itself, and this is not subject to real estate transfer tax. In addition, the sale of shares in a GbR puts personal relationships under far less strain than is typically the case with the sale of a jointly owned property.

Right now, it is difficult to identify a clear trend in terms of the occupational groups in such joint ownership models. Among white-collar workers, there is certainly a tendency for academics to invest in rental property; among the self-employed, the proportion of craftsmen is also high. Across the board though, educational attainment is far less important than possessing the insight and willingness to invest private capital outside statutory pension schemes and to take advantage of low interest rates as a key financing lever.

Minimum income limits

The same basic minimum financial requirements apply to all private property investors. For singles, the hurdle to enter the real estate market is a net income of around EUR 2,500 per month; for couples, it is EUR 3,500. This is largely because of the models used by banks to calculate the cost of living. Banks want to be sure that after all costs have been deducted prospective buyers will have at least EUR 200 to 300 left each month before they agree to finance the purchase of a buy-to-let apartment. Similarly, banks get nervous if a buyer is less than ten years away from the statutory retirement age. The size of the cash deposit needed then rises exponentially with each additional year of life in order to meet the requirements of the Residential Real Estate Credit Directive. Both parameters are directly linked to the age of buyers, the bulk of whom are between 30 and 55.

Older buyers want larger apartments, younger buyers are open to risk

When it comes to age, it is also interesting to note two clear trends in buyer behaviour. First, the older the investors, the larger the properties. In particular, dual-income households, particularly couples who have remained together into their later years, tend to have more equity and higher incomes, which allows them to make larger investments. The fact that they are rapidly approaching retirement age also plays a decisive role. Anyone who invests in rental apartments later in life is probably already planning for the rental income this will generate when they buy, which means they tend to opt for larger properties.

Younger buyers, however, are not characterised by size of the properties they invest in, but by their willingness to accept a higher level of risk. This is presumably due to their greater affinity for investments in shares and digital capital investments, together with a certain age-related recklessness. Above all, thanks to the increase in financial advice on social networks and podcasts, awareness of real estate as an investment asset has risen significantly among the younger population. We therefore assume that the quota of private buy-to-let landlords in Germany will continue to grow and become younger in years to come, despite the many regulatory hurdles that stand in their way.

What does the future hold in store for property owners?

An interview with Jakob Mähren, CEO of Mähren AG

Question 1: Federal elections are coming up in Germany and it is becoming apparent that refurbishments will be subject to far more stringent energy efficiency requirements in the future. What does this mean for residential property owners?

There’s certainly a lot in store for property owners. I see two major areas that they will have to work on. Firstly, expertise. Private owners will have to familiarise themselves with a host of new regulations. And these won’t only apply to refurbishments but also to the replacement of equipment that is actually in perfect working order. Anyone who thinks that they will be able to carry on heating an apartment building with oil for much longer is in for a big surprise. Which brings me to the second point: Owners and landlords are going to face considerable additional costs over the next few years, costs that simply haven’t been on their radar. Additionally, interest rates are starting to gradually rise again. We will see whether property investments will remain quite so easy to finance.

Question 2: Some business models will no longer be profitable because of higher maintenance costs, but what would be the best way to profit from this situation in your opinion?

Owners apartment buildings will definitely have to make sure they get their sums right from now on. I see real risks in terms of properties that don’t generate more than 4% to 5% rental returns because yields will continue to shrink over the next few years. At the same time, you also need to keep an eye on property prices. Over the past twelve years, real estate prices have only moved in one direction: they have skyrocketed. As a result of this alone, anyone who bought an apartment or an apartment building ten years ago has experienced a significant increase in value. Since many banks will have to adjust their lending values because of the additional investment costs, some owners should think about whether now might not be the right time to sell after all.

Question 3: You have been active in the real estate sector since 2002. Has there ever been a similar market situation in the past 19 years?

The German real estate market has changed substantially over the last few years. And before that, it had been slumbering for years. The state was the biggest landlord, so there was hardly any residential market to speak of. However, since 2013, we’ve seen a steady increase in regulations. Two rental price brakes, other rent regulations, neighbourhood protection areas, modernisation levies, the failed Berlin rent cap, expropriation debates, and now the Building Land Mobilization Act – it is clear where we are headed. The state is constantly sticking its oar, and that’s not going to change anytime soon – on the contrary. Of course, all of this has a significant effect on the market. You have to comply with more and more laws, which requires significant professionalisation on the side of property owners. And then you have to keep in mind that prices have stopped rising as fast as in recent years. The German real estate market is settling back into calmer waters.

Question 4: At the moment, there are more than 2,000 residential units in your portfolio. Is it currently still worth investing in real estate in Germany?

That’s a question I can’t really give a blanket answer to. For some owners, now will be the right time to sell. For others, it might still be worth pursuing new investment opportunities. It depends on several factors. First off, you have to be able to act professionally – we’ve already talked about that. Secondly, you have to look at how high the rental yield is because yields look like they will continue to fall for a little while yet. And, last but not least, you have to look at how much equity you have available or invested. The higher your LTV ratios, the more likely it is that it will make sense to sell now. You can ride the wave and take the asset price gains. We will see how long this window of opportunity stays open.

Question 5: As a Berlin real estate investor, you started your investment career in Berlin. Would you do the same today?

There are worlds between the Berlin of today and the Berlin of 20 years ago. When I started out, Berlin was demolishing buildings and tearing down houses. The Senate assumed that the population would stabilise at around three million. Today, you can’t even imagine that anymore – Berlin is well on its way to having a population of four million. So, the fundamentals are completely different now compared to 20 years ago. Today, real estate prices are so high in many parts of Berlin that properties are more like trophies. Some investors have bought buildings or apartments just because they absolutely had to have a property in Berlin, not because it was a good investment per se. This has little to do with investing and profitability. Whether and for whom investments are still worthwhile is a question that needs to be examined very carefully on a case-by-case basis.

Question 6: Considering the current state of the German real estate market, what makes a good investment?

Rents are generally still very low in Germany. For investors, this means that they have to put in a lot of work to leverage potentials, which isn’t always easy, especially in view of increasing regulation. So, I would advise private investors to look at what they want to achieve over the next few years. If they want the property to take care of itself, they need a lot of equity. And if they want to enter the market professionally, they need a lot of experience and patience. But that doesn’t mean there are no good investment opportunities out there. I just assume that the best investments are now all very long-term. If you’re planning to sell in the near future anyway, for example because the ten-year tax period has expired, you might want to do it sooner rather than later.

Question 7: What is your opinion on the development of the German real estate market over the past two decades?

In recent years, the German real estate market had a lot of tailwind and made massive gains. Now, the market is slowly running out of steam, and that’s understandable. Prices have risen sharply. Interest rates, on the other hand, can’t fall any further. Additionally, the German and state governments have made it unmistakably clear that they are going to ramp up the regulations that govern the market. Private investors have made sizeable profits in recent years, now we are entering a phase of consolidation.

Question 8: Do you have any advice for young entrepreneurs who want to follow in your footsteps?

Just do it. There isn’t a right or wrong moment to start a business. An entrepreneur is someone who acts. If you want to work with real estate, you need to have a good sense for the latest developments and trends. That means you have to read the news and keep your eyes open. You get the most important information by being curious and always asking yourself what people want and need. Then you have to do the math and see if a project is worthwhile.

Question 9: Over the last year, the U.S. dollar has lost about 10% against the Euro while real estate prices in Germany have been climbing steadily. Does that make it more worthwhile for American investors to buy real estate in Germany?

The United States is still by far the largest and most exciting real estate market in the world. As an investor, you experience a different dynamic and scope there, simply due to the size of the country and the multitude of markets across the country. However, looking at exchange rates alone is nowhere near enough and I would strongly advise against relying on it. It’s like any real estate investment: you have to examine the properties individually and then put them in context with the microlocation, the macrolocation and other economic and demographic factors and trends. In this respect, the American market is no different from the German market.

Question 10: Real estate prices are also rising in America. Are there parallels from which an investor can learn something?

We are actually invested in the U.S., mainly in the Sun Belt, which is the southern part of the United States. What you can learn from the U.S. is the classic rules of supply and demand. In the U.S., there is little regulation, which enables both the market and the people to actively and flexibly adjust their budgets and requirements. Back here in Germany, we could definitely learn a thing or two from the U.S, including that it’s easy to over-regulate a market, but there’s no way you can ban entrepreneurs in a free society.

Real estate investors could be among the winners from inflation

Over the summer, inflation jumped sharply in a host of countries – including Germany. This was to be expected, as consumers are now spending to make up for lost time as coronavirus lockdowns ease and vaccination campaigns ramp up. However, supply cannot always match the increased consumer demand. That is a reality that is now being felt by everyone and anyone who wants to book a trip or buy certain goods, for example.

Economists are now wondering whether this is just a brief inflationary flare-up or if it is a phenomenon that will be with us for the long term. The European Central Bank (ECB) has already taken the precaution of relieving itself of monetary policy pressure and adjusted its inflation target upward. Instead of “below, but close to two percent” as before, the new target is “two percent”, with significant medium-term upward or downward deviations both being considered equally undesirable. This is definitely a paradigm shift. And the signal the bank is sending out couldn’t be clearer: For the time being, at  least, there will be no monetary policy response from Frankfurt to a potentially permanently higher level of inflation.

Most leases are index linked

As a long-term real estate investor, however, I am relaxed about a sustained inflation scenario – provided it remains within moderate ranges and we don’t enter a phase of hyperinflation, for which there are no indications thus far. Commercial real estate leases are generally indexed against inflation, i.e. they are regularly adjusted in line with general consumer price increases. Rental income therefore increases – with a slight time lag –in sync with inflation. The prerequisites are tenants with strong credit ratings and economic strength whose sales can also keep pace.

Real estate investors can actually be among the biggest winners from inflation if they have concluded long-term loans at fixed interest rates and are spared rising borrowing costs. Since the beginning of the year, yields on the government bonds have definitely risen as a gauge of market interest rates, mainly reflecting the healthy recovery of economies across Europe. The ten-year German federal bond is currently yielding around minus 0.3 per cent, compared with minus 0.6 per cent at the turn of the year.

Persistently higher inflation is by no means a given

However, as the ECB extends its loose monetary policy into the foreseeable future – especially as the central bank has learned from the mistakes made when ending its fiscal and monetary stimulus programmes prematurely in the wake of previous economic crises – market interest rates are likely to develop less dynamically than price increases even if inflation does take hold. As a result, real interest rates will continue to fall and real estate will remain a sought-after asset class among investors. If inflation-indexed rental income increases, leveraged yields would rise in this scenario even if borrowing costs also increase at some point as leases and loans are extended.

The question, however, is whether inflation will actually continue to rise. In terms of official consumer price indexes, I would not be so sure. We have already seen in recent years that the heavily forecast wave of inflation has failed to materialise, even though monetary policy conditions were in place, at least according to pure monetary doctrine: very low interest rates, an expansionary monetary and fiscal policy, a robust economy running at the limits of its capacity, virtually full employment (at least in Germany and some other countries). Against these pressures, technological progress, demographic trends and a highly competitive economy have ensured comparatively high price stability. This structural environment has not changed.

Consumer prices alone do not fully reflect reality

There is certainly nothing wrong with questioning whether official consumer price indexes fully reflect reality. In many ways, the basket of goods used as the basis for the Harmonized Index of Consumer Prices (HICP) does not adequately represent long-term purchases. And this applies all the more to investments in assets. Whether you consider valuations of securities, investments in tangible assets or the prices for owner-occupied housing – all have developed far more dynamically in recent years than the official index of consumer prices. Long-term asset accumulation for retirement should not be a luxury, although it has certainly become significantly more expensive.

Conservative real estate investors can take a relaxed view of future developments: Should inflation continue to rise somewhat, current rental income (minus borrowing costs) is likely to increase disproportionately. In addition, even more capital should flow into the inflation-proof real estate markets, causing asset prices to rise further still. Note the use of “should”, though: Structural factors also suggest that, after a brief inflationary blip, we will settle back onto the path we were on before the coronavirus pandemic disrupted everything. And that would not be bad news for real estate investors either. Hyperinflation could become an issue in the long term, but there are no signs of such a development as things currently stand.

The flatlands of Lower Saxony as an alternative to overpriced metropolitan centres

Lower Saxony offers yields of between 4.4 and 10.0 per cent

If you are among the investors that have so far restricted your investment horizons to Berlin, Munich and Frankfurt, you would be well advised to take a look at the real estate investment market in Lower Saxony. After all, there are good reasons for identifying exciting investment destinations outside Germany’s traditional Top 7 cities that offer a wide range of opportunities for buyers with different investment profiles.

In 2020, the population of the state of Lower Saxony grew by 10,000, bucking the national trend that saw the population of Germany fail to grow last year for the first time since 2010. Forecasts from the Lower Saxony State Office for Statistics anticipate population gains of up to 6.0 per cent over the next ten years, concentrated especially in and around the city of Hanover and in the area around the Volkswagen HQ in Wolfsburg. Lower Saxony is Germany’s second-largest state and boasts strong growth prospects up to 2030. According to a study from the economic research institute Prognos, for instance, the cities of Wolfsburg and Salzgitter, together with the district of Gifhorn, are among the regions with the highest economic growth potential in Lower Saxony. Even today, Hanover, Braunschweig, Wolfsburg and the districts of Gifhorn and Wolfenbüttel all have an above-average purchasing power index. Wolfsburg has the region’s highest per capita purchasing power at EUR 25,966.

The latest Lower Saxony residential investment market report 2021 from SCHICK IMMOBILIEN examines the regions between Celle and Göttingen, as investors have already registered strong interest in the region between the two cities. The report extends across the Hanover region, covering the cities of Braunschweig, Wolfsburg and Salzgitter as well as the municipalities of Celle, Gifhorn, Helmstedt, Peine, Wolfenbüttel, Hameln-Pyrmont, Hildesheim, Schaumburg, Goslar, Göttingen and Northeim. Our analysis shows that, at 1,585 properties, transactions involving apartment buildings in Lower Saxony were at roughly the same level as in the previous year. As a result, demand for apartment buildings remains above the five-year average, despite the tight supply. Although the transaction volume in 2020 was down by 11.6 per cent at EUR 1.2 billion (after an exceptional year in 2019), it still represented the second-highest transaction volume of all time.

In the ranking of the cities and districts surveyed in Lower Saxony, Hanover clearly dominates in first place. The entire Hanover region, including the state capital, accounted for more than half of the total transaction volume (EUR 667.5 million). Records were also set in the districts of Gifhorn, Wolfenbüttel and Helmstedt, where investment volumes were significantly higher than in recent years. Strong demand for apartment buildings also drove an 11.2 per cent increase in square-metre prices, from EUR 1,070 to an average of EUR 1,190. Lower Saxony registers a wide spectrum of purchase prices. Buyers in Northeim or Goslar, for example, pay around EUR 570 per square metre, while properties in the state capital of Hanover cost an average of EUR 2,363 per square meter, placing them at a moderate level compared with Germany’s Top 7 cities.

Depending on the region, price-to-rent ratios range from between 10 and 23 times the net annual rent, generating yields of between 4.4 and 10.0 per cent. Rents for existing apartments have risen by 3.4 per cent across the study area, from an average of EUR 6.70 to EUR 7.00 per square metre. The highest in-place rents are registered in Göttingen, at EUR 9.73 per square metre. Buyers of multi-family houses in Helmstedt can expect the greatest upside rent potential with rents already rising by 6.6 per cent in 2020 alone. At the top end of the market, rents in newly built apartments have risen to EUR 12.86 euros per square metre, representing a year-on-year gain of 6.0 per cent. The latest vacancy rate data reveals that demand for apartments is particularly high in Wolfsburg, Braunschweig and Hanover. The vacancy rate is currently 1.4 per cent in Wolfsburg and 1.8 per cent in both Braunschweig and Hanover.

The results of the Lower Saxony residential investment market report show that the regions surveyed in Lower Saxony exhibit significant potential for value appreciation. Buyers who have so far concentrated their investments on the Top 7 cities should certainly broaden their focus to Lower Saxony. There are, after all, a wide range of attractive investment opportunities in the region, including in Hanover, Braunschweig and Helmstedt.

Download a PDF of the Lower Saxony residential investment market report 2021 (in German) here:

https://schick-immobilien.de/immobilienmakler-niedersachsen/

News

De facto ban on condominium conversions

With the adoption of the Building Land Mobilisation Act into law, Germany’s 16 federal states can now introduce further measures to restrict the conversion of rental apartments into condominiums in tight housing markets. In particular, the subdivision of houses with more than five residential units will now be subject to a municipal approval. In practice, this requirement for municipal approval is tantamount to a ban on condominium conversions, as there are very few, and very narrow, exceptions. These include, for example, a requirement to approve conversions if two-thirds of a building’s tenants want to buy their apartment. In reality, this will very rarely be the case. Experts predict that the tightening will further reduce the supply of apartments on the real estate market over the next few years and that, as a result, prices for new apartments and apartments that have already been approved for conversion will continue to rise.

The rise of the ’burbs

The suburban and exurban areas of Germany’s major metropolises are becoming ever more attractive. As a result of the coronavirus pandemic and rising prices for condominiums in more central areas, a growing number of families are opting to move to more peripheral neighbourhoods. This trend has not only boosted demand for residential properties for sale in the suburbs, but increasingly also townhouses and single-family homes for rent. Property owners in the suburbs can, as a result, expect increased demand, with not only property developers and end consumers but also investors increasingly interested in such properties.

Landlords need to be more sustainable

It is already clear that sustainability and climate change mitigation in the residential real estate sector are set to become increasingly important across Europe over the next few years. In particular, owners and landlords will increasingly need to replace aging heating systems, insulate the facades of their buildings and even generate their own building energy. Although subsidy programmes are being launched to support the necessary retrofitting measures, implementation will be cost- and time-intensive, particularly for smaller landlords. In France, for example, owners of low energy-efficiency apartments – levels F and G on the energy certificate – will no longer be allowed to rent them out from 2028. Based on developments in other European countries, landlords in Germany should be prepared to expect mandatory energy refurbishments in the near future.

Dear Reader,

The current legislative period is drawing to a close and Germany’s political parties are gearing up their pre-election campaigns. So, there’s no better time to look back and review the developments that have impacted our industry over the past few years. Unfortunately, rather than having opened the door to lighter regulation, Germany’s politicians have repeatedly legislated to introduce ever more stringent regulations that have affected every facet of the industry. Yes, lawmakers have rediscovered their penchant for interfering in the housing industry, but all too often with the wrong measures. And in the end, it is the tenants who foot the bill. It is clear that we need a new approach – away from stoking divisions between tenants and landlords, and towards a joint dialogue on what contemporary housing should look like, how home ownership can be strengthened and how much housing is worth to us as a society.

Read on to find out more!

Your

Jürgen Michael Schick and Dr Josef Girshovich

Engaging in dialogue rather than playing the blame game

Attacks on real estate companies have become a regular occurrence in Germany’s major cities. Vehicles are set on fire, car tires are punctured, shop windows are smashed, facades are vandalised and employees are threatened and intimidated. My company has also been targeted on an almost monthly basis. Typically, vandals scratch and spray graffiti on our windows, sometimes they even smash them. The signs we put up to advertise sales are regularly torn down and destroyed. The nationwide hostility against our industry reached a disturbing climax when a real estate company’s employee was attacked and injured in her apartment in Leipzig. In most cases, we will never know what motivates such attacks or find out who the perpetrators are.

And because these crimes usually involve damage to property, the outbreaks of violence can easily be dismissed as the youthful indiscretions of a handful of idealistic to ideological activists. As a result, many of the companies that have been targeted have decided it is better to stay quiet, say nothing, and decline to press charges. Drawing attention to the attacks, companies reason, would only embolden the perpetrators and attract copycats.

At the same time, I can certainly understand many people’s current sense of frustration. There is a housing shortage in Germany’s largest cities and conurbations. Middle-income households, and public-sector workers in particular, frequently find that a new apartment is beyond their financial reach. Of course, that is frustrating for people who want to move into a new home with their partner, or who are looking for a bigger apartment because they want to start a family. People looking to downsize, maybe because they have separated from a long-term partner, are just as badly affected. Many have no choice but to stay where they are, sharing a home with their former partner. For large swathes of the population, moving home is no longer an affordable option.

There are two things that worry me most right now. First, that some people’s frustrations are boiling over into blatant aggression and, second, that the scapegoats – the real estate companies – have already been so clearly identified. The housing industry is nothing more, and nothing less, than a part of the wider fabric of society. It cannot offer a panacea or create more and more affordable housing all on its own. Nor should it serve as a scapegoat for more universal problems. What we need right now is a dialogue on how we, as a society, can find our way out of this spiral of mutual recrimination. We don’t need blanket judgements and we shouldn’t be hoodwinked by simple solutions. By that, I mean we shouldn’t be incited by the latest demands to expropriate private housing companies, demands that fuel hostility and that a number of political parties have thrown their weight behind. I also mean we shouldn’t accept the arrogant behaviour of some real estate entrepreneurs. The following applies equally to everyone: There is nothing to be gained from finger-pointing. Even more so, seeking to allocate blame will not do anything to ease tensions on the housing market.

There are numerous initiatives seeking to facilitate constructive communication and discourse on the current housing and affordability crisis on the one hand and, more broadly, on the future of urban coexistence on the other. But these initiatives and associations are often small-scale, with narrowly defined goals and interests. Looking at these initiatives, it is difficult to identify a common language or a shared platform. This is where the real estate industry as a whole is called upon to build a platform for exchange, a platform that can facilitate dialogue over the next few years and that can reach out to engage people in the cities.

It is not too late to stop the current radicalisation process. We just need to deploy compelling arguments to make sure that we address the challenges of affordability and housing shortages within the bounds of civil society. But it would be foolish to believe that it is only “the others” who need to make a move.

Berlin is comfortable in its outsider role

Berlin’s office market has been coping surprisingly well with the fallout from the coronavirus pandemic. Although many employees are still working from home, office take-up has remained fairly stable. Despite numerous completions, the vacancy rate was up only marginally, by half a percentage point to 1.8 per cent, at the end of 2020. This is among the findings of a survey conducted by bulwiengesa for the latest edition of the Berliner Sparkasse market report, which also finds that prime office rents remained stable at EUR 39.00/sqm. The Berlin office market’s remarkable stability is, at least in part, due to its specific historical situation, combined with the city’s diversified economic structure, which is proving more resilient in this crisis than in previous crises. And what applies to the office market is equally true of the city’s residential real estate market.

Compared with the markets in Germany’s other top 7 cities, Berlin’s office market occupies a relatively comfortable and quite unique position. Offices are still in short supply in the capital. No other top 7 city has less office space per capita. Cities such as Frankfurt and Munich, for example, with their many commuters, have more than twice the space available per inhabitant. For historical reasons that stretched over decades, Berlin was unable to develop large inbound commuter flows, so there are practically no reserves on the office property market.

But this structural shortage of office space is only one explanation. The other is Berlin’s distinctive economic structure. Berlin has long been Germany’s number one start-up hub. The New York Times once referred to the city as “Silicon Alley”, cheekily echoing the name given to the undisputed hotbed of tech in the United States, and not for nothing. During the pandemic, as we have seen, the city’s economy is one of its biggest advantages. Historically, the start-up sector has been sensitive to economic cycles, but during this crisis in particular, many start-ups were not only able to weather the storm, they exploited it as a growth accelerator. A host of online fashion stores and food delivery services, for example, have emerged stronger than ever before. And as these companies grow, so does their demand for office space.

Equally crisis-proof (and heavily represented in the capital) is the public sector. The Cologne Institute for Economic Research (IW) calculated that Berlin had significantly more state and municipal employees per inhabitant than any other federal state in 2018. And that is not even including federal employees. In total, there are almost 280,000 public sector employees in Berlin, equivalent to almost one in five employees subject to social security contributions. All of this also supports a veritable troop of other industries that depend on government business, including the media, trade and industry associations, consultants, law firms and many more besides. Being the seat of government serves as an anchor of stability for Berlin, compensating for the lack of large national and multinational corporations that are at home in other capitals.

The robust health of the office market has a positive knock-on effect on the city’s residential market. The high level of job security in the public sector and in downstream services means that there is a significant supply of crisis-proof tenants and relatively secure rental income. Moreover, the “capital” as a place to work has lost none of its appeal for newcomers, nor has its status as an IT hub diminished – quite the opposite. Berlin is and will remain a city that attracts talented young professionals, who, in turn, have a positive impact on housing demand. The only cloud on the horizon is Berlin’s reliance on tourism, which has, understandably, been hard hit by the pandemic. Industries that depend on large numbers of tourists are suffering badly from the ongoing lockdown restrictions. Nevertheless, one thing should give them hope: Berlin will quickly attract visitors again.

Women as real estate investors

The fact that women invest differently than men is no secret. Women’s investment decisions tend to be based more on security, sustainability and transparency. In particular, however, women want to know that they can trust their contractual partners and that, once they have made their investment decision, there will be no nasty surprises: no hidden small print, no additional fees, and no risks that are brushed under the carpet only to emerge later on. Six words they never want to hear are “But you should have known that”.

Now, bear in mind these clear and comprehensible criteria and you are sure to be surprised when you consider the proportion of women who invest in real estate. Only about one-third of all residential purchases made by single individuals are made by women. If women buy real estate, then in most cases it is a joint purchase with their partner. As an investment asset, it would certainly seem as if individual women have little interest in apartments.

For me, this raises the following question: Are women fundamentally less interested in real estate investments than men? Or are many real estate investments so non-transparent and burdened with footnotes that they do not meet women’s expectations of contractual reliability?

Because one thing is clear: Investments in real estate are inherently long-term, which means they are significantly less volatile than stocks and other investment assets, and they are generally highly transparent. Buying an apartment as an investment is, basically, entirely straightforward. Once the purchase has been notarised, the buyer is nothing more and nothing less than the owner of an apartment. Accordingly, residential real estate should be consistently attractive for female investors.

More and more companies are actively embracing the issue of women in leadership roles. In 2021, financial independence for women is no longer a lofty goal, it is the norm. Of course, many issues still need to be resolved, including the gender pay gap and discussions about the introduction of a quota for women in management positions. Irrespective of this, however, the real estate industry should address the question of whether it is making the right offers to female investors and buyers. Fund initiators, banks, insurance companies and many crowd investing platforms have already made significant strides in this regard and have a correspondingly higher proportion of female customers. The fact that this is not the case in real estate in 2021 does not cast the real estate industry in a good light. Not only does it reinforce the industry’s reputation as a men’s club, such a half-hearted approach to the growing number of financially independent and well-educated women who could represent more than 50 per cent of the industry’s potential customers makes no business sense whatsoever.

Blocking homeownership and lowering property prices for the state

Take a look at the Building Land Mobilisation Act, which was passed after its second and third readings in the Bundestag on Friday and you will quickly realise that the government wants Germany to remain a country of tenants. The last thing Germany’s politicians want is more homeowners. After moves to support homeownership aspirations in recent years, including the help-to-buy scheme for families and reforms to split real estate agent commission payments equally between buyers and sellers, I have to say I am quite shocked. We had already taken the first right steps to promote homeownership. The next steps should have been to exempt first-time buyers from real estate transfer tax and equity guarantees. Particularly in times of low to negative interest rates, these would have been the most appropriate instruments to boost homeownership rates, both for owner-occupiers and buy-to-let investors.

The government, however, has different ideas and its amendments to the German Federal Building Code read like a state-imposed tenant manifesto. I would like to focus on two aspects in particular because, for me, they clarify the two faces of the law – and they need to be understood in context.

On the one hand, the Building Land Mobilisation Act restricts the purchase of rental condominiums. Here, the federal government is playing on the persistent prejudice that tenants are increasingly threatened with eviction if their apartment building is converted into a condominium complex and their apartment is sold to a new owner. But is this really true? Most metropolitan areas with tight housing markets have strict regulations to protect tenants: a protective shield far beyond the scope of traditional tenant rights applies after the sale of any apartment and includes a ban on evictions for own use for seven, ten and sometimes even 15 years. It would be impossible to provide longer-term tenant protection, unless we want to see life-long guaranteed tenancies.

But if this de facto ban on converting rental apartments into condominiums is not intended to protect tenants, what is its purpose? To find out, it is worth taking a look at one of the requirements that need to be fulfilled before any privatisations can be approved. The new law states that an apartment building may only be subdivided if two-thirds of the tenants in a multifamily building exercise their right of first refusal. Since this hardly ever happens in practice, however, it means that tenants have effectively been deprived of any opportunity to buy their own apartments.

And now the second point, the flip side of the coin if you will, which seeks to restrict the private ownership of residential property. While dashing the hopes of potential tenant buyers, the Building Land Mobilisation Act also makes it easier for municipalities to exercise their rights of first refusal. First, the Act extends the period for exercising a municipal right of first refusal from two to three months. Second, municipalities can attempt to pay a lower price for the properties they want to acquire – they are not bound to match any price agreement concluded between the private individuals (or companies) buying and selling the property, but have the right to acquire the property at the “market value”. So, while private homeownership is being made more difficult, municipalities and state-owned housing companies have never had it easier. As the explanatory notes published by the Bundestag committee that scrutinised the legislation frankly state: “Compared to existing regulations, this will, in many cases, create a price dampening effect to the benefit of municipalities”.

The Building Land Mobilisation Act aims to make it more difficult for private investors to acquire residential property and for tenants to get on the property ladder. The major losers from these reforms will be middle-income households who cannot afford high-priced new-build apartments. In effect, the new legislation actively prevents people from making financial provision for their retirement and, as a result, actually promotes poverty among older people across broad sections of the population. At the same time, people are to be forced into a relationship of dependency with the state as their landlord. There is no other way to interpret the deliberate preferential treatment granted to the state over the individual when it comes to acquiring property. For me, the new Building Land Mobilisation Act is a damning indictment of the outgoing federal government’s social and pension policy.

News

Berlin’s rent cap overturned – plans for a nationwide cap remain

On 15 April, the Federal Constitutional Court declared Berlin’s rent cap unconstitutional. In their landmark decision, the judges in Karlsruhe found that the state of Berlin had overreached its legislative competence and confirmed that tenancy law remains under the purview of federal legislators. However, this does not mean that the spectre of the rent cap has been banished. A quick glance the election manifestos announced by the SPD, the Greens and Die Linke parties are enough to confirm that, if they get an electoral majority in September, Germany’s three main left-wing parties plan to introduce a nationwide rent cap and will permit rents to increase only in line with inflation. However, one thing is already clear: Even though their proposals for a federal rent cap law might be formally permissible, it is highly debatable whether such encroachments on existing tenancy agreements, on freedom of contract in general and on the protection of property rights set forth in Section 14 of the Basic Law would be constitutional.

Subdivisions are made more difficult, pre-emption rights are strengthened

On 7 May, after months of negotiations, Germany’s parliament, the Bundestag, passed the Building Land Mobilisation Act. The law represents a comprehensive amendment to the existing German Federal Building Code – with two controversial consequences for owners of apartment buildings: On the one hand, the conversion of rental apartments into condominiums will, in future, be subject to official approval. In principle, this means that property owners will not be able to subdivide apartment buildings with more than five units without authorisation (municipalities will also be given the right to reduce the restrictions to buildings with three units, or to increase them to a maximum of 15). Since the list of exceptions for which permission must be granted is very narrow, the restriction is tantamount to a ban: anyone who has not yet converted their rental apartments into condominiums will find it almost impossible to do so over the next few. In addition, municipal authorities’ rights of first refusal will be extended outside of designated neighbourhood protection areas. Moreover, municipalities will be given three months instead of two months to decide whether they want to exercise their pre-emptive purchase rights. In an even more significant change, municipalities will not only be able to step in and buy with the same terms and conditions agreed between seller and buyer, they will be allowed to acquire the property at “market value”. This is likely to lead to protracted legal disputes between sellers and municipalities, as sellers will now have to demonstrate that the agreed purchase price actually corresponds to the market value. There is, however, one small consolation: The federal law will need to be implemented by each of Germany’s 16 federal states – and some, including Baden-Württemberg and North Rhine-Westphalia, have already announced that they will not be making use of these regulations.

Number of building permits increases, rental price inflation stabilises – except in Berlin

With the exception of Berlin, building permit approvals are rising across Germany. Despite the coronavirus pandemic, the number of building permits issued nationwide rose to 368,400 units in 2020, a year-on-year increase of around 2.2 per cent. Over the same period, building permits and completion numbers in the German capital have fallen. In 2020, only 16,000 new units were completed – a decline of 14 per cent compared to 2019. In another concerning development, Berlin’s building authorities issued only 1,094 building permits in February 2021, around 9 per cent fewer than in February of the previous year. The knock-on effects speak for themselves: While the housing market is easing nationwide and rents are no longer rising as sharply, the housing supply in Berlin remains too low – with clear consequences for rental prices in the capital.

Apartment buildings and forward deals of the month

Office and commercial building with significant rental upside in Berlin-Lichtenberg

 This five-storey commercial property was completed in 1996. The main tenant has been in place since 1999 and occupies the entire ground floor area, plus the first and second floors. The third floor is let to an online retailer. Floors four and five are in a vanilla shell condition and are untenanted.
There are several parking spaces and an underground garage on the 4,007-sqm plot. The property is located in a commercial zone in the Berlin district of Lichtenberg.

Price: EUR 6,900,000 plus 5.95% commission (incl. VAT)

Total lettable area: 4,018 sqm

Annual net rent:  EUR 243,672

Information acc. to energy performance certificate: Not yet available / in preparation. 

(Please quote property reference 52335 when making your enquiry)

Project development of a modern senior residence complex near Schwerin

This project development comprises an assisted living complex for seniors in an attractive, green setting. The complex will feature two parallel buildings, each with two full and one recessed storey. The site measures approx. 4,120-sqm plot and will accommodate 40 residential units. If required, the development can also be acquired with an operator in place.
The property is located about 6 km west of the city centre of Schwerin.

Price: EUR 7,800,000 plus 5.95% commission (incl. VAT)

Planned area: approx. 2,800 sqm

Construction starts:  Autumn 2021

No energy certificate available as this is a new construction project.

(Please quote property reference number 52393 when making your enquiry)

Renovated residential and commercial building in central Braunschweig

This residential and commercial building was originally constructed in 1956 and comprises 13 residential and two commercial units. The half of the penthouse level overlooking the street has been converted into a residential unit and has been equipped with a 21-sqm roof terrace.
This residential and commercial building is located in the centre of Braunschweig.

Price: EUR 3,825,000 plus 7.14% commission (incl. VAT)

Lettable area: 1,297 sqm

Current annual net rent: EUR 138,960

Information acc. to energy performance certificate, residential units: energy consumption 102.0 kWh/(m²*a), energy-efficiency class D, natural gas, built in 1954.
Information acc. to energy performance certificate, commercial units: energy consumption for heating (natural gas) 202.7 kWh/(m²*a), energy consumption for electricity 62.7 kWh/(m²*a), built in 1954. 

(Please quote property reference number 52394 when making your enquiry)

Dear Reader,

In one way or another, everything is in flux: cities are transforming, but there are no apartments; the supply of housing is increasing, but so is demand; banks have become more restrictive in their lending, and yet there are more and more alternative financiers. The world is seemingly as bipolar as it has ever been, and at the same time connected in the same way as yin and yang. For this issue of our newsletter, we have therefore brought together different perspectives that reflect the broad spectrum of the real estate industry and also dare to examine both sides of the issues that matter. In addition to a look at the rising importance of alternative financiers and an exploration of the clever interplay between housing stock and new construction.

We hope you enjoy reading this issue’s interesting and informative articles.

Your JMS and JG

Interest rates are driving prices

The lower interest rates fall, the more investors flock to real estate. And the more demand grows, the higher prices rise. So, nothing surprising there, then. Daily news bulletins are full of reports about how low interest rates are driving people to invest in real estate and securities. It is equally clear where this is all heading: homeownership becomes more and more expensive with every month that passes. We’ve now arrived at the point where virtually no one can afford to buy a new-build anyway, and what housing is available in sought-after locations sells like hot cakes.

So what needs to be done to get house prices back to a more sustainable level? Perhaps guaranteed interest rates in the investment and insurance markets need to be raised? Or maybe a sudden upward base rate correction?

I am just as sceptical of such suggestions as I am of the prevailing, and very one-sided, view of real estate price growth. Nobody buys a property with cash. Every private house purchase involves banks and savings banks. For 99 per cent of the population, buying a house or condominium will be the biggest purchase of their lives. And they’ll need at least one loan or mortgage to make it happen. As I see it, then, the absolute prices of residential property are relative. They need, at the very least, to be seen in a fair relationship – to supply and demand, certainly, but above all also to the interest rate environment and the financing landscape.

Potential buyers with normal, healthy credit ratings are currently going to be charged interest rates of between 0.5 and 1.0 per cent. That is a full 2.0 percentage points less than 2015 – and 4.0 per cent less than 2011. The upshot? Financing a property purchase has never been more affordable. As an example, let’s take a mortgage with a classic 2.0 per cent repayment rate, ten-year fixed term and a total monthly payment of €1,500. Then, let’s apply interest rates of 5.0, 3.0 and 1.0 per cent. In 2011, our sample buyer would have been able to borrow €257,000. In 2015, they would have got €360,000. And today? A mortgage of €600,000. That’s certainly nothing to be sniffed at. Especially as there are now a range of help-to-buy schemes, including grants for families with children and subsidised KfW loans. What’s more, since December 2020, real estate agents’ fees have been split equally between buyers and sellers, which has cut the ‘soft’ costs associated with buying a new home. Moreover, a reform of real estate transfer tax is still on the political agenda, even if the federal government is unlikely to implement the tax cuts for first-time buyers it promised in the coalition agreement before the end of this legislative period.

In my opinion, many potential buyers back are being held back because they lack confidence in their own wealth-creating and earning capabilities. When they start to think about buying a home, they are confronted by such large and abstract figures that they start to question whether they will ever be able to pay off the largest investment of their lives. But absolute prices alone are not a meaningful indicator. We can only appreciate the true costs of homeownership by looking at the ratio between prices and interest rates. If only this were more widely understood, so many more hesitant potential buyers would make the leap into homeownership.

The rise of alternative real estate financing

The market for real estate financing is evolving. Banks, building societies and savings banks, as traditional lenders, are becoming increasingly risk-averse and more and more reluctant to finance portfolio purchases and real estate developments. A growing number of alternative lenders are now stepping up to fill the vacuum left by the banks.

Traditional lenders have become more cautious than ever before, thereby opening up new opportunities for alternative debt instruments, including loan funds and institutional investors. So far, alternative financing has largely been restricted to subordinate/junior loans and transactions with higher loan-to-value ratios. The classic financing structure typically consisted of a senior tranche of up to 60 per cent, provided by banks, building societies or savings banks, coupled with a junior tranche of mezzanine financing to bring the debt capital up to about 85 per cent. The remainder was equity.

New opportunities for lenders
Since banks are increasingly only providing loans for lower loan-to-value transactions, alternative lenders are making their move. And, as the banks realign their lending profiles, alternate lenders are benefiting from significantly lower risk exposure. Investment opportunities for lenders are also increasing. In contrast to the pre-coronavirus status quo, borrowers are not only turning to alternative lenders to finance new construction projects. Instead, alternative lenders are increasingly being called upon to finance portfolio acquisitions, another indicator of the move into lower risk market segments.

And let’s not forget another major advantage: While banks, building societies and savings banks often need weeks or months to greenlight a loan application, alternative lenders are both liquid and lean, which means they can make decisions quickly. Given the current situation – the coronavirus pandemic and lockdown restrictions – speed is often of the essence as new opportunities emerge. And alternative lenders are ready and waiting to help developers and investors strike while the iron is hot, rather than missing out as they wait for a bank to complete its sluggish loan approval process.

As result of these developments, a growing number of transactions are going ahead with no traditional bank involvement whatsoever, not even to cover the conservative senior tranche of 50 to 60 per cent loan-to-value. This presents yet another opportunity for alternative providers. Increasingly, developers and investors are looking to alternative lenders to provide all of the financing they need, i.e. ‘whole loans’. Increasingly, traditional banks are being cut of the loop entirely.

The interplay between banks and insurance companies
However, lower risk inevitably means lower interest rates. Even if their faster approval processes mean that alternative lenders can command a premium on the market, current interest rates for lower LTVs are still not particularly attractive for mezzanine loan funds. As a result, loan funds frequently syndicate the senior tranches. And this is where banks and insurance companies come back into play again. But why are they so reluctant to take on the senior financing up front, only to step in so late in the day? Well, first of all, smaller institutions in particular are keen to diversify their existing real estate financing portfolios. Second, such a strategy provides banks without their own real estate financing divisions access to the attractive senior financing market.

Nevertheless, it would be a mistake to think that we owe these recent financing market developments to the current pandemic. Loan funds and mezzanine instruments were already on the rise long before Covid-19 came along. The corona crisis has merely exacerbated an existing trend and accelerated its growth. In particular, the ability to move at speed can be decisive in a market environment that creates so many individual investment opportunities. And it is this factor that currently favours alternative providers. But even long after the current crisis, this is a trend that is here to stay. Given the strength of demand from investors and developers, alternative financing providers are well on their way to establishing themselves as major players in the financing market. Not only do they offer accelerated decision-making processes, they also fill the financing vacuum created by overly cautious banks with highly liquid capital. At the same time, they also allow regional banks and savings banks to diversify their asset structures. These are all persuasive points, and not only in times of crisis.

Transforming unused spaces into venues for urban interaction

The development of fully integrated neighbourhoods has a long tradition in Germany. As early as the dawn of the twentieth century, urban planners were incorporating the concept of holistic neighbourhoods in their planning. Such early efforts were driven by large industrial companies, Siemens, AEG and large-scale steel plants, around which estates of factory housing were built. In recent years, the concept has experienced something of a renaissance, especially as it addresses the needs of every aspect of modern urban development: business, residential and social. What’s more, well-planned neighbourhoods reflect a completely new attitude to life. In the past, populations used to emphasise the strict separation of work and family life; nowadays the two are increasingly intermingled. Intelligent strategies can amplify this trend in such a way that it is perceived as a benefit rather than a burden. After all, wouldn’t it be great if your office was only a short walk from where you live? How about being able to drop your child off at the nearby daycare centre on your way into work in the morning? Or picking up a few essentials at the local supermarket on your way home in the afternoon? You could even grab a quick snack in the restaurant around the corner during your lunch break. And in the evening, before you make yourself comfy at home, you could always squeeze in a quick round of sport at the gym.

Creating space for people to come together
But is it really enough if people only really ever meet while they are on their way from A to B? Is this how relationships and friendships are cultivated? Building a community requires more than a shared identity in the form of attractive neighbourhood branding and a shared address. What neighbourhoods need are places where people can meet, exchange ideas and be active together. And well-designed neighbourhoods create the right environment by paying as much attention to open spaces as they do to the “inner life” of the neighbourhood’s actual buildings.

You can only encourage people to enter into a dialogue if you create the right framework. And this means building a neighbourhood with lots of open spaces between the buildings. However, it is not enough to simply create open spaces. You also need to make the effort to design them as integral components of the neighbourhood as a whole. It is not enough to provide a green space and three benches – you need a concept to promote interaction and communication. That could be sports facilities or playgrounds. And every neighbourhood needs spaces where people can simply sit and relax. Then there’s urban gardening, for example, which has established itself as a major trend and can be easily embedded in neighbourhoods. Communal gardening, tending flowers and vegetables, not only serves to help educate children, it also helps transform the idea of “community” into something tangible and real. And wasn’t this the original idea behind neighbourhood squares? Weren’t they once intended as an alternative to private gardens within the city?

Breathing new life into old ideas
There is another major dimension to creating open spaces within modern neighbourhood developments. Ludger Basten, Professor of Economic and Social Geography at the Technical University of Dortmund, believes that well-designed squares have a pivotal role to play in establishing a strong sense of neighbourhood identity. And, according to Professor Basten, if we want to design squares that live up to this role, we need to be brave enough not to automatically fall back on old templates. Whenever we develop a new square, we need to decide where we can draw on past experience – and where new approaches and ideas are needed. As our expectations of the neighbourhoods in which we live and work evolve, we need to face up to new challenges, take on new tasks and develop even more innovative business models. And it is only by adopting a fully integrated concept that we can transform the development of a property into a new and successful asset class.

The Berlin rent cap is working. Really?

In a recent article under the headline “Der Berliner Mietendeckel zeigt Wirkung” (“The Berlin rent cap is working”), Immobilienzeitung reported on an analysis of the housing market conducted by the online portal Immobilienscout24. Here’s what the article had to say:

“The Berlin rent cap was introduced just under a year ago and is already having an impact on the market. At least this is the conclusion drawn by an analysis of Berlin’s rental housing market conducted by the online portal Immobilienscout24 to mark the first anniversary of the rent cap legislation. As a result of the cap, asking rents have fallen. According to the Immobilienscout24 study, asking rents in Berlin have fallen by an average of 7.8% over the last 12 months. The study’s authors also note, however, that three-quarters of rental listings exceeded the city’s rent cap one year after it came into force. Moreover, the number of listings on the portal has fallen drastically”. 

Analyses like these are doubly wrong.

Are rents in Berlin falling because of the rent cap? I suspect that many landlords are no longer even advertising their apartments. Whenever an apartment becomes vacant, landlords can usually find suitable tenants via word-of-mouth recommendations from their existing tenants. Then there’s the vociferous left-wing campaign against what some have christened ‘shadow rents’. Basically, tenant activists have accused landlords of formally agreeing higher rents with their tenants, only to ‘discount’ them for the duration of the rent cap. These claims have attracted a great deal of media attention and have, unsurprisingly, discouraged many landlords from ever listing their vacant apartments on the open market. Instead, they are increasingly relying on private channels, often through the previous tenant. At the top end of the market, demand is so strong that there is almost no need to advertise publicly. In the case of upscale apartments in desirable neighbourhoods, the previous tenant is usually happy to provide a reference and suggest a potential new tenant. And because the same strategy is far less likely to succeed at the lower end of the market, upscale apartments are listed far less frequently than other types of apartment. This is certainly the case for my own property portfolio. And if other owners are doing the same, which I expect they are, it would mean that the proportion of listings for apartments in the lower segment of the market have increased. As a result – oh wonder of wonders – the average asking rent for properties listed on Immobilienscout24 would logically be lower than in the past. Thus, concluding that the rent cap is working because asking rents on Immobilienscout24 are falling is clearly far too short-sighted. Announcements like these from online property portals are of no use to anyone. It would be far more helpful if someone would analyse the decline in median asking rents scientifically and systematically.

I claimed above that this type of analysis is doubly wrong. The second reason is that such reports entirely ignore the fact that rents are falling almost everywhere in Germany –not just in Berlin, where the rent cap applies. Just recently, researchers at F+B published a study confirming that new contract rents across Germany stagnated over the previous 12 months. In 27 of the 50 most expensive towns and cities, new contract rents actually fell. IVD research has also confirmed that rents in Germany’s top 6 cities are performing below the national average. The era of skyrocketing rents is history. The volume of housing construction in Germany has increased so strongly that the additional supply is now having an impact on rental prices. The number of apartments being completed in Germany has almost doubled in comparison to previous years.

Housing construction is back on an even keel and is now providing relief to overheated rental markets – no thanks to the populist left-wing rent cap. But the fact that the construction of new housing is being prevented in Berlin is also part of the picture. If the market was allowed to work in the capital as it does in the rest of Germany, would-be tenants would be spoilt for choice. But the left won’t make life easier for tenants because it would rob them of one of their key election issues. And that’s the last thing they want.

News

Property prices continue to defy the coronavirus crisis

Despite the coronavirus crisis, property prices in Germany continued to rise in 2020. At the same time, the pace of rental price growth in major cities levelled off. Both of these developments were confirmed by the latest data from the Association of German Pfandbrief Banks (vdp). According to the vdp, property prices rose by an average of 5.9 per cent for the year as a whole, boosted by a rise of 6.0 per cent in Q4. In comparison, process rose by 6.4 per cent in 2019. Upon closer examination, however, the data reveal clear differences between price movements in individual asset classes and submarkets. While prices for residential real estate rose by 7.5 per cent in Q4 2020, commercial real estate only gained 0.6 per cent. For the year as a whole, prices in the two segments rose by 6.8 and 3.1 per cent, respectively. The rise in residential property prices in Germany’s seven largest cities was somewhat less pronounced. Prices for residential property in the top seven rose by 3.5 per cent overall and by 4.7 per cent in Q4; in the owner-occupied segment, the increases were as high as 4.9 and 5.7 per cent.

More funding, more energy-efficiency refurbishments

German property owners are making their buildings more energy-efficient. According to official figures, the 600,000 applications for the Federal Ministry for Economic Affairs and Energy’s energy-efficiency refurbishment programmes was almost twice as many as had been submitted in 2019. The extra funding will double the building sector’s CO2 savings to 14 million tons by 2030. These impressive figures have been achieved on the back of a substantial increase in funding and improvements to the programmes’ funding conditions. In 2019, the German government allocated €1.85 billion to energy-efficient refurbishments. The figure for 2020 was almost €8.6 billion, which funds a variety of programmes, including the KfW Bank’s CO2 building rehabilitation programme and the Market Incentive Programme (MAP). One of the main drivers of energy-efficiency refurbishments was the dramatic increase in demand for subsidies for the installation of renewable heating systems. According to the Federal Office of Economic Affairs and Export Control (BAFA), applications for this type of subsidy alone rose from 76,000 in 2019 to more than 280,000 in 2020. The building sector has a pivotal role to play in ensuring that Germany achieves its climate protection targets. Almost 40 per cent of the energy consumed in Germany is attributable to the building sector.

The expropriation debate goes into the next round

The debate on whether to expropriate large rental housing companies in Berlin is back. The activists behind the “Expropriate Deutsche Wohnen & Co.” campaign have just declared that they are ready to move forward with the second stage of their petition for a city-wide referendum on housing expropriation. Earlier in their campaign, they managed to collect 77,000 signatures calling for a referendum. Now, over the next four months, the activists are looking to sign up at least seven per cent of Berlin’s voters (approx. 175,000 signatures). If the campaigners are successful, Berlin’s voters will then be asked to vote on the expropriation of housing companies with more than 3,000 units on 26 September, in parallel to the General, state and local elections taking place on the same day. Jürgen Michael Schick, president of the IVD, warned of the consequences for the future: “No investor will risk investing in socialist Berlin. This will have ruinous consequences on our city’s housing stock, the construction industry and the economy as a whole”.

Apartment buildings and forward deals of the month

Renovated apartment building with vacant units and potential for new construction in Charlottenburg-Wilmersdorf

This residential and commercial building, built in 1965, was extensively modernized in 2016. The upgrades to the building included an attic conversion, the installation of an elevator and the renovation of the facade and basement. The property comprises a front building and a left side wing. All in all, the property consists of six full floors and one recessed floor and has 16 residential units and 5 commercial units. The property is built on a 1,089-sq m plot and the inner courtyard accommodates 22 parking spaces. Some of the space currently used for parking has been approved for the construction of a new building with approximately 700 sq m of living space. The plans for the new building envision five floors plus a recessed floor with roof terraces, which will be added to the existing building as a right side wing. Daily necessities, various cafés and restaurants can be reached within a few minutes’ walk. There are excellent public transport connections via commuter rail and subway. The A100 freeway is very easy to reach via the nearby junction.

Price: €8,000,000 plus 7.14% commission (incl. VAT)
Lettable area: 2,047 sq m
Annual net rent: €206,838

Information acc. to energy performance certificate: energy consumption 106.3 kWh/(m²*a), energy-efficiency class D, oil, built in 1965  

(Please quote property reference number 52363 when making your enquiry)

Residential development with two attractive apartment buildings in Falkensee

This residential complex is currently under construction and consists of two apartment buildings with 20 units each. The two-story solid construction buildings with full basements will be built to modern, high-quality standards featuring floor-to-ceiling windows and roof-mounted solar panels. The average living space per unit is 52.5 sq m. Apartments in this size segment in particular are in short supply in Falkensee. Each apartment is allocated a cellar compartment and a parking space. Falkensee is an attractive business location and one of the best-connected towns in the Berlin region. Train and bus connections offer good access to Berlin and Potsdam.

Price: €8,500,000 plus 7.14% commission (incl. VAT)
Lettable area: 2,100 sq m
Expected annual net rent:  €340,200

No energy certificate available as this is a new construction project.  

(Please quote property reference number 52256 when making your enquiry)

Beautiful 1909 corner building in one of the most desirable locations in Chemnitz

This residential and commercial building, built in 1909 and extensively renovated in 1996, is located on a 960-sq m plot. The property consists of four floors and an unconverted attic. The 13 apartments and two commercial units have a combined rentable area of approximately 1,312 sq m. The property borders directly on central Chemnitz and is one of the most sought-after residential areas of the city with its many small pubs and bars. Furthermore, there are several day-care centers, schools and playgrounds in the immediate vicinity. Bus lines connect the neighborhood with the city center, which can also be reached on foot in about 20 minutes.

Price: €1,800,000 plus 7.14% commission (incl. VAT)
Lettable area: 1,312 sq m
Expected net rent: €75,260

Information acc. to energy performance certificate: energy consumption 144.3 kWh/(m²*a), energy-efficiency class E, natural gas, built in 1909  

(Please quote property reference number 52316 when making your enquiry)