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Dear Readers,

This year perhaps more than ever before, the real estate industry has demonstrated just how stable it is at coming through a crisis. In particular, the housing industry continues to offer a number of attractive, long-term investment opportunities. Nevertheless, every crisis exposes the shortcomings of and challenges facing any industry. How well does the investment market work against the backdrop of general uncertainty? What will happen to the commercial real estate markets and the major property developments that, just a few months ago, investors were fighting over? And how can digital technologies help to unlock future potentials? These are among the issues addressed by our experts in this edition of the WID newsletter.

We are sure you will enjoy these exciting topics and – most importantly – sincerely hope you stay healthy!

Your JMS und JG

New construction or modernisation – which is more sustainable?

New apartments consume less energy than older ones – or do they? After all, with each iteration of the German Energy Saving Ordinance (EnEV), energy-efficiency requirements have become more and more stringent. New insulation techniques and energy-saving heating systems allow for more climate-friendly building operation than ever before. But let’s take a more nuanced look at the question: Are new apartments – viewed holistically ­– still more environmentally friendly if they require the demolition of an existing building? How does the energy balance of demolition and new construction compare with high-quality, modernised apartments that (almost) meet the standards of new construction?

Only half the story ever gets told
Advocates of modernisation argue that the most important factor in achieving sustainability in the building sector is to preserve existing buildings. Many of the sustainability parameters involved in demolishing buildings and replacing them with entirely new structures are not reflected in debates about the building sector’s energy balance. For far too long, there has been a reluctance to provide a complete balance of a building’s energy consumption over its entire life cycle. There is even a term for it, grey energy, which refers to the “hidden” energy expended on the production, repair and disposal (or reuse) of building materials. According to a study by the Federal Office for Building and Regional Planning, heating, hot water, ventilation and auxiliary power in building operations typically account for up to 40 to 60 percent of the total energy requirements of new buildings. Conversely, 40 to 60 percent of the total energy requirement is expended on construction and transportation. Thus, about half of a building’s negative environmental impact is simply ignored when calculations are limited to the annual primary energy balance according to EnEV rather than taking a far more holistic view.

A lack of transparency creates unnecessary hurdles
However, grey energy is difficult to quantify. There are data, for example, on how much CO2 is emitted during the production of one ton of steel – in 2018, 1.7 tons of CO2 were emitted during the production of each ton of crude steel – but these data only apply to one specific production method. Even with such data, there is no getting around the fact that CO2 emissions depend largely on whether materials are manufactured using green energy or not. Perhaps the move towards ESG reporting will shed more light. After all, a growing number of construction and real estate companies are starting to publish non-financial data on their activities, including their carbon footprints. The more granular these data, the greater the transparency of the market – even down to the climate impact of individual construction components used by each company. And the better the data, the easier it is to decide on a case-by-case basis which approach is truly more sustainable.

The future importance of mobility
However, producing a complete energy balance could well mean going further than “just” including grey energy. For example, what vehicle emissions are associated with the property? Do long journeys cause ecological damage because a property is not surrounded by supermarkets, workplaces and daycare centres? Do residents use their own vehicles because the property is poorly connected to public transport? Is the property equipped with charging stations for electric vehicles? And if not, is the energy infrastructure robust enough to allow a large enough number of households to opt for an electric vehicle? And how practicable are the chosen solutions? According to the energy provider Eon, a conventional charging station can be installed at a cost of around EUR 5,000, while rapid charging stations can cost up to EUR 120,000 each. All in all, this is certainly one area in which newly constructed apartment buildings (or better yet, the new construction of an entire neighbourhood) should come out on top. After all, it is probably easier to develop this kind of infrastructure from scratch than it is to replace existing systems. However, even here, there is no one-size-fits-all answer.

The need to optimise both approaches
One thing is already clear: Whether they are constructing new buildings or modernising existing ones, developers and other real estate companies will need to come up with solutions to improve the energy balance and sustainability of all of their projects. And to do so, they will need to start seriously analysing the topic of sustainability in all its facets right now.

Are rental condominiums the ideal solution to residential developers’ woes?

The impact of the coronavirus pandemic on apartment sales in Germany has varied. In many markets, sales to owner-occupiers have taken a real tumble. Given the general climate of uncertainty right now, a large proportion of German households, and especially those on middle-incomes, are happy to continue living as renters rather than making the long-term commitments associated with buying their own homes. For decades, developers have always assumed that they would have no problems quickly finding owner-occupiers for their most attractive penthouses and well-situated garden apartments. Even those days now seem to have passed.

Investments in rental condominiums are on the rise
Demand for investment condominiums, in contrast, would seem to have surged. There are still an incredibly large number of high-equity private investors who are keen to invest in rental condominiums, largely because they simply cannot find attractive, high-yield alternatives anywhere else on the market. They are also attracted by the fact that rental housing is regarded as a particularly inflation-proof investment and fears of inflation are starting to re-emerge right now.

Exploiting new sales and marketing channels
This divergence in the market is also being noticed by developers, who have started cutting back on sales and marketing campaigns that target owner-occupiers. In response to the shift in the market, residential developers are marketing a far larger proportion of their new dwellings to private investors. However, many developers have failed to understand that this requires an entirely different marketing strategy.

The need for professional prospectuses
Marketing materials are one such example: These are no longer merely sent out to real estate agents, but also to financial service providers and investment advisors. Nevertheless, many developers haven’t changed their prospectuses. Rather than designing them according to the IDWS-4 standard and thereby reducing property developer liability and meeting the requirements of financial service providers, they have adopted a business as usual approach.

Sales and after-sales management
And are developers set up to deliver best-in-class sales and after-sales support? In other words, do they have the personnel and the know-how to deal with financial and investment advisors for years of sales and after sales? Developers certainly need to be aware that investors and investment advisors can be quite demanding clients.

Risk diversification
Compared to units for owner-occupiers, condominiums for investors also need to satisfy different requirements. While owner-occupiers tend to prefer larger apartments with high-quality furnishings, investors are more interested in smaller and simpler apartments with less intricate floor plans. In order to spread the risk of their real estate investments, forward-looking investors would often rather buy two smaller units in different locations than one large dwelling, however attractive it might be.

The sweet spot is somewhere between 40 and 90 square metres
Developers who are still in a position to redesign their projects should therefore review their plans and gear their pipeline projects to small, highly rentable units. The most marketable floor plans will depend on the individual market, but are likely to be between 40 and 90 square metres.

Setting prices
When it comes to calculating the prices of individual units, developers should also bear in mind that financial service providers and investment advisors, unlike traditional real estate agents, are often not used to charging a broker’s commission to their clients. The agent’s commission, then, is usually paid in the form of an internal commission. And this tends to be slightly higher than the classic internal commission for brokers.

Energy and ESG – success depends on the strength of your vision

The energy transition forces property developers to find new ways of doing things. The use of more environmentally-friendly construction materials is just one factor on the road to improving the sustainability of real estate. We also need to improve the way we manage buildings over their entire life cycles and, perhaps most importantly, have the courage to find creative solutions.

The basic idea is as simple as it is ingenious: a building that goes beyond net-zero energy consumption and actually generates a surplus of energy. While nobody is expecting a perpetual motion machine to be developed anytime this century, existing technologies certainly offer the potential to create energy-autonomous buildings in the very near future. For engineers and building owners alike, this raises fundamental questions about the costs and benefits of such solutions – which approach is really worth pursuing, what difficulties can be expected, what work still needs to be done before we can make the next developmental leap?

Nothing can be achieved without sensor technologies and connectivity
One essential fact needs to be clarified up front: Active energy management is set to play a key role in the future, not only in terms of comfort but also in terms of sustainability. This may sound paradoxical at first, because many architects and engineers around the world are working at full speed to find ways of using passive methods to optimise the energy and heat balance of their buildings – and additional electronic systems and computing power naturally consume additional electricity, at least at first.

Nevertheless, this is by no means a new approach. Plenty of buildings have used rivers to supply water for domestic use. Others have incorporated greenhouses into and around dwellings, or used insulating layers of earth to create so-called earthships. Ever since the 1970s and even earlier, innovative pioneers have been testing a wide variety of solutions, some of which have even made it into the mainstream. Still, as important as these contributions have been – and as effective as external blinds, for example, are in comparison to energy-intensive air conditioning – the vast majority of these innovations have delivered little more than incremental benefits. They need to be intelligently combined and controlled in order to take the next significant developmental leap.

Photovoltaics – from bright spark to damp squib?
Photovoltaic solar cell technologies have also been tried and tested for years, but are rarely seen as a panacea. In the early years of the new century, many were pinning their hopes of an emissions-free future on the solar revolution. Disappointment soon followed as people realised that the efficiency of photovoltaic systems is limited by numerous factors, including their location. In Europe, this means that the further south your solar cells are located, the greater the likelihood of them being exposed to intensive solar radiation. Anywhere else and they cannot hope to have a major impact on energy generation.

In addition to questions over the service life of such systems, their potential is also limited by operational issues: the angle of the roof, potential sources of pollution in the immediate vicinity, insufficient wind to efficiently cool the photovoltaic modules – the list of potential limitations is long. And each results in less energy being produced. As a result, the future for solar energy doesn’t look so bright – despite subsidies and tumbling prices, even ambitious Germany has failed to expand its photovoltaic network in line with expectations. Despite the German government’s target of 98 gigawatts of photovoltaics by 2030, the installation of new systems has been running well behind schedule for years now.

Hybrid concept: high-rise and wind turbine in one
If you want some better news regarding energy self-sufficiency, you need to look abroad and away from photovoltaics. In small Bahrain on the Arabian Peninsula, for instance, plans for the world’s first net-zero emission skyscraper were announced in 2007. The Burj al-Taqa was designed to be energy self-sufficient and even generate surplus energy at peak times. And, although the project fell victim to the global financial crisis of 2008 and there were still some potential technical issues that needed to be resolved, there is no disputing the impressive vision behind the project.

The fact that such ambitious projects could actually be implemented in the near future is demonstrated by another pioneering skyscraper, the Bahrain World Trade Center, which opened in 2008. At 240 metres, it is taller than Germany’s second tallest building and sets an impressive precedent as the world’s first high-rise to feature integrated wind turbines. In fact, there are three separate turbines fitted to the cross struts that connect the building’s twin towers. I am certain that these turbines, the highest of which is about 125 metres above the ground, are just a foretaste of future technologies – and proof of what is possible when people follow their visions.

Nationwide rent cap?

For the first half of 2020, Berlin’s official Property Valuation Committee has reported a sharp drop of one third in residential and commercial property transactions. Average purchase prices were also significantly lower than in the first half of 2019, having declined by as much as 11 percent. The news of the dramatic slowdown in the residential investment market has blindsided many market observers. It certainly looks as if the coronavirus pandemic and rent cap have combined to put a major damper on the overheated rental housing market in the German capital in the first six months of this year.

The decline in the number of transactions is primarily due to the general wait-and-see approach adopted by many market participants in the first half of the year. This was most evident in the second quarter, when many market players kept their powder dry. Many hunkered down to wait and see how the pandemic would play out and what impact it would have on the economy. In contrast, the Property Valuation Committee emphasised, the 11-percent reduction in prices was little more than a statistical blip – the result of a comparatively large number of transactions involving high-priced new buildings in 2019. My impression, too, is that purchase prices for classic apartment buildings in Berlin have remained surprisingly stable and have not been affected by the pandemic in the slightest. And, as the second half of the year got underway, the market picked up considerable momentum. It doesn’t take a lot of imagination to picture the residential investment market emerging from the crisis almost entirely unscathed.

There is no way Berlin is going to relinquish its crown as the leading residential investment market in Germany. To gain a true understanding of the extent of Berlin’s dominance, it is worth looking at aggregated data from the official Property Valuation Committees across the whole of Germany, which are currently available, but only for the previous year. In keeping with the long-term pattern, Berlin registered a transaction volume two and a half times larger than Munich or Hamburg in 2019. A total of EUR 4.824 billion were transacted on multi-family real estate in Berlin, compared to EUR 1.997 billion in Munich and EUR 1.932 billion in Hamburg. In the smallest city in Germany’s top 10, Essen, transactions totalled just EUR 439 million.

Mixed-use residential/commercial buildings are a distinctly metropolitan product. As the latest German Residential Investment Report from MICHAEL SCHICK IMMOBILIEN GmbH & Co. KG reveals, a combined EUR 22.26 billion flowed into this market segment in Germany’s 45 largest cities last year. The top 7 cities alone accounted for 56 percent of the total, namely EUR 12.48 billion. Munich, Hamburg, Frankfurt, Cologne, Leipzig, Hanover and Düsseldorf all reported year-on-year transaction volume growth. Berlin, Dresden and Essen, on the other hand, all registered annual declines. Incidentally, the report’s most expensive market remains – as in every ranking of Germany’s residential markets – the Bavarian capital, Munich, which recorded the highest prices per square metre, at an average of EUR 6,900. In contrast, the average square-metre price for an apartment in Berlin is just a third of the Munich average.

News

Cabinet approves condominium conversion ban

In regions with overheated housing markets, it looks likely that owners of rental apartments will soon require permission from local authorities to convert them into condominiums. This is the result of a federal cabinet decision to approve a national condominium conversion ban. It is now up to the federal states to decide which regions have overheated housing markets. The centre-left SPD was the most vocal advocate of a conversion ban and pushed for it to be included in the new Building Land Mobilization Act. Federal Minister of Building Horst Seehofer (CSU) had originally included the conversion ban in an early draft of the Act, before deleting it from a subsequent version. The SPD then threatened to block the law unless he reinstated the ban – and seems to have succeeded with its threat. The new ban needs to be approved by the upper house, the Bundestag, and would initially apply until the end of 2025. If the ban is approved, it will then be inserted as a new Section 250 of the Federal Building Code (BauGB). The ban does make provisions for a number of exceptions, including the sale of apartments to relatives and heirs. The parliamentary factions of the CDU/CSU have criticised numerous aspects of the ban, such as the fact that it impinges upon the property rights of landlords.

Not a market for foreign investors?

The Federal Ministry of the Interior has joined forces with the Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR) to launch a research project to assess the impact of foreign investment in Germany’s residential investment market. The project was first mentioned in the minutes of a meeting with representatives of other federal and state ministries in Berlin and Bavaria, which have been seen by Immobilien Zeitung, and aims to find out whether foreign investors work with shorter investment horizons, have higher yield expectations and invest less in regular maintenance than domestic buyers. The minutes of the meeting did not specify where the data for the project would come from. To date, notaries, property valuation committees, land registry offices and municipal real estate offices do not document the nationality of property buyers. It remains to be seen whether potentially discriminating against buyers on the basis of their nationality would be at workable or enforceable, especially given legislation on the free movement of capital and rights of establishment within the EU.

The Berlin market is carrying on regardless

Even in this exceptional year, prices for residential real estate have risen in almost all Berlin submarkets. The latest figures are published as part of the IVD Berlin-Brandenburg’s real estate price service and are based exclusively on the actual prices paid for residential and commercial real estate in the Berlin-Brandenburg metro region. “Seven months after the start of the coronavirus crisis, the Berlin real estate market has so far remained largely unaffected”, commented Katja Giller, Chair of the IVD Berlin-Brandenburg’s Valuation Committee.

Since the introduction of the city-wide rent cap, the supply of rental apartments plummeted. Rents for new-build apartments are not covered by the rent cap and have risen by 4.3 percent to an average of €12.25/sq m in average locations and by 3.7 percent to €14.00/sq m in more upscale locations. Because of the rent cap, which effectively sweeps away all normal market principles, the IVD decided not to collect data for older apartments. In terms of condominium prices, units in upscale neighbourhoods in Berlin-Mitte remain the most expensive. Prices for existing properties in average locations continue to rise steadily and gained 6.8 percent, although the increase this year has been weaker than in previous years (2019: 11.3 percent, 2018: 12.8 percent, 2017: 12.0 percent). Nevertheless, some things never change: The highest residential real estate prices are still being registered in sought-after Berlin-Mitte (€5,100/sq m) and Charlottenburg (€4,700/sq m).

Apartment buildings and forward deals of the month

Fully-let, classic Berlin apartment building and 1980s mixed-use building from private owner in sought-after Neukölln neighbourhood

This offer from a private owner consists of a purely residential, classic Berlin apartment building from 1919 and a mixed-use, residential/commercial building from 1985, which was added to the existing structure as a street-front and corner building. The older, five-story building contains 14 residential units, most of which are equipped with balconies and are accessible via a central staircase. The 1980s building has six full floors and a converted attic and accommodates 19 units, accessible via a staircase and an elevator. The property is ideally located for easy access to public transportation.

Price: €7,700,000 plus 6.96% commission (incl. VAT)

Lettable area: 2,410 sq m

Annual net rent: €225,286

Information acc. to energy performance certificate: energy consumption 133.3 kWh/(m²*a), energy-efficiency class E, oil-fired heating, built in 1985/1910

(Please quote property reference number 52263 when making your enquiry)

Exquisite, Wilhelminian-style apartment building plus new-build in central Oranienburg

This mixed-use, residential/commercial property comprises a renovated and well-maintained apartment building from 1905 and a newer building from the 1990s situated on a 1,260 sq m plot. The buildings’ units are accessed via three staircases. The apartments’ floor plans range from 36 sq m to 82 sq m and the average net rent is €6.76/sq m/month.

Price: €3,990,000 plus 6.96% commission (incl. VAT)

Lettable area: 1,493 sq m

Annual net rent:  €123,280

Information acc. to energy performance certificate: energy consumption 82 kWh/(m²*a), energy-efficiency class C, natural gas, built in 1905

(Please quote property reference number 52251 when making your enquiry)

Commercial property at prime location in Erfurt

This well-maintained commercial property features impressive modern architecture and a light-flooded atrium. The building is in excellent condition and there is no noticeable maintenance backlog. The property has15 units, all of which are let, and 139 underground parking spaces. Constructed in 1995, access is provided by three staircases and three elevators. The commercial building is located within easy walking distance of Erfurt’s main train station.

Price: €14,100,000 plus 5.8% commission (incl. VAT)

Lettable area: 6,811 sq m

Net annual rent:  836.136 EUR

Information acc. to energy performance certificate: energy consumption 93 kWh/(m²*a), energy-efficiency class C, natural gas, built in 1995

(Please quote property reference number 51595 when making your enquiry)

Mixed-use residential/commercial building in popular Berlin-Friedrichshain

The property, which was renovated in 1995, comprises a street-front building, side wing and rear wing. The 21 apartments and two commercial units are accessed via three separate stairwells. The average apartment rent is €8.32/sq m/month. The two commercial units are rented for an average of €11.69/sq m/month. The 250-sq m attic offers great conversion and/or expansion potential. The building has a gas heating system.

Price: €4,950,000 plus 6.96% commission (incl. VAT)

Lettable area: 1,425 sq m

Net rent: €149,003

Information acc. to energy performance certificate: energy consumption 137.9 kWh/(m²*a), energy-efficiency class E, natural gas heating, built in 1905

(Please quote property reference number 52284 when making your enquiry)

Dear Readers,

What makes the most sense, living as a tenant or as an owner-occupier? Nowhere is this debate being conducted as heatedly as in Germany. There are a host of arguments in favour of owning your own four walls, many of which also benefit landlords. However, politicians have repeatedly pursued policies designed to prevent tenants from becoming property owners. There is welcome news, therefore, in the fact that Germany’s courts are finally curtailing the regulation mania we have seen in recent years. In several expert articles we have collected the most important arguments in favour of increasing home ownership and explain how protecting tenants and increasing home ownership can go hand in hand.

As always, we hope you enjoy reading our latest newsletter,

JMS und JG

A new dimension of living: Reducing space but adding value

For more than 50 years, per capita living space in Germany has known only one direction: upward growth. Whereas in 1960 each German citizen had around 20 square metres at their disposal, the average today is almost double that amount. But the 20th century is long gone, and today’s challenges are different from the post-war promise of prosperity. Megatrends such as global urbanisation and the increase in single-person households inevitably raise the question: Is it possible that in 2050 people will have even more living space at their disposal?

The answer will most likely be “no”. The Federal Office for Building and Regional Planning (BBSR) currently assumes that total living space in Germany will grow by around seven percent by 2030 – but primarily for owner-occupiers. In the same period, the number of households will also increase by about 500,000 – with a slight decrease in the total population. Especially in urban centres, which are already affected by a shortage of housing and building land, this can only lead to one conclusion: Medium- and long-term demand for rental housing can only be met if the supply of what we now describe as housing units with below-average living space increases significantly.

Less living space does not mean less living quality
Does that mean that over the next few decades German tenants will not be able to live as comfortably as they do today? Not necessarily. Because apart from the mere question of space, there are other factors that determine the quality of housing, such as location, public transport connections and the leisure facilities and services available in the immediate vicinity. Understandably, there is healthy demand for apartments in the vibrant neighbourhoods of major cities because they are the only locations that possess all of the quality features described above. In order to create living space that can meet the requirements of the urban population in the 21st century, there is therefore no alternative to densification, including the exploitation of previously unused space for housing construction.

So, the real challenge is: How can we create high-quality living space for as many people as possible on increasingly scarce inner-city building land? The onus is on developers and investors to come up with well-conceived architecture and clever design ideas to ensure that a reduction in living space is not accompanied by a loss of quality of life. It is well worth looking abroad for best practice examples. In the incredibly tight housing markets of global metropolises such as Sydney, Hong Kong and New York, architects and interior designers have been gathering ideas and experience for decades on how to achieve this goal. You only have to browse a little on social media to discover that a young and, above all, enthusiastic, global urban community is more than happy to live on 20 to 30 square metres – and is completely satisfied with multifunctional interior design concepts because, despite the lack of space, they still include fully equipped kitchens and bathrooms.

“Sustainable” can also mean “liveable”
With this example in mind, reduced space can also mean added value here in Germany. All the more so given the much-cited trend towards sustainability. On the minus side, smaller apartments tend to increase the energy footprint of a building, be it in construction or in energy and water consumption. On the plus side, dwellings in urban locations are socially sustainable because they are built in functioning environments with plenty of clubs and educational institutions, medical facilities and a varied range of restaurants and retail outlets. In contrast, if cities were to simply expand into the periphery according to the old pattern, all these amenities would first have to be created – something that many newly developed quarters fail to achieve.

Because these factors are decisive for a high quality of life, building in inner-city locations is also linked to the economic sustainability of a residential investment. Especially in times of urbanisation, climate change and against the background of changing household structures, it is more important than ever to develop a product that meets the requirements of the 21st century. Visionless run-of-the-mill products aiming to satisfy tomorrow’s demand with yesterday’s concepts will in any case be hard-pressed to find occupants.

How neighbourhood conservation districts put families at a disadvantage

Do neighbourhood conservation districts actually live up to their name? In many cases not – especially when young families who want to buy a home are forced out of their neighbourhoods.

Apart from the effects of corona and the ongoing debate on the rent cap, those who shape German housing policy are currently discussing another controversial issue: the widespread ban on converting rental housing into condominiums. At the beginning of the year, the Federal Ministry of Justice presented a draft bill according to which permits would be required for conversions in all areas with tight housing markets. In Berlin, conversion bans are already common practice across the city in designated neighbourhood conservation districts (NCD). However, Berlin’s neighbourhood conservation districts are a good example of the undesirable consequences for local families, for example, if tenants are over-protected.

Especially in the German capital, demand for larger condominiums with four to five rooms has been growing for some time now. And this demand is primarily being driven by Berlin families who would like to stay in their own neighbourhoods but want to switch from rented accommodation to their own four walls. In the past, this desire was almost non-existent, but it is now very much in evidence – politicians are also generally encouraging this, for example by offering help-to-buy grants to families with children.

The problem is that the supply of apartments suitable for families, i.e. apartments with four to five rooms, is very limited. For years, it was one- to two-room apartments that achieved the highest square metre prices, which is why the market has long focused on them – and sellers have frequently split up larger apartments, further reducing the supply of four to five-room units.

NCDs now mean that this development cannot be reversed as existing floor plans may not be modified, including, for example, a ban on two small apartments being combined to form one large family apartment. In addition, the ban on conversion also keeps the market for condominiums in NCDs artificially small.

For the reasons mentioned above, the supply of existing, family-sized apartments in Berlin is almost non-existent – after all, anyone who has an apartment is unlikely to give it up in the current situation. Newly built apartments are also often out of the question, as they are rare due to the low level of housing construction in inner-city neighbourhoods, and are usually much more expensive.

Families in NCDs are left with two options. Either they buy an apartment in another part of the city, mainly on the outskirts or even in the surrounding area where NCDs are rare and the supply of suitable housing is greater. In such cases, the NCD, whose stated function is to protect the local population from being squeezed out, ironically leads to families being pushed out of their neighbourhoods.

Or the families reluctantly accept that they cannot buy and stay in their rented apartment – and thus remain dependent on landlords. This thwarts the efforts of politicians to promote home ownership, especially for young families, and families continue to pay rent instead of using the historically low interest rates to accumulate assets and private retirement provisions. Tenants who become property owners not only contribute to their financial independence in the long term, but also protect themselves from rising rents or even from having to give up their rented apartments if the landlord decides to use the unit for themselves.

But this is precisely the dilemma in which families with a desire to own property in NCDs face: being displaced or remaining tenants in their familiar neighbourhoods. And it is a dilemma that could be made even worse by a proposed draft law to make conversions even more difficult. At present, there is still an exception in NCDs whereby converted units may be sold exclusively to tenants for the first seven years after conversion, thereby allowing some tenants to at least buy their own apartments. However, if this draft law is enacted, this exception would probably be abolished.

Berlin residential property is resistant to infection

We often only notice the beauty of normality when it is no longer there. At the moment, our everyday life is characterised by insecurity and the economic impacts of the coronavirus are not yet foreseeable. This cloud of uncertainty has also enveloped the real estate markets, with the probable exception of housing. Because unlike in the retail and hotel sectors, the demand for living space has remained fairly constant. After all, people will always need a place to live. On top of that, there is still a massive supply shortage in Germany’s top 5 cities. In Berlin, the experience of the first few weeks of the corona pandemic seems to have confirmed that many things will remain as they were.

The feared real estate crisis – at least in the capital – is not expected to materialise. This is because the fundamentals will not change even in the event of a general economic recession. On the one hand, there is enormous excess demand for housing, which was peaking before the corona crisis and is now proving to be a safety buffer in the current situation. The fact that this demand will not weaken in the future is supported by the investments of well-known corporations, who are creating a steady stream of well-paid jobs in Berlin over the next few years. The list is extensive: Siemensstadt is being revitalised for EUR 600 million, Tesla is building a gigafactory with a development centre in Berlin’s suburbs and Google has opened a new hub in Berlin-Mitte. In addition, Amazon has rented 55,000 square metres of office space and SAP 35,000 square metres. The Berlin market has also become enormously internationalised in recent years. Because of their profitable rentability, apartments in the capital are a very sought-after investment for international buyer groups, so a contraction in demand is hardly to be expected.

On the other hand, residential real estate is considered to be particularly crisis-proof, a fact appreciated by many investors with few other options. Alternatives such as shares are set to remain highly volatile for the foreseeable future and dividends are uncertain, returns on government bonds have evaporated and gold does not generate regular cash flows. In contrast, residential real estate has an impressive track record: In the recessions of the past decades, there were only two cases where purchase prices fell, one of which saw prices dip by a mere 0.9 percent. In all other economic crises, the value of residential property has risen.

The mood among buyers is therefore unlikely to change much in the foreseeable future. Buyers who were already looking for a property before the outbreak of the virus or who are about to close the deal are sticking to their decision and calmly seeing it through. There are several reasons for this. Firstly, apartments are a highly emotional investment. Particularly among owner-occupiers, the decision to buy property is often driven by strong personal motives, be it growth in the family or a move to another city due to a change of job. However, these motives do not disappear simply because a virus has broken out. Secondly, anyone who was close to buying an apartment pre-corona is not going to be put off now. After all, buying a property always involves a lot of commitment and long-term planning.

At the same time, there have not been any noticeable declines in new business either. As we all know, personal contact is essential when buying and selling real estate. Ideally, initial talks are now being held via video conference, which is much closer to a personal meeting than a telephone call. Floor plans can also be discussed in detail online. For apartment viewings, many potential buyers appreciate being given a virtual tour of the premises or viewing a live video feed of the construction site to see a project taking shape. Our sales associates can walk around the property and highlight the features of a neighbourhood or the unit’s views with the help of digital tools. These tours through the shell of the building give our clients a very clear view of the floor plan, room proportions and ceiling heights. So far, buyers have embraced these features and continue to show an appetite for residential real estate despite the imponderables. Overall, therefore, no “infection” of the Berlin residential real estate market is to be expected.

Nationwide rent cap?

After the Bavarian Constitutional Court’s decision to reject the petition for a referendum on a “6-year rent freeze”, many people were pleased. I too was relieved when I heard the verdict. In many debates, including one with the Bavarian SPD-chairwoman Natascha Kohnen, I also argued that the rent freeze initiative is not compatible with the constitution – because the federal legislator ultimately regulates social rental law. Most landlords and housing industry associations are now following the same line of argumentation regarding the Berlin rent cap (Mieten-WoG Bln). We are therefore calling for and supporting an abstract judicial review of Berlin’s rent cap. Now it depends on the decision of the Federal Constitutional Court. However, hardly anyone is expecting a ruling before the end of this year.

The question remains: Would even a judgement from the Federal Constitutional Court put an end to this regulatory nightmare? Unfortunately, not. There are two reasons why we will be stuck with this populist tussle over a rent freeze for some time to come. The left-wing/green camp is by no means willing to accept defeat when it comes to rent caps. If it is not possible in Bavaria, then the rent cap will have to be introduced on a federal level. That is what the SPD, Greens and Die Linke are demanding – and they have an ally in the German Renters’ Association. As so many times in the past, they argue that this measure would give the market a breather. And that it would only be limited to five years. They have been trotting out the same old arguments ever since the lead up to the introduction of the first rent brake. Since 2015, however, this “breather” has apparently accomplished little. As a result, the rent brake has been tightened and summarily extended several times.

Highly vocal calls for a nationwide rent cap have framed the controversial topic of rents as a debate on social justice and envy and pushed housing to the top of the agenda for the 2021 federal election campaign. Such a nationwide rent cap would essentially see real-term rents frozen. Increases would still be possible, but they would be pegged to the inflation rate. Federal legislation would also undercut purely formal objections, such as those used against controversial state regulations, namely that states do not have the legislative authority to impose rent caps at all. The left-wing camp will again skilfully play up the emotional fates of individual tenants, which will be gleefully portrayed on every TV talk show, leaving no room for rational arguments.

In addition to the rent cap, a second issue is smouldering: plans have been floated to reform the so-called “rack-rent” clause against extortionate landlords. The state of Bavaria has introduced a draft bill to this effect in the Bundesrat. Unfortunately, some figures from within the housing industry have publicly support the proposed reforms, claiming they are necessary to fight disreputable landlords. In short, the subjective criteria of the offence are to be deleted from Section 5 of the German Economic Offences Act (WiStG). The reform would introduce a provision which would no longer allow landlords the honest practice of taking advantage of restricted supply. In future, all rents would be limited to exceeding the local comparative rent by less than 20 percent. The federal government remains unconvinced and believes that removing the subjective criteria would make it impossible to prosecute criminal actors and levy fines (which, by the way, are to be increased to EUR 100,000). A referral in the German Bundestag is still pending. In effect, these reforms would introduce a second rent brake. This time, however, nationwide and without an expiration date. So, the regulatory carousel continues to spin merrily. And the investors and property owners? They continue to serve as the symbolic enemy and as an easy target in the great redistribution debate.

News

Berliners face hefty rent cap back payment

One apartment, two rents – ever since Berlin introduced a city-wide rent cap on 23 February 2020, many tenancy agreements have specified two different rents: a lower rent that complies with the rent cap and a higher rent that complies with the German Civil Code (BGB) and corresponds to the actual market rent. Should the Federal Constitutional Court overturn the Berlin rent cap, landlords would be able to retroactively claim the difference between the capped rent and the market rent from their tenants. If this happens, large numbers of Berliners face substantial back payments. According to an F+B study, the BGB rents per square metre are now on average almost twice as high as rents under the rent cap. F+B’s researchers first analysed more than 3,100 apartment listings to determine the average capped rent (EUR 7.05/sqm) then the average market rent for the same listings (EUR 13.63/sqm). Thus, the researchers identified an average difference of EUR 6.58/sqm. Taking a typical 60-sqm apartment, the researchers extrapolated this figure and arrived at a combined back payment of EUR 1.2 million/month for the 3,100 listed apartments.

An unceremonious exit

Berlin’s Construction Senator Katrin Lompscher (Die Linke) may have pushed a city-wide rent cap and government rent tables through in the face of opposition from her party’s coalition partners, the SPD and the Greens, but it was her own party that deserted her when it was revealed that for years she had not always declared or paid tax on income earned from state-owned enterprises. Lompscher’s errors came to light in response to a written request from one of the opposition parties in Berlin’s House of Representatives. Lompscher leaves a political shambles in her wake. The Federal Constitutional Court is currently assessing the legality of Berlin’s rent cap, while even municipal housing companies have been rebelling against state regulation of the rental housing market and complaining of plummeting revenues (see below). The number of building permits also fell under Lompscher’s watch and the IVD has responded to her exit by calling for a “rollback of policies that prevent construction”. Whether this goal has become more attainable remains questionable, but one thing is for certain: Lompscher’s successor will not have an easy job solving Berlin’s housing crisis.

Growing discontent among municipal housing companies

Based on unpublished forecasts, Berlin’s six municipal housing companies are set to see debts soar in the period between 2015 and 2023. The debt burdens of some of the companies, such as HOWOGE,  could even almost double. As 2020 got underway, the six companies, who together own 325,400 apartments in Berlin, were forecasting a shortfall of up to EUR 300 million over the next five years. This is partly due to the negative impact of the new rent cap on rental revenues and partly due to the state government’s plans for “affordable rents, housing construction and social housing provision”. According to the plans, the companies will only be able to rent 25 percent of their new-build apartments to couples with annual net incomes of more than EUR 36,000. In addition, 75 percent of their new apartments will have to be rented to social housing tenants, up from 60 percent at present. To qualify for social housing, a single person needs a net income of less than EUR 16,800 per year and a two-person household less than EUR 25,200. The companies’ earnings are therefore likely to continue to decline for years to come. This is a disaster for the Berlin housing market because the money is missing twice: firstly, as income for the housing companies themselves; secondly, as investment capital to construct desperately needed new housing units.

Apartment buildings and forward deals of the month

Well–maintained classic Berlin apartment building in quiet setting in Berlin-Schöneberg

This mixed-use, street-front residential and commercial building was built in 1909 and is free-standing on three sides. The property has a full basement, two stairwells and an internal elevator. The eleven rental units extend over five full floors, including the building’s uppermost floor. The building is centrally situated in an extremely quiet residential street and has excellent public transport connections.

Price: EUR 4,400,000 plus 6.96% sales commission (incl. sales tax)

Lettable floor area: 1,300 sqm

Net annual rent: EUR 77,485

Information acc. to energy performance certificate: energy consumption 168.9 kWh/(m²*a), energy-efficiency class F, natural gas E, built in 1909

 (Please quote property reference number 52236 when making your enquiry)

Two attractive sub-portfolios in outstanding location in Berlin-Prenzlauer Berg:
a) condominium and b) commercial

This Wilhelminian-style apartment building was formally divided into condominiums in 1999 and comprises a street-front building, two side wings and a transverse building, all of which are accessible via a total of four staircases. This offer includes a) the residential portfolio of 16 residential units (several units are free for occupancy and can be sold directly, including some which have already been modernised), plus the large attic floor that has not yet been converted into living space, and b) four commercial units with a total of 480 square metres of rental space and very attractive rental income. The property is situated in a prime, extremely central location in the popular district of Berlin-Prenzlauer Berg. The nearest underground station is a mere one-minute walk away. The two sub-portfolios a) residential and b) commercial can be acquired together or separately.

Price: EUR 7,500,000 plus 6.96% sales commission (incl. sales tax)

Lettable floor area: 1,331 sqm

Net annual rent:  EUR 229,613

Information acc. to energy performance certificate: energy consumption 142 kWh/(m²*a), energy-efficiency class E, natural gas H, built in 1901

 (Please quote property reference number 52194 when making your enquiry)

Terraced house portfolio in a small-town community to the north of Berlin

This portfolio consists of seven terraced houses, each built on 140-sqm plots. The two-storey, six-room terraced houses accommodate living space of approximately 135 square metres. Parking spaces are located directly in front of each property. Local transport infrastructure includes a commuter rail station and a bus stop just 150 metres away. A nearby motorway junction provides direct access to the A11 and A10 motorways.

Price: EUR 1,890,000 plus 3.48% sales commission (incl. sales tax)

Lettable area: 948 sqm

Net annual rent:  EUR 70,771

Information acc. to energy performance certificate: energy consumption 113.4 kWh/(m²*a), energy-efficiency class D, local heating plant, fossil fuel, built in 1998

(Please quote property reference number 52183 when making your enquiry)

Dear Readers,

The coronavirus crisis has shown us that the housing market is healthy and stable. While many sectors of the economy, including other real estate segments, have weakened, demand for residential space remains constant. Nevertheless, this is no time for investors and buyers to sit back and relax. Numerous tenants are facing potential financial difficulties ­– which is where a smart service charge policy can come into play, as Frank Wojtalewicz from d.i.i. explains. At the same time, many investors are asking whether the current price corrections will create attractive opportunities for quick movers and, above all, in which markets the best growth potential awaits. Join André Schmöller of Domicil and Professor Steffen Metzner of Empira as they answer these questions and more.

We are sure you will find much food for thought in this, the latest edition of our newsletter.

Jürgen Michael Schick and Dr. Josef Girshovich

Rental housing: C-cities offer catch-up potential

Rental housing represents a stable and sustainable investment with relatively predictable rental income. Over the last few years, rents have risen in almost all segments. In view of the current cycle, however, risk awareness is growing. It is therefore becoming more important to focus on locations that offer the highest levels of stability. A new study from Empira analyses a range of primary, secondary and tertiary housing markets using socio-economic and market-related criteria. As the study shows, population growth is a decisive factor in the development of rents.

Residential rents are not a product of chance and housing markets do not develop autonomously. Rental prices and the provision of housing are clearly dependent on supply and demand. Both factors in turn depend on upstream variables. The most important of these are the socio-economic parameters of population and income growth and the overall economic landscape. Against this backdrop, it is interesting to observe whether these influencing factors develop constantly or vary over time and in clusters, whether they track developments in rental prices and whether any such correlations are clearly or only weakly discernible.

Population growth is the main driver of the housing markets. Even with low incomes, population growth ensures that the total budget available for rental payments in any given location increases. Every rise in population ultimately leads to an increase in demand for housing – both in terms of floor space and the number of individual units as well as in terms of the tenants’ willingness and ability to pay. In the case of national data for Germany as a whole, population growth is mainly attributable to net migration. Dynamic growth in immigration figures is clearly reflected – albeit usually with a time lag ­– in adjustments to new contract and in-place rents. What is more, current volumes of housing construction are too low to fully compensate for the additional demand, thereby fuelling price rises.

Population growth is not limited to Germany’s major cities
It is also well worth comparing population growth and rental price inflation in individual cities and clusters between 2013 and 2018. The study analyses 60 German cities in detail and reveals that population growth is not only limited to Germany’s Top 7 cities. While Frankfurt registers strong population growth (+7.4% in five years), a few secondary and tertiary cities, including Leipzig (+10.6%) and Potsdam (+10.3%) reported even stronger growth. As you would probably expect, mean population growth is highest in primary investment locations at 5.3%. However, at 4.8%, mean population growth in the tertiary investment cluster is a mere 0.5 percentage points behind the Top 7 cities. In addition, this figure also beats mean population growth in the larger secondary investment markets by a full 1.5 percentage points.

A parallel consideration of rents reveals that rental price inflation is considerably higher than the rate at which the population is growing. And, as the study shows, there are certainly differences between the respective size clusters. This applies both to different time periods and to individual cities. The primary investment locations (Top 7) are ahead in terms of both rental prices and rental inflation. With rental price growth of 25.1% over five years, rents in the Top 7 are clearly rising faster than anywhere else. In direct comparison, the study’s lowest growth rates are recorded in smaller, tertiary cities at the bottom of the ranking, even though their population growth figures almost match the rates seen in the Top 7. In terms of rental growth, however, their figure of 17.9% is slightly behind the secondary locations, where rents rose by 19.4%. This could be due to base effects or larger housing reserves. These additional effects will need to be investigated further.

The study concludes that Germany’s Top 7 cities have registered both the largest population growth and the highest rent increases in recent years. The cluster of smaller cities is only 0.5 percentage points behind in population growth, although it lags far behind in terms of rental price growth. This observation points to significant catch-up potential that could be exploited in years to come.

Ancillary housing costs are the key to socially responsible yield optimisation

The development of residential rents is causing a growing number of residential property investors serious headaches – and not just as a result of the coronavirus crisis. Although the effects of the pandemic on the economy and the labour market are likely to lead to completely new and unique challenges for residential property investors, it should not be forgotten that the flattening of the rental growth curve was an increasingly pressing issue long before the Covid-19 pandemic.

On the one hand, the slowdown in rental price growth is a direct result of changes to government housing policy in recent years, which have led to a growing number of regulatory interventions in tenancy law at ever shorter intervals. On the other hand, the loss of momentum in rental price growth can also be explained by the fact that households in many large cities have reached the limits of what they can afford to pay for their housing. For many households, housing costs (also known as the housing burden) now account for between 30% to 40% of their household income, which means that higher rental prices are simply no longer affordable.

In many cases, this now makes it difficult for residential real estate investors to achieve both their desired rental yields and target exit yields. And the situation has been exacerbated by the intense pressure to invest and enormous capital inflows into the real estate sector in recent years, both of which have driven property prices to levels that could only be seen as sustainable when viewed through a prism of hope for future rental price increases. Nevertheless, with the right strategy it is still possible for investors to increase the return on their investments (ROI) and simultaneously minimise increases to tenants’ housing burdens. Moreover, the right strategy also hedges against future housing policy risks.

Tenants know: It is the gross rent that counts
When a tenant considers their housing burden, they are not primarily concerned about the net cost of their home, they look at the bottom line: the gross rent, including all ancillary costs. For investors, ancillary housing costs thus represent an efficient – and yet all too often neglected – lever to boost their ROI without significantly increasing the burden on tenants. A representative YouGov survey conducted at the end of 2019 reveals that tenants are aware of this fact: 82% of surveyed tenants are more likely to look at the gross rent than the net rent when assessing their own housing burden. Tenants are therefore concious of the influence of ancillary costs – especially since, according to the survey, almost half of the tenants rate their ancillary living costs as too high.

This creates effective opportunities for investors to not only implement their own yield optimisation strategies, but to do so in a socially responsible way. There are two key levers in particular: energy-efficient refurbishment and the optimisation of supply and service contracts.

Large housing companies have an advantage
In many cases, the potential for energy-efficiency refurbishments is considerable, especially in relation to older properties. There are a wide range of measures that can be implemented to reduce energy consumption – renewing the roof, installing a heat recycling system, installing a new heating system, replacing windows, etc. Where modernisation programmes primarily consist of such measures, a balcony could also be added to increase the value to tenants and add extra rental space without adding significantly to the tenant’s housing cost burden.

This is especially true where ancillary costs are optimised alongside any energy-efficiency gains. Proactively managing ancillary costs requires expertise and some effort. After all, benchmarking operating costs, regularly reviewing supply contracts for gas, oil, district heating and electricity, as well as services and contracts for building supervisors, maintenance and cleaning services, can be extremely tedious. Especially as you are only likely to be successful in renegotiating all of these contracts if, firstly, you have negotiating experience and competence in the field and, secondly, you have a sufficiently large pool of customers behind you to strengthen your negotiating position. And this is precisely why larger portfolio holders have a clear advantage.

Minimising political and financial risk
But ultimately, such efforts bear fruit: By consistently deploying and combining two primary levers – energy-efficiency refurbishments and renegotiating supply and service contracts – our company regularly manages to strike the ideal balance between the increase in modernisation-related rental prices and the savings in ancillary living costs for the tenants.

This strategy enables investors to significantly increase their rental income streams and – when it comes to making an exit – raise the achievable sale price of their real estate assets, while tenants hardly feel any financial impact from the investor’s value and yield gains. Moreover, the advantages of this socially responsible approach are not limited to the investor’s political and social reputation. At the same time, the approach is less susceptible to the two phenomena mentioned at the beginning of this article, which have recently caused steadily mounting problems for residential property investors: the broader political interventions in tenancy law on the one hand and the increasing housing burden on tenants on the other.

Explicit calls for energy-efficiency measures
Anyone who invests in energy-efficiency refurbishments and designs their modernisation measures to have as small an impact on tenants as possible has nothing to fear from politicians, who know that existing living space needs to be modernised in order to make progress towards national climate protection targets. Just like new construction, energy-efficiency measures are exempt from almost all tenancy law regulations introduced in recent years. In fact, energy-efficiency measures are not only permissible, they are expressly desired. With a strategy of consistent energy and ancillary cost optimisation, an investor’s exposure to future political interventions is therefore just as low as the risk of being unable to increase rental yields as a result of reaching the maximum limit of what tenants can afford to pay for their housing.

Investors who adopt socially responsible and ecologically sustainable approaches also have advantages in other business areas – be it housing privatisation or major new construction projects. While both are attracting more and more investors, it is important to recognise that being successful in either of these fields relies largely on cultivating positive relationships with local authorities. Consistent ancillary cost management, therefore, offers multiple benefits. Not only does it have a positive impact on ROI, it also helps to reduce investment risk, as well as improving the likelihood that an investor will be able to diversify their investments within the residential segment.

Corona and the housing markets

For years, property prices have only been moving in one direction: upwards. In recent months, however, the coronavirus crisis has certainly put a damper on prices. As things currently stand, we are certain that the consequences will remain manageable for our segment, housing. “Business as usual” would perhaps be an overstatement, but overall, our day-to-day business at Domicil is running as usual. Even though purchases sometimes take longer to complete because there are fewer notary appointments available due to Covid-19 restrictions, demand for condominiums remains high. While the supply of properties in the EUR-10-million-plus segment has declined slightly, there is also a noticeable reduction in the number of competitors for these properties. While quite a few companies are currently standing on the sidelines having adopted a wait-and-see approach, others cannot or do not want to be active on the buyer side right now. A priority is already more important than anything else priority for us in these times is to protect our employees, customers and partners. However, thanks to our remote working systems and digitalisation measures, which include digital data rooms and a sales partner portal, we are able to maintain our business operations without restrictions.

We need to think long term
Given the constant and consistent cash flows the residential investment market and rental apartments in particular generate, demand has risen as investors seek a “safe haven”. According to a recent survey on the effects of the corona pandemic on investment decisions conducted by Fondsforum, institutional buyers believe that the short-term price corrections on the residential property market will create a growing number of attractive opportunities for acquisitions.

Investors with long-term investment strategies, for whom high purchase prices and low rental yields have recently become a nuisance or even a test of endurance, may well take a different view, at least for the time being. The analysts at Empirica have predicted price declines of 10% to 25% for the German market, whilst also noting that rents should remain stable. According to Empirica, we are likely to see the first indications of a price rebound as early as 2021. This provides a small window of opportunity for investors to increase the average rental yield from their portfolios.

Residential real estate investors therefore have less to worry about in this threatening economic environment than investors in the hotel segment, for example. After all, residential real estate investors will once again be able to enter increased purchase and rental yields on the credit side as soon as the housing market regains its former strength after the crisis – and it will. After a brief emergency stop in response to the coronavirus countermeasures, rents should return to the previous year’s level by 2021 at the latest.

“Bargain hunters” should not be blind to the risks
So good news from all sides? Well, yes and no. Simply assuming that a relatively low entry price and a good location make for an attractive investment can lead to investment mistakes. Even with theoretical discounts of 20% – and we are nowhere near those kinds of discounts yet – a lot can go wrong. Potential investors should always ask themselves: “Which locations and properties offer the best long-term potential?” This question is more important now than ever, especially with dark clouds gathering on the economic horizon. And there are two significant risks lurking behind these supposedly favourable conditions for market entry:

Who wants to miss out on the opportunity to acquire an attractive asset far below its true value? The real danger right now is that an investor’s determination to snap up a “bargain” will make them rush their due diligence and overlook potential shortcomings regarding the medium and long-term potential of a location and property. Alternatively, an investor might spend too much time assessing an opportunity and miss the best time to enter the market. In this latter case, the investor will go home -handed. But that is still better than ending up with a millstone – in the form of a suboptimal property – around your neck. Moreover, investors cannot afford to turn a blind eye to regional regulatory frameworks – maintenance statutes here, rent freezes and rent brakes there. And that is to say nothing of the different rent caps and the variations in rent indexes at municipal level.

Investors who are keen to take advantage of current opportunities to enter the residential market need regional market expertise now more than ever before, especially when it comes to assessing the “bargains” coming to market. And if they  do not have their own in-house expertise, they would be well advised to rely on partners and service providers who do. Otherwise, the risks for investors are incalculable – especially at a time of crisis like this.

Market expertise should be a self-evident principle, but it is at risk of being forgotten in the rush to “buy the dip” that has already gripped the stock markets and some real estate investors. After all, snapping up a “bargain” today could leave an investor facing heavy losses tomorrow.

Clever investments in the post-corona period

Rental market remains stable, strong growth in central Germany

Right now, many investors are intensively examining the markets to decide where they want to acquire properties in the future. Residential investments are likely to be the winners of the corona crisis. But which markets are particularly attractive? In a comparison of the Top 7 cities, Berlin ranks far ahead of all other major German cities with a transaction volume of EUR 4.9 billion. In terms of transaction volume, the Munich rental housing market represents just 43 percent of Berlin’s total. In Hamburg it is 39 percent compared to the German capital. This is followed by Frankfurt at 29 percent and Cologne at 23 percent. Stuttgart brings up the rear at 8.5 percent of Berlin’s transaction volume.

Central Germany is booming
Cities in Central Germany have experienced particularly strong investor interest in the past year. I assume that this will continue to be the case in the future and that demand there will continue to rise. As estate agents we have experienced this ourselves and can easily back up the official figures with our own track record. The two major hotspots are still Leipzig and Dresden. While in Dresden investments in apartment buildings fell by 18.8 percent in 2019 compared to 2018, in Leipzig it rose by 14.4 percent. Declining transaction volumes have been observed in many German cities. In many cases, there is simply a shortage of product coming to market. In Berlin, too, transactions involving apartment buildings were down by 11 percent in 2019 compared to 2018. Of course, the controversial discussion about the Berlin rent cap is a specific feature of this market.

In contrast, transaction volumes in seven leading real estate markets in eastern Germany have risen by double-digit percentages. In Magdeburg (+31.7 percent), Jena (+29.5 percent) and Chemnitz (+25.0 percent), the growth in transaction volumes was particularly impressive. The same applies to Halle (+16 percent) and Schwerin (+12 percent). In the small Dessau market, the transaction volume increased by a staggering 92 percent.

In the post-corona period, investors will be even more sensitive in their search for high-growth markets. In my view, central Germany will retain its status as an attractive market and as a complement to investments in the major metropolises. These markets remain particularly dynamic. In view of the 400 transactions in the Leipzig apartment building market and 325 in Dresden, the high number of acquisitions in the other cities is pleasantly surprising. In the ranking of transactions, Chemnitz comes third in central Germany with 260 apartment building deals, followed by Halle with 174 and Magdeburg with 169 transactions. Incidentally, in Berlin there were “only” 887 transactions (-13 percent) in the same period.

On average, an apartment building costs the most per square metre in Dresden (EUR 2,020 / sqm). In Leipzig buyers are paying an average of EUR 1,659 per square metre, in Halle EUR 1,281 per square metre, in Magdeburg EUR 1,223 per square metre and in Chemnitz EUR 987 per square metre.

Berlin-News

Housing market remains stable during the crisis

According to the new Housing Cost Report from the Institut der deutschen Wirtschaft (IW), the German housing market has a good chance of emerging from the corona crisis and the subsequent economic slump unscathed. Admittedly, the report only presents data up to the end of 2019. Nevertheless, it is possible to make a forecast: As neither the rental costs nor the housing costs for owner-occupiers were previously overvalued, a collapse is unlikely. Buying residential property in Germany is still significantly cheaper than renting it. The cost advantage of living in a condominium compared to a similar rented apartment was 48.5 percent nationwide in 2019. According to the study, owner-occupiers have much lower housing costs than tenants in almost all German regions, including the major cities. In its fifth edition of the annual Housing Cost Report, IW compares housing costs for owner-occupiers and tenants. The report’s calculations are based on a comparison of the net rent paid by tenants with the costs of owner-occupiers, including the purchase price, ancillary acquisition costs, mortgage interest and lost interest on equity capital as well as repairs and depreciation.

Judicial review of rent caps

In addition to the Federal Constitutional Court, the Berlin Constitutional Court will also review the city’s rent cap and rent freeze regulations. Burkard Dregger, chairman of the Berlin CDU faction, and Sebastian Czaja, leader of the Berlin FDP faction, filed an application for a judicial review of the rent cap at the Berlin Constitutional Court at the end of May. The complaint is more far-reaching than that of the FDP and CDU/CSU in the Bundestag, which was recently filed with the Federal Constitutional Court in Karlsruhe. The plaintiffs argue that the rent cap deprives tenants of legal security. According to Dregger, there is uncertainty, especially among landlords, as to the future of the rent freeze. In addition to legal concerns, Dregger complains that the rent cap law undermines landlords’ financial plans for their retirement. Moreover, there are still constitutional doubts as to whether the state is overreaching and interfering with the legislative competence of the federal government.

Germany builds more housing

According to the German Federal Statistical Office (Destatis), 293,000 apartments were completed in Germany in 2019. The last time a higher number of dwellings were completed was in 2001 (326,600). As Destatis further reports, this was an increase of 2.0 percent or 5,700 completed dwellings compared to the previous year. There was also a significant increase in the number of building permits issued in 2019, which rose by 4.0 percent year-on-year to 360,600. This led to a surplus of 740,400 approved but not yet completed apartments.

Apartment buildings and forward deals of the month

Three partially renovated mixed-use residential / commercial buildings with vacancies in Leipzig

The three properties comprise 40 apartments and five commercial units, twelve parking spaces and a garage. Thirty-three of the apartments and one of the commercial units are currently unoccupied. Floor plans vary from 30 to 102 square metres. One of the buildings has historical preservation status. The properties are in the immediate vicinity of Leipzig’s main railway station.

Price: EUR 4,700,000 plus 5.95% sales commission (incl. sales tax)

Lettable floor space: 3,245 sqm

Price per sqm: EUR 1,448

Information acc. to energy performance certificate: energy consumption 105.1 kWh/(m²*a), energy-efficiency class D, oil heating, built in 1906

 (Please quote property reference number 51886 when making your enquiry)

Very well maintained, privately owned early 20th century apartment buildings in sought-after neighbourhood in Berlin-Lichtenberg

These two extensively modernised mixed-use residential / commercial properties consist of a corner and a street-facing building and were built in 1904. The properties have four full floors, a converted attic and a full basement. In total, the two buildings comprise 37 apartments and three commercial units. Apartment floor plans range from 35 to 90 square metres.

Price: EUR 8,000,000 plus 7.14% sales commission (incl. sales tax)

Lettable floor space: 2,806 sqm

Net annual rent:  EUR 278,680

Information acc. to energy performance certificate: energy consumption 110.5 kWh/(m²*a), energy-efficiency class D, gas central heating, built in 1904

(Please quote property reference number 52229 when making your enquiry)

Exquisite condominium at Potsdamer Platz in central Berlin

At an ultra-prime location in Berlin, this sophisticated condominium leaves no wishes unfulfilled. Situated on the building’s first upper floor, the apartment offers the highest levels of comfort and convenience combined with state-of-the-art technologies. The exclusive appointments include the finest marble bathrooms, underfloor heating and a lift. A concierge is available around the clock.

Price: EUR 2,950,000 plus 5.96% sales commission (incl. sales tax)

Floor space: 257 sqm

Underground parking spaces: two

Information acc. to energy performance certificate: energy consumption 92.2 kWh/(m²*a), energy-efficiency class C, CHP, fossil fuel, electricity mix, built in 2003 

(Please quote property reference number 52160 when making your enquiry)

Dear Readers,

Understandably, everybody is talking about coronavirus – and no one knows for sure how the situation will develop or what the status quo will look like after the current crisis. Some people are even rejoicing, hailing the “long-awaited end of the real estate bubble”. But just between us: Do you really think people will want and need less housing in the future? Or that urbanisation, which has been a societal driving force for the last 5,000 years and could easily be described as the greatest achievement of human coexistence, is set to come to an end? Nevertheless, the coronavirus crisis is certainly having an impact on a number of real estate submarkets, although the impact has not been uniform. Of course, the residential sector is among those facing challenges, although housing will continue to be the most consistent and reliable of all asset classes and real estate investments: long-term, plannable and a basic requirement at all times. We explain why this is the case in our new newsletter, alongside a great selection of articles on a range of other interesting topics.

We hope you enjoy our latest newsletter – and stay healthy!

Jürgen Michael Schick and Dr. Josef Girshovich

The residential real estate market rally is just beginning!

The mood in the German real estate sector has noticeably deteriorated of late. Some market participants are already comparing the shock caused by coronavirus with that of the global financial crisis of 2007/2008. However, there are also a number of far more optimistic voices predicting a steep plunge into recession (with predictably negative consequences for the real estate industry) followed by a rapid recovery as soon as economic stimulus measures and support programmes kick in. bulwiengesa, for example, expects a potential economic boost as early as the second half of 2020, although it is not entirely clear when this will feed through to the real estate sector. In general, there is a great deal of uncertainty surrounding current forecasts. Nevertheless, there are some indications that at least the residential real estate market will emerge from the crisis relatively unscathed and may even be among the biggest winners of the crisis from next year onwards.

Fresh reinforcements for the residential property market
While developers and estate agents are among those suffering most from the sweeping restrictions put in place to limit the spread of Covid-19, there is little to fear for the residential property market as a whole. On the contrary, after a short-term price correction in 2020, it is entirely likely that prices will rise again over the next few years. Some institutional investors are already gearing up to take advantage of this price correction and the resulting improvement in price-to-rent ratios. As they become more active in the market, prices will stabilise. In addition, demand for housing from would-be homebuyers and tenants is not going to slacken anytime soon as there is still a shortage of hundreds of thousands of apartments nationwide and the industry is already struggling to secure enough building permits and deliver the required volume of completed dwellings.

And these long-standing fundamentals are now being exacerbated by a number of new developments that are likely to create their own unique, long-term dynamics in the residential property market. If we take interest rate developments out of the equation, it is clear we are in a historically unique situation.

On the one hand, many investors are dealing with a scarcity of investment alternatives in the wake of the trade disputes of 2019, the bond and equity market turbulence of 2020, the coronavirus crisis, and rising concerns over inflation. Whereas office and retail assets were, until very recently, considered suitable investment alternatives, their risks have now been ruthlessly exposed. Residential real estate, on the other hand, has come through most of these crises relatively unscathed, which means that residential real estate is likely to become an ever more central element of real estate investors’ investment strategies, especially when it comes to small investors and institutional investors with risk minimisation concerns.

On top of all this, a glut of capital is expected to flood the investment market over the next five years. According to JLL, around EUR 800 billion of (relatively) high-interest German government bonds are due to mature by 2025. This is ten times the volume of funds invested in the entire German real estate market each year, and almost 40 times more than was invested in the residential real estate market in 2019. The lack of risk-averse investment alternatives will lead to a significant portion of these funds flowing into the residential real estate market.

Market observers who think that prices on the German residential property market have already peaked and are now moving towards a long-term plateau will probably have to reassess their forecasts in the wake of the corona crisis.

If anything, the coronavirus crisis will reward those market participants who steer their companies and investments through the current predicament with a steady hand and take judicious advantage of emerging opportunities without sacrificing their risk management principles. After all, even though the German residential real estate market’s long-term prospects are good, the current market situation is creating investment risks that will need to be closely monitored for some time to come.

Real estate tokens are becoming an established investment product

Whether e-commerce or the social media revolution – whenever profound, digitally-driven structural change has been involved, the real estate industry has generally responded with the same old mantra: “You can’t digitise bricks and mortar”. With the advent of blockchain technology and trade in cryptocurrencies and other token products, however, it is clear that this sentence simply no longer applies.

Same technology – different volatility
We have now reached the point at which all types of tangible assets – including every conceivable type of real estate asset – can be stored in the blockchain as “security tokens”. These assets can, therefore, include ownership of an underlying asset, a subordinated loan, or other securitised rights. Just like Bitcoin, the tokenisation of real estate offers an outstanding degree of security, transparency, accessibility and consistency. In addition, real estate tokens, again just like cryptocurrencies, can be infinitely fractionalised, thereby doing away with the traditional investment thresholds of real estate funds. This means that real estate investments are now a very real option for regular savings plans.

The major difference between real estate security tokens and cryptocurrencies, however, is that the performance of security tokens is primarily determined by the value of the property or underlying security they represent. This means that most digital real estate investments are likely to be significantly less volatile than Bitcoin and other cryptocurrencies.

The first real estate investment products based on tokens are already being developed, although a number of regulatory uncertainties remain. While the underlying real estate-related asset – for example a subordinated loan – is subject to the existing legal framework specific to that vehicle, the tokens (as digital representations of the asset) have not yet been subject to uniform regulation. One of the consequences of this legal discrepancy is that tokenised real estate products are not yet as freely tradable as cryptocurrencies. However, this will change in the foreseeable future, and the first steps have already been initiated by the German government.

Products for internet-savvy investors
In the longer term, conventional real estate investment products – such as mutual funds – will become increasingly tokenised. This will be governed by the established principle that, given enough time, anything that can be digitalised will be digitalised. Blockchain products could displace these investment structures as the market standard within the next decade, provided the regulatory framework is in place.

At present, however, the primary focus in the world of digital real estate investments is on making real estate products more attractive for younger, innovation-hungry investors. Such investors are generally already familiar with digitally supported products, such as Robo-Advisors, and are also an attractive target market for crypto-investments. From a technical point of view, it is also conceivable that real estate tokens could be directly exchanged with cryptocurrency tokens, thereby creating a digital investment experience. For investors with a close affinity for digital technology, these new investment products represent an opportunity to further diversify their portfolios – without, for example, having to waste time in an annoying queue at their local bank. Unfortunately, for subscribers to traditional real estate investment products, there is no alternative to joining the back of the line and biding their time.

Demographic trends will not change

Right now, Germany is largely at a standstill as a result of the coronavirus pandemic. At this time, our thoughts are naturally with the sick, their families and all those at risk of serious illness. Despite the seriousness of the current situation, we remain positive as we cast our minds forward to the post-lockdown return to normality. After all, there is no change in prevailing demographic trends: 2020 sees the first cohort of Germany’s baby boomers reach nominal retirement age. In other words, the post-war generation, characterised by its particularly strong birth rates, is on the verge of retirement.

We are at the dawn of a new era for the senior living sector. Demand for serviced apartments, a segment of the market commonly referred to as “assisted living” that provides a combination of essential housing services supplemented by additional personal care and health care services, has risen continuously in recent years and is set to accelerate over the next ten years.

How the economy as a whole and the submarket in particular will develop over the next few months and years remains to be seen. However, given cast-iron demographic developments, it is possible to make a range of forecasts whose validity, based on our current understanding, will remain unaffected by the Covid-19 pandemic. By 2030, the number of over 65-year-olds in Germany will increase by 28 per cent to 21.8 million, and the number of over 80-year-olds by as much as 38 per cent to 6.2 million. As a result, this asset class has an investment potential of EUR 64 billion within just 15 years.

Investors are also already aware of the sector’s massive potential. According to immoTISS care, the volume of transactions involving assisted living facilities for seniors may well exceed EUR 1.0 billion in 2020. Looking ahead to 2021, the forecast assumes that the volume of transactions in the assisted living segment will overtake care homes for the first time.

There is already a significant shortfall in provision for the new cohort of senior citizens, who, as a far more independent generation than pervious retirees, are striving to enjoy an active and self-determined retirement in their own homes. This assessment is confirmed by the 2020 Spring Report 2020 from the German Property Federation (ZIA), which for the first time devotes a separate chapter to the segment, thereby reflecting the enhanced status of assisted living for seniors. The report estimates that the demand in municipalities with more than 5,000 inhabitants currently totals 865,000 residential units – compared with an estimated supply of roughly 300,000 existing serviced apartments. This means that there is already a shortfall of more than half a million units. As a result, a vast number of senior citizens do not have access to assisted living facilities close to where they live that meet their specific financial needs. The striking conclusion of the empirica study: By 2035, the gap will widen by another 200,000 apartments.

The premium segment is among the winners
Demand varies both regionally and between individual market segments. From a medical and social perspective, the provision of care for 5.0 per cent of households over the age of 70 is deemed sufficient. Thus, for every 20 households in a city, one serviced apartment should to be available. Unfortunately, almost no German municipality has so far managed to meet this provision requirement. While provision in Hamburg (4.9 per cent) and Berlin (3.5 per cent) are close but still have a bit of work to do, there is a blatant undersupply in many other regions. In Rhineland-Palatinate, Thuringia and Saarland, the rate of provision is just 1.0 per cent. The lowest levels of provision are found in Germany’s eastern federal states, although the national average of 1.8 per cent shows that action urgently needs to be taken almost everywhere.

A comparison of the different equipment and service categories as represented by the Gesellschaft für immobilienwissenschaftliche Forschung (gif) star rating system reveals a disproportionate shortage of supply, with the most serious shortage in the premium segment. According to empirica data, Germany would currently need between 90,000 and 100,000 extra four- and five-star serviced living dwellings to meet current demand. This is, once again, the result of disappointing levels of provision, which vary regionally between 0.07 per cent in Saarland and eastern states to 0.64 percent in Hamburg. A rate of 0.75 per cent would meet current demand – but no German city has ever managed to get supplies up to this level. As the generation of baby boomers gradually retires, the supply shortage will become even more acute. By 2035, demand in the premium assisted living segment is set to rise by an additional 33,000 units. This is one of the reasons the ZIA Spring Report recommends a fundamental rethink of provision. The main challenge society faces over the next few years will be ensuring an adequate supply of housing as the number of Germans over the age of 65 increases.

Assisted living is an affordable option for many seniors
Thankfully, the sound financial footing of households with residents aged over 70 provides a solid basis for closing the significant supply gap. The relatively high number of affluent households, combined with the progressive differentiation of senior housing as an asset class, which has partly been driven by baby boomers’ higher expectations in terms of home comforts, flexibility and mobility, allows an average monthly rent of EUR 1,100 across the entire sector. And when it comes to four- and five-star apartments, which tend to have more generous floor plans, better equipment and more services, residents are currently paying an average of EUR 2,100 to EUR 2,800 per month.

This is the basis for the total investment potential of EUR 64 billion for the construction and maintenance of serviced apartments by 2035, which senior citizens would actually be able to finance from their income alone. If taxpayer funds were also used to improve care, this would enable EUR 100 billion of nationwide investment in the sector. And the general trend applies equally to the premium segment: empirica concludes that 2.4 million households could pay up to EUR 7,000 per month from their current income and existing assets. With their financial muscle, the retirement of Germany’s baby boomers in all probability means an extremely promising decade for the assisted living sector.

The residential investment market will prove to be a coronavirus crisis winner

It is far too early to predict the full extent of the corona-induced recession. Even with a gradual easing of the restrictions on various segments of the economy and sectors of public life, at this point in time it is only possible to provide rough estimates of the medium-term impact of the current crisis. Nevertheless, there are already a number of distinctly gloomy scenarios for the real estate market. Some experts are even forecasting a dramatic price slump or an across-the-board decline in demand.

I have a very different view of the future of the residential investment market. Many institutional investors, financial intermediaries and insurance companies will once again return to residential real estate as a safe haven. Family offices and wealthy private investors will now be highly reluctant to invest a large proportion of their liquidity in stocks, although there will certainly be opportunities to re-enter the stock market after a future market correction. Instead, they will again turn to rental housing investments. And investors who have so far primarily focused on commercial real estate will increasingly turn their attention back to the housing market. The residential investment market will prove to be a coronavirus winner. Incidentally, the same does not apply to the market for premium condominiums and owner-occupied homes. In both of these segments, it is highly likely that we will see a shift in the behaviour of many private buyers even after the end of the current phase of uncertainty.

Then there is the office boom of recent years, which is likely to be severely dampened for the time being. Record performances such as the one achieved in 2019, when one million square metres of office space was brokered in Berlin, will not be achieved again anytime soon. It is pretty much given that the knock-on effects of the pandemic will hit the office market far harder than the housing market. The subsequent recession will reduce the number of office workers and demand for office space will drop noticeably. During economic downturns, companies do not want to commit themselves to long rental contracts. Neither do they want to proceed with long-gestating expansion plans. Office rents will come under increasing pressure. Of course, even in a crisis, there are always a number of attractive projects that can be developed with a secure future. But on average across the entire market, the office sector is unlikely to get off lightly. The recession will leave the deepest traces in the retail sector (food and groceries excluded), the gastronomy sector and the hotel industry. Social distancing and quarantine orders will rattle the economic foundations of many commercial tenants. As a result, demand for space will fall – even after the current preventative measures are lifted. Of the tenants that do survive, some will have no option but to try to renegotiate their rents.

And yet, none of this applies to the rental housing market. Even after the coronavirus crisis, the residential market will still be subject to high demand in rapidly expanding cities and conurbations, and the supply of housing will remain stubbornly low. I estimate that 2020 rents will follow the patterns we observed in 2019 and gain around 3.0 per cent by the end of the year. The huge leap in rents over the past decade was already over anyway, as we had seen in all of Germany’s major cities. Given its stability, the rental housing market is the safe haven in uncertain times. This is good news for any property owners out there considering the sale of their property to generate extra liquidity. With no dip in demand, no one should be worried about coronavirus as a driver of price declines. Anyone looking to sell a rental property in the wake of the crisis, for example in order to invest in their own company, can expect an accommodating market environment.

In Berlin, however, this is only true in part. The German capital’s residential real estate market is indeed under pressure. Not because of coronavirus, but because of the left-wing governing coalition’s rent freeze and cap. The impact of the rent cap, which bears a striking resemblance to expropriation, seems far more severe than the impact of the current pandemic. The virus is a force majeure. The rent cap is the result of a misguided real estate policy that deliberately divides rather than encouraging people to work together. And if there’s anything we need right now to help us through the crisis, it is to work together.

Berlin-News

Housing construction goes into standby mode

In the midst of the coronavirus crisis, housing construction has ground to a halt. This is one of the key results of a new survey of members of the Federal Association of Free Real Estate and Housing Companies (BFW), who report that large numbers of construction sites have come to a complete standstill because of a lack of official permits, a shortage of foreign workers and interruptions to the supply of building materials. According to BFW’s members, problems in just one of these three areas is enough to stop the entire construction process. According to the survey, 76 per cent of surveyed companies are experiencing or expecting construction delays. Most companies expect delays of about two to three months. What’s more, 40 per cent of the companies reported that they would not even be able to start planned construction works because so many municipalities are currently not processing building permit applications.

However, a recent study from bulwiengesa has confirmed that construction activity in Germany’s seven largest cities had already started to slow down even before the latest developments. According to a study, fewer apartments were planned or built last year in all cities except Berlin. The market data was collected by bulwiengesa’s analysts before the Covid-19 pandemic, so any impact of the virus is not reflected in the figures. The data indicates that construction would have declined even without the current threats to public health. Many property developers are increasingly focused on building offices rather than apartments. Furthermore, there remains a serious shortage of affordable land for housing construction.

No problems with rental arrears in Hamburg

Are residential and commercial tenants still paying their rents on time during the coronavirus pandemic? It is a question that is certainly causing escalating anxiety among landlords. The latest indications from Hamburg should therefore provide a welcome measure of relief. The Hamburg Alliance for Housing has conducted a survey of its members and found that, in the residential sector, 2,490 cases of late payments have been reported, equivalent to less than 1.0 per cent of all registered apartments. On average, the rent arrears per apartment averaged EUR 704.00.

By comparison, 17 per cent of rents for commercial properties, including offices and logistics space, have not been paid. The rent arrears per commercial unit averaged EUR 3,032. Retail, restaurants, cafes and hotels are particularly hard hit by the standstill. In some cases, landlords have lost up to 80 per cent of their regular rental income. The survey was conducted online and ran until 14.04.2020. As a result, most rental payments for the month of April are reflected in the survey. In total, 888 Hamburg companies and private landlords provided data relating to 357,572 residential and 11,072 commercial leases.

Property market bearing up well in the face of coronavirus

According to the Cologne Institute for Economic Research (IW), the housing market should come through the coronavirus crisis relatively unscathed. According to a new IW study, residential property prices will probably not fall at all or, if they do, the declines will be moderate. In the worst-case scenario, prices could fall by up to 12 per cent. The damage to the property market depends on how many weeks the economy as a whole remains at a standstill, as it is the lockdown that most endangers people’s incomes. The study’s authors have calculated three scenarios. Were rental income to fall to the extent last seen during the global financial crisis of 2008/2009, property prices would collapse by around 17 per cent this year in the worst case. However, the authors dismiss this as a likely outcome because a decline of this magnitude would also require significantly higher interest rates. However, given the strong assumption that long-term interest rates are likely to fall even further, prices are more likely to stagnate or fall slightly. A significant price slump could occur, but only if the coronavirus crisis causes the collapse of the real estate market as a whole. However, as the authors point out, there is no real estate price bubble in Germany. Instead, there is a structural shortage of housing and the costs for tenants and owner-occupiers remain closely linked. According to the IW study, there is another major factor underpinning the stability of property purchase prices – rental prices, which show no signs of falling any time soon.

Apartment buildings and forward deals of the month

Four new-build office units in Berlin-Schöneberg

These four separate units each accommodate usable office spaces of between 73 and 253 square metres. The units are forecast to be rented out at an average of EUR 23.50/sqm/month. The units are well-situated, especially in terms of public transport links and vehicular access. The units are also equipped with ten underground parking spaces, priced at EUR 150.00 per month.

Price: EUR 3,750, 000, plus 7.14% sales commission (incl. sales tax)

Forecast net annual rent: EUR 185,000

Price-to-rent ratio: 20.28

Information acc. to energy performance certificate: projected energy consumption 68 kWh/(m²*a), energy-efficiency class B, gas central heating, built in 2016 (planning option).  

(Please quote property reference number 52178 when making your enquiry)

Multi-family apartment building in Berlin-Neukölln

This multi-family apartment building was extensively upgraded to KfW-70 standard in 2010. The property’s facades were repainted and all windows and doors were replaced. The 33 residential units belong to a single HOA. The units have floor plans ranging from 46 to 114 square metres and are accessed via an elevator. Each unit is equipped with a balcony overlooking the quiet courtyard.

Price: EUR 4,500,000, plus 7.14% sales commission (incl. sales tax)

Lettable floor space: 1,773 sqm

Price per sqm: EUR 2,538

Information acc. to energy performance certificate: energy consumption 82 kWh/(m²*a), energy-efficiency class C, district heating and hot water system, built in 1970.

 (Please quote property reference number 52109 when making your enquiry)

Well-maintained, free-standing multi-family property in Essen (NRW)

This free-standing multi-family apartment building is located in a quiet area with outstanding public transport links relatively close to the Zollverein UNESCO World Heritage site. The property accommodates ten apartments and one commercial unit and the average rent is EUR 5.20/sqm/month. The apartments have floor plans from 49 to 83 square metres. The commercial space is rented for EUR 5.49/sqm/month and, like the apartments, offers plenty of potential for rent adjustments.

Price: EUR 760,000, plus 3.57% sales commission (incl. sales tax)

Actual net annual rent: EUR 48,708

Price-to-rent ratio: 15.60

Information acc. to energy performance certificate: energy consumption 256.8 kWh/(m²*a), energy-efficiency class H, gas central heating, built in 1929.

 (Please quote property reference number 52203 when making your enquiry)

Dear Reader,

“And I thought socialism was history” were the words of a U.S. investor upon hearing about the Berlin rent cap and the regulatory frenzy on Germany’s real estate markets. And it’s true: anyone who is currently considering investments in the German housing market needs to do their homework and get to grips with the many (some would say too many) barriers and restrictions – with the ban on converting rental apartments into condominiums just one example. It is important to focus on long-term value add and not to take the path of least resistance, i.e. limiting investments to markets with favourable political, explains Jürgen Schorn of Bauwerk Capital. And buyers would be well advised to follow the advice of Gabriel Khodzitski, CEO of PREA, who recommends making greater use of alternative data to evaluate investment decisions. And Mark Heydenreich from Fortis explains how new and old buildings can be equally sustainable, both from an energy and economic point of view. In the midst of all this, one thing is certain – there is plenty to do and keep abreast of on the real estate markets in 2020.

Here’s to an informative read!

Jürgen Michael Schick and Dr. Josef Girshovich

The real estate industry needs to re-examine which data it uses

Too many real estate industry professionals are astonishingly stubborn when it comes to which underlying data they use to make their business decisions. For years, they have been relying on an asset’s long-term WAULT (Weighted Average Unexpired Lease Term) to provide an indication of its long-term stability. And they have long calculated a property’s achievable rental income by analysing a range of investment comparables – such as the prices that have most recently been achieved for other assets in the same market.

Now, however, we need to ask ourselves how up-to-date our data collection approaches are in today’s market – and whether our industry would not be better advised to wean itself off its beloved data habits. After all, many of the classic property-related facts and figures we use are highly imprecise. Firstly, these data have almost nothing to do with the specific and unique value propositions of an individual property. Secondly, the data merely reflect information from the past – and rarely make it possible to draw conclusions about the potentials and risks that could be exploited in the future. Thirdly and finally, the industry is unable to unlock new potentials and exploit emerging opportunities if it sticks too rigidly to its tried and trusted approaches. Without changing our ways, we fail to collect the kind of alternative data we need to reliably zero in on the risks and opportunities that will shape our industry’s future.

For the long-term development of a property, it makes far more sense to analyse selected social and economic data than it does to create an Excel table of residual lease terms. How are the job markets, purchasing power indexes and crime statistics developing? How much potential does the relocation of industry-leading companies offer? What transport infrastructure improvements are planned over the next few years and where? With this type of information, real estate companies can develop forward-looking strategies to build and upgrade properties to satisfy users’ wants and needs five or ten years down the line.

The same applies to the local and regional politics of building permits. It is by no means a rare occurrence that even supposedly robust building permits are subject to critical review long after planning authorities have granted their approval. Increasingly, activists are launching political initiatives which, if successful, can quickly ensure that a ready-for-construction project is overturned. Data on citizens’ associations and grassroots campaigns, along with local, regional and national election timetables – which could provide advance warning of potential shifts in municipal interests – are therefore essential. All of this alternative data is freely available, but is rarely used in the pricing and evaluation of a potential real estate investment.

Even more potential – much of which remains untapped – is waiting to be discovered in the world of Smart Data. Intelligent algorithms and machine-learning technologies can already make forecasts with far greater precision than traditional calculation methods. However, the full range of possibilities these applications offer can only be exploited when we optimise both our processes and the data on which we base our calculations. After all, even cutting-edge Artificial Intelligence can only do so much with traditional data that only tells half the story.

What is the most sustainable real estate investment: new construction or existing buildings?

A growing number of investors and owner-occupiers are currently asking themselves whether the housing market boom of recent years is about to come to an end any time soon. On the one hand, the massive price rises for residential real estate in Germany’s largest cities and metropolitan areas have created a major issue for both politicians and society at large – and led to ever more stringent regulation of the country’s housing stock. On the other hand, it is not clear whether prices for new buildings have now reached a “glass ceiling”. After all, no matter how expensive building land and construction costs become, some market observers believe that we will eventually hit a ceiling, even in the best locations. There is, after all, a point at which a square meter of living space simply becomes unaffordable.

In this debate, I am interested in the fundamental question of how high this “magic” limit is and who decides: is €7,000 per square metre in a newly constructed apartment building still realistic and €8,000 now too high? Is €12,000 per square metre asking too much, or is it still possible to ask for €14,000? The market for new residential construction rests on two pillars: firstly, on investors’ assumptions that they can achieve a certain level of rental income from a specific asset; and, secondly, on the willingness of buyers to pay a certain absolute price for a new home. It is probably unnecessary to add that both are dependent on a third factor – namely the ability of potential buyers and potential tenants to service their mortgages and rents. I have come to believe the following: Provided there is scope for buyers and tenants to make increased mortgage and rent payments, housing prices will continue to rise, even beyond any supposed and arbitrary glass ceiling.

In the United States, the real estate platform PropertyShark publishes an annual ZIP code ranking of the most expensive properties in the country. The ranking is based on an analysis of which postcode areas have the highest average asking prices. It’s well worth noting the following trend: In past rankings, the most expensive ZIP codes were in Long Island (just outside New York City) and Connecticut; over the last three years, it has been cities and communities in Silicon Valley that have been breaking all records. This trend is not only relevant in terms of the potentials for price increases and general demand for residential real estate, it is also of interest in a sector-specific context. Connecticut and Long Island are the ancestral homes of New York investment bankers – America’s highest earners in recent decades. So, what has changed? Well, the banking industry no longer pays the highest salaries – it has been overtaken by the internet and tech industries. As incomes rise, people are willing and able to spend more on housing, a fact that is clearly confirmed by PropertyShark’s ZIP code ranking. More than 90 of the 100 most expensive ZIP codes in the United States are now in California.

As Generation Y approaches middle age, one of the most environmentally conscious generations of all time has entered the real estate market. So, it comes as no surprise that a given property’s environmental footprint is near the front of potential buyers’ minds as they weigh up whether to buy a condominium or not. After all, energy-efficient buildings make a valuable contribution to protecting the environment.

If the primary measure of a building’s energy-efficiency is its energy consumption during operation, new construction seems to be the more ecological option compared to an older building. However, such an approach neglects the most important part of the climate calculation. After all, an older building does not have to be rebuilt at great expense in terms of energy and resources: it doesn’t need tons of materials to be shipped halfway around the world; it doesn’t need cranes and excavators that pollute the air. The most sustainable approach, therefore, is to preserve existing buildings and to modernise them to meet modern energy-efficiency standards. Thus, refurbished older buildings are often more climate-friendly than many recently constructed new-builds.

Leveraging the potentials of modernisation

Of course, many older buildings do not even come close to modern energy-efficiency standards. Thankfully, there are numerous measures that can be implemented to leverage the full potentials of building modernisations and elevate a charming, Wilhelminian-style stucco palace to the height of energy efficiency. First of all, any measures need to address the building’s heating systems. After all, district heating and gas are far more efficient than oil heating systems. Another relevant factor in terms of heating is that the installation and replacement of existing systems will also be heavily regulated from 2026 as the German government strives to achieve its climate protection objectives. Improving the insulation around supply and waste water pipes is another good way to protect the environment. Façades and attic spaces are also important elements of any older building. With the right insulation, a massive amount of energy can be saved – and the charm of the building’s historic envelope remains intact.

However, owners of condominiums in older apartment buildings should seriously consider whether they want to renovate and modernise their apartments themselves, or whether it makes more sense to move into an older apartment that has already been modernised to the highest energy-efficiency standards. After all, owners who want to do modernise their apartments themselves don’t have the final say on which measures they implement, they first have to reach agreement with the other members of their HOA. But even in such cases, environmentally conscious apartment owners have a number of options for achieving a greater degree of sustainability on their own. One of the most important levers is water consumption. Where water-saving aerators are installed in the single-lever mixers in the shower and washbasin, water consumption can be cut by about half. The right shower heads also provide the same showering experience, but with just a third of the water consumption. And of course, new toilets with efficient cisterns are far more economical than older ones.

Limited supply, stable prices

 However, sustainability is not only a question of reducing energy consumption. In terms of real estate, sustainable also refers to properties that retain their value over the long term. Or even gain in value. More people than ever before aspire to live in older buildings, but the supply is extremely limited. And if these sought-after properties are located in popular neighbourhoods, prices will most likely remain stable, even if the economy falters. According to a study published by the brokerage firm Homeday, for example, prices for older buildings have risen by an average of around 30% over the past three years. This is a full five percentage points higher than the average price rises for all other properties in Germany’s 80 largest cities. As these figures prove, environmentally-friendly investments in older buildings can be highly lucrative, especially for buyers who want to sell their condominiums at some point in the future.

Be more courageous!

Germans enjoy living in style and comfort – and in large apartments. And, in the minds of most Germans, it is difficult to have one without the other: the average floor area per person in Germany is roughly 50 square metres, significantly higher than in neighbouring countries such as Poland, France or Austria. At the same time, the gap between Germany and its neighbours is shrinking, especially when you take the figures for Germany’s seven largest cities. According to the Federal Statistical Office, the average floor area per person in Germany’s Big 7 shrank from 40.9 square meters in 2010 to 39.2 square metres in 2018. In view of rising housing costs and an increase in the number of single households, it is not surprising that more and more Germans are choosing to reduce their housing footprint. Gone are the days when per-capita living space seemed set to rise inexorably, even in major cities.

And in all honesty, there’s no need for the amount of floor space per person to increase year in, year out. Contrary to received wisdom, intelligent floor plans and creative furnishing solutions can achieve a high level of comfort in a small area. Nevertheless, criticism of one-room apartments has not diminished. They are deemed too small, too expensive and too elitist – and are blamed for destroying the long-established social structure of cities as they displace original populations. In my opinion, these arguments are not only wrong-headed, they are also counterproductive. The reality is that more and more people are moving to cities and this trend is set to continue for the foreseeable future. Although population forecasts are only ever reliable over relatively limited timescales, the vast majority of scenarios indicate significant growth in Germany’s largest cities over the next few decades.

Even today, developers in cities such as Munich, Hamburg and Cologne are literally treading on each other’s toes. There is simply not enough available space to absorb current population growth with conventional residential construction – especially as space is also needed for commercial developments and to create new open areas. I am certain that if the archetypal 80-square-metre, three-room apartment with two occupants remains the benchmark for politicians, planning authorities and the public, we will never solve the most pressing social and ecological problems in the housing sector. If we don’t change the way we develop new housing, our “keep calm and carry on” approach will simply exacerbate the shortage of building land. And push housing costs even higher.

According to a recent survey, a host of small- to-medium-sized towns and districts in Germany are creating living space at an incredible rate. And this new space is more than necessary, says the German Economic Institute (IW). In fact, construction activity is running at 50% above demand in 69 rural areas. In Germany’s largest cities, in contrast, building activity remains relatively subdued. Among the leading cities, Düsseldorf and Hamburg meet at least 86% of demand through new construction. If these two metropolitan areas can maintain the same level of construction over the next three years as they have over the last three years, their housing markets will quickly ease once more. Frankfurt is also doing reasonably well. In Berlin, Munich, Stuttgart and Cologne, however, the all-clear is far from being sounded. Why is that?

Not enough trust

I think many private developers have shied away from the risk of tackling supposedly “difficult” locations for too long. These can include, for example, locations a little outside city centres, socially disadvantaged neighbourhoods and even central neighbourhoods with above-average vacancies. And yet it has long been clear that these risks are well worth tackling – for developers and for communities in urban areas. The fact that too few new apartments are being built in major cities is not a recent phenomenon. For about ten years or more, it has been clear that we were at risk of a serious housing shortage. The media and industry experts starting debating a potential housing crisis a decade ago. And every month that passed with no or too little construction, the danger increased until it became an acute reality.

The usual reasons

Difficult locations? One could equally say that there has too often been a lack of vision, foresight and belief in the dynamics and growth potentials of our major urban centres, cities such as Berlin and Cologne. High land prices certainly played a greater role in Munich and Stuttgart, but even in these cities there was far too frequently a lack of courage. Against this backdrop, we should perhaps regard what can sometimes be long and drawn out planning and implementation phases of complex residential projects, which many market players have rightly criticised, as a plus. This gives the environment around your development the time it needs to evolve before your own project adds yet another building block in the process. Incidentally, we all need to be less emotional when we discuss these extended periods of time. After all, when it comes to complex projects, it is essential that the public sector and private stakeholders engage in intensive dialogue and include members of urban communities in their considerations. In our largest municipalities, almost all planning offices have been demonstrating an increased commitment and clear will to accelerate their processes, whether by increasing staff or by making exceptions in urgent cases.

 Too many developers have abandoned the cities

The simple fact is that too many developers have turned their backs on Germany’s cities in favour of focusing their development activities on rural areas and growing communities beyond the outskirts of attractive metropolitan areas. Ultimately, this will result in long-term vacancies. According to IW, for example, in the northern Bavarian district of Rhön-Grabfeld, the construction of new apartments has recently outstripped demand by a ratio of 4:1. Each location is unique, as are the opportunities in each location. But the fundamentals of demographics still apply and the urbanisation trend continues unabated. Meanwhile, the problem of overall population declines has been somewhat balanced out by immigration. Fundamentally, however, the problem remains. We will continue to see small communities in structurally weak becoming increasingly abandoned – places in which it will become ever more difficult to maintain current infrastructure and property values. Places that will eventually become completely deserted.

Conclusion

We need to reduce the number of developers that have turned their backs on our urban centres. Nobody can realistically expect to create affordable living space when they buy overpriced land in top urban locations. But the cities do offer a great deal of potential in wider urban areas – through rezoning and repurposing, perhaps even by remediating contaminated land or refurbishing existing buildings. Certainly, there are developers who cannot get their plans off the ground, and their developments are coming back onto the market. The old maxim of location, location, location is just as valid today as it ever was. Let us think more in terms of the long term. Real estate is long term, so let’s build where buildings are needed in the long term.

Federal ban on converting rental apartments into condominiums?

Germany’s governing coalition has announced plans to make it more difficult to convert rental apartments into condominiums. After a tidal wave of rental market regulations, many owners have been forced to convert and sell their rental apartments as condominiums. The CDU/CSU and SPD coalition now wants to put a stop to this practice at a federal level. According to the plans, even rental conversions outside designated social preservation areas (Milieuschutzgebiete) will be subject to official approval. Property owners who have gone through this process with planning offices in Munich, Hamburg or Berlin already know how difficult it is to get approval. Subjecting conversions to prior approval would, in effect, mean a nationwide ban on conversion. Municipalities know that by restricting conversions, they can claim that they are acting in the interests of tenants.

As long ago as the Housing Summit in the Federal Chancellery in September 2018, legislators indicated that they wanted to make it more difficult to convert rental apartments into condominiums. Restating its commitment to this goal, the coalition committee reaffirmed its plans last year. Right now, the Ministry of Justice and the Ministry of the Interior are in the process of drafting a final proposal with the aim of anchoring the new conversion requirements in the Federal Building Code (BauGB). As things currently stand, the new regulation will apply in certain regions. Nobody can conclusively say which regions will be affected.

In my opinion, this is the latest in a long line of populist regulatory instruments designed to create the impression that politicians are taking decisive action without any understanding of whether tenants in converted apartments are actually being squeezed out or not. There are simply no reliable figures to prove things one way or the other. Once again, it is enough to claim that tenants are being squeezed out.

Tenants already have a right of first refusal after conversion; they are protected against lease terminations for personal use for a period of between three and ten years; and planning authorities in social preservation areas can already approve conversions under the proviso that apartments are only sold to tenants for a period of seven years. Tenants in condominiums are better protected than tenants in normal rented accommodation.

From a housing policy perspective, it’s even more difficult to understand the logic behind the government’s latest plans. On the one hand, the federal government launched its controversial programme of subsidies for families with children (Baukindergeld) to promote home ownership. At the same time, this new “conversion ban” would drastically restrict the supply of housing for owner-occupiers. Prospective homeowners who want to buy their own four walls will be forced to switch to the most expensive segment in the market, namely newbuilds.

Real estate owners with portfolios outside social preservation areas should give serious thought to converting their rental apartments into condominiums as quickly as they can, before it is too late. Of course, they should also carefully consider the potential tax implications. However, if ever stricter rental market regulations (from the manipulation of official rent indexes to the proposed rent cap in Berlin) keep rental yields low, the sale of individual apartments could well be a necessary business model.

And in terms of basic policy, I think it also makes sense. After all, Germany is not a tenant nation, as we are often told, but a nation of frustrated potential owners. As the IVD has just confirmed, 50% of Germans aspire to be homeowners. Of course, this is a fact that neither tenants’ associations nor left-wing parties are willing to accept. Some would lose members, others voters, if people were simply allowed to do what they want – to buy a home free of political pitfalls and obstacles. Incidentally, when tenants are asked why they want to buy their own home, most answer: as an investment to secure my financial independence when I retire.

Berlin-News

ZIA Spring Real Estate Industry Report: Clear skies with the occasional shower

The expert authors of the latest Spring Real Estate Industry Report from the German Property Federation (ZIA) have identified the first signs of easing on Germany’s rental markets. The report highlights a slowdown in rental price growth and an increase in new residential construction in Berlin and a number of other cities across Germany. In the words of the report’s “Wise Men”, these trends should consolidate, provided “investors maintain their high propensity to invest and continue to find attractive investment opportunities”. The report’s authors criticise Berlin’s upcoming rent cap for being counterproductive in this respect. In contrast, they register continued purchase price rises in all of Germany’s A-cities. They also point out that demand-side pressures are building in some commercial sectors. According to the report, demand for office and logistics space is becoming increasingly difficult to satisfy and is starting to put the brakes on economic growth. The situation is particularly critical in Berlin and Munich, where the report highlights vacancy rates of 1.3% and 1.4%, respectively. As the report points out, neither city now has a healthy supply reserve. ZIA President Andreas Mattner has called for an end to “the hostile building environment” and for a moratorium on state regulation of the sector, which only serves to make the construction of new apartments more expensive.

Surprising? When it comes to their own properties, owners want to call the shots

In August 2019, the German government announced plans to reform the German Condominium Act (WEG). The aims of the reform include, for example, making it easier to install charging stations for electric cars in communal garages. The new Condominium Act is expected to come into force in late 2020. Ever since it was announced, property owners have become increasingly vocal in criticising the legislation’s failings. According to a survey conducted by the Wohnen im Eigentum consumer protection association, 94% of surveyed owners reject plans to expand the role of property managers by giving them greater freedom to make decisions and approve measures on their own authority. A vast majority of owners see any strengthening of property managers’ roles as a strict “no-go” area. And 95% of owners would like to be able to more easily terminate contracts with unqualified property managers. Wohnen im Eigentum surveyed 3,500 condominium owners and made the survey’s findings exclusively available to the major Berlin daily newspaper, Tagesspiegel. The questionnaire included 31 closed and one open question.

How far reaching will share deal reforms be?

Representatives from the CDU/CSU and SPD, the two groups that make up Germany’s coalition government under Angela Merkel, are currently discussing changes to the future tax treatment of share deals. Positions within the Grand Coalition are still far apart. The only point on which agreement has been reached is that the new law should not apply retroactively from 1 January 2020. Legislators are aiming to pass the new law by the middle of this year so that it can come into force in early 2021. A number of major points of contention remain, including the shareholding threshold that will trigger the tax and whether the new regulations should also apply to companies with share capital or only to partnerships with real property, as has previously been the case. The Greens are calling for far-reaching reforms to Germany’s taxation system and want a quota model, which could lead to higher property prices and drive rents and costs up. Over the next few weeks, politicians will be working hard to agree solutions that reflect the findings of a recent Finance Committee hearing of real estate industry associations and experts. So far, however, the talks have failed to produce a decisive breakthrough and industry figures are becoming increasingly uncertain regarding the eventual outcome.

Apartment buildings and forward deals of the month

Attractive residential complex within easy reach of the future TXL Campus Berlin

This very well-maintained and fully-let residential complex was built in 1982 and is accessed via four stairwells with elevators. With a total floor area of 4,012.48 sqm, the complex comprises 40 residential and two commercial units. All of the apartments have balconies or terraces and some feature private gardens.

Apartment rents are below market level, averaging €6.39 / sqm / month.

Price: €12,000,000 plus 4.76% sales commission (incl. sales tax)

Underground parking: 35 spaces

Actual net annual rent: €361,296

Information acc. to energy performance certificate: energy consumption 123.7 kWh/(m²*a), energy-efficiency class D, gas central heating, built in 1982.

(Please quote property reference number 52028 when making your enquiry)

Multifamily apartment building with 17 units in Erfurt

This multifamily apartment building was built in 1997 on a 1,500-square-metre plot. The property comprises 17 apartments, which are accessible via two stairwells. The two- and three-room apartments have floor plans ranging from 52 to 80 sqm and 15 of the units are equipped with balconies or terraces.

The property also offers outside parking for 17 cars.

Price: €2,200,000 plus 7.14% sales commission (incl. sales tax)

Lettable floor space: 1,129 sqm

Price per sqm: €1,948

Information acc. to energy performance certificate: energy consumption 82.4 kWh/(m²*a), energy-efficiency class C, gas heating, built in 1997.

(Please quote property reference number 52163 when making your enquiry)

Two exquisitely appointed multifamily apartment buildings on the outskirts of Berlin

These two properties comprise a total of 19 residential units with floor plans of between 40 and 110 square metres. The newer property was constructed in 2010 and the older building was modernised in the same year. The properties feature generous balconies and terraces, modern bathrooms and fitted kitchens. Both buildings are equipped with wheelchair accessible elevators.

Price: €4,900,000 plus 5.35% sales commission (incl. sales tax)

Parking spaces: 20

Actual net rental income: €190,022

Energy performance certificates have been issued for both properties.

(Please quote property reference number 51762 when making your enquiry)

Dear Reader,

There’s no shortage of controversy surrounding Berlin’s upcoming rent freeze and cap. As the original proposal came from the governing SPD, we asked one of their young politicians for his take on the left-of-centre party’s real estate policy. He has some interesting demands – which go in a completely different direction than his party would probably expect. Unpacking the debate surrounding expropriation, rental price brakes, freezes and caps, we ask: What are politicians hoping to achieve? Shouldn’t their aim be to guarantee both tenant satisfaction and a fair balance between the interests of owners and tenants? One common denominator for both groups is sustainability – an issue that also has an impact on rising energy costs. On the subject of tenant satisfaction, Thomas Meyer has some interesting findings from a recent WERTGRUND study, which leads us seamlessly to a question from Konrad Jerusalem: How can the building sector possibly achieve its ambitious climate targets? After all, improving the energy efficiency of the buildings we use can also contribute to higher levels of satisfaction among both owners and tenants.

We wish you an informative read and a pleasant end to what has been a tumultuous year

Jürgen Michael Schick and Dr. Josef Girshovich

A question for Konrad Jerusalem: “How can the building sector achieve its climate targets?”

According to the German Energy Agency (dena), there are 21 million buildings in Germany and they account for 35% of the country’s total energy consumption. What’s more, there is huge potential to reduce the energy used for heating, hot water, lighting and air conditioning. It is therefore hardly surprising that the German government is determined to reduce primary energy requirements in the building sector, cutting consumption as far as possible and substantially increasing the amount of energy generated by renewable sources. As an interim target, the federal government is aiming for 14% of Germany’s energy to be generated by renewable sources by 2020. Three years ahead of schedule, the target was almost achieved in 2017. In terms of reducing consumption, however, there is still a long way to go. The largest single energy consumer in the building sector is heating – the interim target envisaged a reduction of 20% in heating energy consumption by 2020 compared with 2008. Unfortunately, as things currently stand, it doesn’t even look as if a reduction of 10% will be achieved. One reason for the failure to hit the 20% target is that Germany has a large stock of older buildings and they are not being renovated and modernised fast enough. Only about one percent of residential and commercial buildings undergo energy efficiency upgrades each year. At this rate, achieving tangible reductions will take another 100 years. Do we really want to take a full century or more to achieve our climate targets? Of course not. As I see it, we need to start by increasing the modernisation rate to 10% of older buildings per year. If we had already done this, we would be on schedule to achieve building sector climate targets as early as 2030. So, how can we get the modernisation rate up to 10%?

Achieving such ambitious climate and energy efficiency targets will need more than just market mechanisms. Even with such low interest rates, investments in energy-efficiency upgrades only pay off over very long periods of time. Investments in roof and façade insulation, for example, often only pay for themselves after a decade or more, even with attractive financing options. For the building sector to achieve its climate targets, the government will have to offer more support. The sector needs incentives that are much more effective in delivering the greatest possible savings as quickly as possible, and with the most efficient use of state resources. For example, we have around twelve million outdated heating systems in Germany. If these were replaced with modern systems, we could save up to 40% of heating energy. The same applies to other technical systems such as cooling units and pumps for distributing hot water. Against this background, a government scrappage scheme would, in my opinion, provide an effective incentive and the funds would certainly be well invested.

Property owners in the commercial and residential sectors, and the owners of rental properties in particular, have a lot to gain from improving the sustainability of their buildings. After all, demand for rental space is exceptionally high right now. Unfortunately, many owners seem to forget about energy consumption and operating costs almost as soon as they have secured tenants for their properties. And this could easily come back to haunt them as soon as demand decreases again. But even the prospect of losing out on future tenants would appear to provide insufficient incentive. Reducing energy consumption is clearly another area where the legislator can help. In this case, much could be achieved by relaxing existing restrictions. As things currently stand, landlords are only allowed to pass up to 8% of modernisation costs on to their tenants. And this despite the fact that it is primarily tenants who benefit from lower energy bills and more comfortable surroundings, while it is the landlord who bears nearly all of the costs. For example, if a refurbishment costs €15,000, the landlord is only allowed to pass on a maximum of €1,200 per year to all of a building’s tenants.

A second option to encourage energy efficiency would be a higher CO2 price. According to plans announced by the federal government, one tonne of carbon dioxide will cost €10.00 from 2021, rising to €35.00 by 2025. However, based on calculations from researchers at the Mercator Research Institute on Global Commons and Climate Change (MCC) and the Potsdam Institute for Climate Impact Research (PIK), in order to achieve the goals of the Paris Climate Agreement, the price for one tonne of CO2 would have to start at €50.00 in 2020 and rise to €80.00 by 2025. Even though a higher price for CO2 was not included in the German government’s climate package, property owners should take the time now to develop and implement strategies for sustainable real estate operations. As a first step, owners need to systematically measure and analyse the energy consumption of their buildings. Second, they need to set and implement ambitious sustainability targets. On this point, it is not enough to merely invest in state-of-the-art technology; the technology must also be operated efficiently. For example, it is important to set the heating correctly and have the air conditioning system serviced regularly. This is one area that still offers considerable potential for improvements and cost savings.

Ultimately, owners would not only be investing in reducing their carbon footprints, they would also be investing in the attractiveness of their properties. After all, sustainability is set to be an increasingly important factor in the rentability, and profitability, of buildings.

The SPD in Berlin needs a bolder housing policy

As a young Social Democrat in Berlin, I care a lot about the way my city is developing. I also look to the leading Social Democrats of the past for inspiration. Courageous Social Democrats in Germany have done far more than just take a lead on major social questions such as integration, peace and social justice. Their visions have also helped to craft progressive urban development, building and transport policies. Unfortunately, the leading lights of the modern Social Democratic Party are struggling to live up to their legacy.

Large-scale projects that once shaped the city of Berlin, such as the 200-kilometer expansion of Berlin’s underground network under the Social Democrats Ernst Reuter and Otto Suhr in the 1950s or the construction of entire housing estates under Mayor Willy Brandt, seem practically unthinkable at present. The policy of small steps has become the norm in recent years. Great visions and the kind of global thinking that a cosmopolitan city like Berlin really needs are noticeably absent. But who, if not the SPD, can possibly shape the future of the German capital?

Other left-wing parties might describe themselves as progressive, but they have very little to do with progressive ideas and ideals at the moment. When it comes to urban development and housing, they prefer to serve the narrow interests of their respective bases and focus on the here and now instead of helping to design tomorrow.

That is why we Social Democrats need to develop clear ideas about the big city in which we live and want to live. In my view, our efforts should focus on two things in combination: social issues and progressive issues.

First, we need to listen to the advice of Daniel Liebeskind, the world-famous architect who is deeply familiar with Berlin and its idiosyncrasies. He soberly states that taller buildings offer the opportunity to create socially acceptable and thus affordable living space. We can also learn a great deal from the ideas of our Austrian sister party, the SPÖ, which launched the Vienna Model 100 years ago as a sustainable concept vested in the common good.

Specific proposals could include, for example, redefining the city’s approach to high-rise construction and re-evaluating the regulations introduced in the 1920s to restrict the height of many buildings. These regulations are relics of the past that put unacceptable restrictions on the future. This is not about turning Berlin into New York and changing the cityscape beyond all recognition. It is about refusing to see high-rise projects as a threat. It is about recognising opportunities.

Progressive urban development is not one social democratic issue among many, but the issue par excellence. It is about realising that we need a fairer way to distribute living space in a growing city and that this can only be achieved by thinking, and building, big. We should spare no effort or cost in order to create new neighbourhoods and redevelop existing neighbourhoods in line with the Viennese model.

We could also expand the current Berlin model, which specifies that 30% of housing should be rent and occupancy-controlled units, while simultaneously reducing bureaucratic hurdles and cutting the time it takes to get permits and start construction. After all, if you want to build faster, you have to think socially.

In principle, we also need to discuss whether we are approaching the end of the rental era. With roughly 85% of the city’s population living in rental housing, might it not be time to massively promote home ownership? In view of Berlin’s tense housing market, it is no longer true that renting offers the greatest flexibility, even if this is still frequently mentioned as one of the major advantages of renting. We have now reached the point where we should question even our most fundamental ideas.

Currently, however, Berlin seems to be attracting a great deal of attention for all the wrong reasons, above all for the blockades its politicians are putting up. The ambitious redevelopment of the iconic Karstadt building on Hermannplatz is just one example and is being blocked by local planning authorities in Friedrichshain-Kreuzberg, a district that is actually quite famous for its willingness to experiment. A gap is opening up in Berlin’s political landscape; a gap that could and should be filled by a social and progressive SPD.

The German rental housing market: How does Joe Public actually live?

Joe Public and his German equivalent Max Mustermann represent the average tenant, which means they can provide us with valuable insights into the German rental market. How exactly does Joe Public live, how much rent does he pay and how satisfied is he with his current rental situation? We recently joined forces with the Allensbach Institute for Public Opinion Research (IfD) to answer these questions and more.

Joe Public is not all that interested in money

Basically, Joe Public is a loyal tenant. He has been living in his apartment for eleven years now. He spends an average of EUR 690 per month on his rent, of which EUR 498 is for the basic rent and EUR 192 for the operating costs. As he is only affected to a limited extent by the sharp rise in asking rents, his rent is a rather low financial burden. In the past three years, Joe Public’s rent has barely risen. In fact, it is just 2.5 percent higher, which is even lower than the inflation rate (3.3 percent) of the past three years. Incidentally, the biggest rent increases were not in the metropolises but in rural areas (4.7 percent).

The fact that rental prices for tenants such as Joe Public have only increased moderately is also reflected in the figures on rent increases. Between 2016 and 2019, average German tenants were hardly affected by rent increases and, given their experiences over the last few years, tenants like Joe Public do not expect any rent increases in the future either. Rather, they hope that the pressure on rental prices in Germany will ease again in the coming years. At least this is what the study tells us.

On the whole, Joe Public is satisfied – but not with everything

Like 74 percent of all respondents, Joe Public, our average tenant, is basically satisfied – but not without reservations. The proportion of satisfied tenants is currently seven percentage points lower than in 2016, the reference year for our previous comparative study. There are many reasons for this. For example, he thinks that the parking situation and the quality of service provided by the building’s superintendent have deteriorated. He is also annoyed by the fact that repairs take so long to organise. In contrast, he is much more satisfied with his relationship with his landlord than he was in 2016. He is also happy to have seen improvements in building security and the quality of life in the area around his apartment. These results show that Joe Public demands better service. Essentially, he expects more for his money.

Our survey also gives us a clear picture of who tenants rent from, with more than half of the respondents renting their apartment or house from a private landlord (55 percent). The proportion of tenants who rent from real estate companies is significantly lower at 10 percent. Joe Public thinks it’s a good thing that there are so many private landlords, as are the 78 percent of respondents who say they are (very) satisfied with their current rental situation. Real estate companies ranked second in the popularity scale with a satisfaction rate of 74 percent, followed by municipal housing companies at 67 percent. In an overall comparison, however, satisfaction with all landlord types has fallen slightly since our last survey.

Affordable housing – a topic that appeals to everyone

As far as the government’s housing policy is concerned, our study says that Joe Public wants politicians to do more to tackle the issue of affordable housing. In his opinion, everything needs to be done to accelerate the construction of new housing, including increasing state subsidies for housing construction for the needy. He also sees the state as responsible for awarding more contracts to construction companies that can actually guarantee affordable rents for new buildings. On the other hand, he has less confidence in market mechanisms such as the designation of more building land or the relaxation of building regulations.

Of course, Joe Public, the average German tenant, only exists in theory. Nevertheless, he is important in helping politicians understand the impact of rents on society as a whole – and to shift the focus away from individual aspects such as surging asking rents in Germany’s biggest cities. Our Joe Public analysis shows that it is not long-term tenants who are struggling to cope with the difficulties of the rental market, but rather those who are currently looking for apartments and are directly affected by the housing shortage.

Our analysis also provides food for thought for legislators. Clearly, it makes no sense to implement ever stricter regulations to control existing rents, such as the Berlin rent cap, for example. Rather, politicians need to focus on new construction in order to increase the supply of living space that is both high-quality and affordable. To achieve this, however, politicians and the real estate industry need to improve the way they work together. Only if they manage to do so will everyone benefit, including Joe Public.

The Berlin test

There has been a breakthrough in efforts to reform Germany’s property tax system. But what should have been good news has actually come to demonstrate just how far Germany is from a nationwide housing policy. I propose a quick test as a first step towards a unified strategy.

October 16 proved to be an important day for Germany’s housing sector. Two things happened, perhaps coincidentally, but both proved emblematic of German housing policy. First, there was a breakthrough in the lengthy negotiations on property tax reform as agreement seemed to have been reached between the governing grand coalition of CDU/CSU and SPD and their opposite numbers in the FDP and Greens. On the same day, EY published a study claiming that almost one in three German municipalities with more than 20,000 inhabitants are planning to increase the rate of property tax they levy within the next twelve months.

Since Germany’s property tax system was ruled unconstitutional by the Federal Constitutional Court, politicians have spent 18 long months arguing over the reform, stressing again and again that it should be revenue-neutral and should in no circumstances increase the financial burden on tenants and property owners. On the very day of the breakthrough in negotiations, however, the futility of these earlier reassurances became clear because it is the municipal authorities who will actually set Germany’s property tax rates, not the federal government. Many municipalities are so cash-strapped that they need every cent they can get their hands on, which is why they will happily raise the rates and, surprise, surprise, increase the financial burden on tenants and owners.

So, what does this tell us about German housing policy? It underlines once again that Germany is a long way away from a uniform, nationwide housing policy. The property tax reform agreed upon by the federal and state governments may in itself be revenue-neutral, but it will make no difference if the municipalities raise their assessment rates. Yes, housing construction policy has shifted in recent months and the government may have provided for a soft promotion of housing construction, but this will be undercut if tenancy law is tightened nationwide and rent caps are introduced at state level. If we keep taking one step forward and then one step back, we’ll never get anywhere.

And that’s not even factoring in the government’s climate protection policy, which may be necessary from an environmental point of view but is certainly making building and renovations, and thus housing, ever more expensive.

Despite the fact that politicians and commentators repeatedly highlight the housing crisis as one of the defining social questions of our time, we are no nearer to a comprehensive national strategy on how to solve it. On 21 September 2018, the day of the government’s much-trumpeted Housing Summit, there was a small glimmer of hope that an appropriate strategy could still be developed. Unfortunately, any hope was quickly dashed as political arithmetic dictated that every concession to the construction industry should be balanced out by a matching piece of regulation.

As a result, Germany’s housing policy remains piecemeal, a potpourri of countless uncoordinated measures. In fact, there are so many that it is extremely difficult to keep track of and respond to all of them. This is, of course, a tedious process. But it must be done. Housing policy is simply too important for us to stand aside in frustration and leave it to the politicians.

Every time a housing policy proposal or measure is being evaluated, we all need to ask the following basic questions: Will this measure increase the supply of affordable housing or increase the home ownership rate? If the answer to both of these straightforward questions is no, the proposed measure is unlikely to provide much relief for the German housing market. This is just a quick test (you could even call it the Berlin Test, because at the moment every housing policy proposal coming from Berlin would most likely fail), but if there is ever to be a truly nationwide housing policy strategy in Germany, this test would be an ideal first step in the right direction.

Berlin-News

Rent caps – constitutional or not?

Habemus Mietendeckel” (“We have a rent cap!”) – pontificated Green faction leader Antje Kapek on Twitter regarding the agreement reached in October to introduce a rent cap in Berlin. The real estate federation IVD called the compromise a “return to socialist housing policy”. At the beginning of November, however, the Federal Ministry of the Interior announced that the Berlin Senate’s planned rent cap probably falls foul of Germany’s constitutional law. According to an email from the Federal Ministry, the state of Berlin does not have “the legal powers” to enact laws such as rent caps. The Ministry pointed out that rent limits are the purview of the federal government and are already “comprehensively and conclusively regulated”. Horst Seehofer (CSU) let it be known that the federal legislator’s decisions must not be “usurped” by a single state going it alone. Like many others, he sees the “legislative competence of the German states” in such matters as “null and void”. Kai Wegner (CDU) also considers the rent cap to be unconstitutional and expects that if the law is overturned by courts at a later date, demands for large additional payments or even eviction notices could be issued against Berlin’s tenants. In the meantime, the Beamten-Wohnungs-Verein (Civil Servants’ Housing Association) and cooperating non-profit building associations in Köpenick have withdrawn from a planned construction project on the Berlin housing market in view of the coming rent cap. The association and the cooperatives explained that the possible rent cap would mean they would lack the income needed to finance the new construction project.

Berlin SPD speaks out against possible expropriations

As early as 2018, the expropriation debate started in Berlin, kicked off by tens of thousands of Berliners protesting against rising rents. In October, the SPD held its Berlin party conference and many members, including Lord Mayor Michael Müller, took the opportunity to address the subject of expropriation and adopted a clear position against their coalition partners. A majority of 58 percent voted in favour of a motion calling the socialization of real estate companies “impractical”. The SPD also confirmed that it does not plan to support the upcoming Berlin-wide referendum on expropriation. In comparison, the SPD’s coalition partners, the Greens and Die Linke, have been supporting the campaign to “Expropriate Deutsche Wohnen & Co.” for months. The goal of the campaign is to expropriate property companies who own more than 3,000 apartments. The first hurdle in securing a referendum, a drive to collect 20,000 signatures, has already been successful and the Senate is currently examining whether a petition for a referendum would be legally permissible. Family Minister Franziska Giffey (SPD) also spoke out against the expropriation debate in Berlin: “I hope that Berlin finds better messages to broadcast to the world. For me, a modern city is one that does not stand for expropriation, but for innovation”.

Apartment buildings and forward deals of the month

Renovated early-20th century villa in Berlin-Biesdorf

This beautiful, four-storey villa was built in 1908 and has a full cellar. It accommodates five residential units, ranging from 70 m² to 141 m².
The property is located in Biesdorf-Nord in Berlin’s Marzahn-Hellersdorf district.

Price: EUR 1,425,000 plus 7.14% sales commission (incl. sales tax)

Lettable space: 492 m²
Current net annual rent: EUR 50,930

Information acc. to energy performance certificate: Energy consumption: 163 kWh/(m²*a); energy efficiency class: E, central heating with warm water; built in 1908.

(Please quote property reference number 52123 when making your enquiry)

Office and commercial building in prime Jena location

This six-storey office and commercial building with impressive modern architecture was built in 1996. The building has 13 units and an underground car park with 14 parking spaces.
The property is in a prime location of Jena.

Price: EUR 6,100,000 plus 7.14% sales commission (incl. sales tax)

Lettable space: 2,385 m²
Current net annual rent: EUR 319,220

Information acc. to energy performance certificate: Not available

(Please quote property reference number 52122 when making your enquiry)

Apartment building as part of a residential community in Berlin-Neukölln

This well-maintained 1975 apartment building has 33 residential units, accessed via a staircase and a lift. In 2010 the property was completely renovated to the KfW-70 energy efficiency standard.
The property is located near the heart of the old quarter of Rixdorf in Berlin’s Neukölln district.

Price: EUR 4,500,000 plus 7.14% sales commission (incl. 19% sales tax)

Net cold rent p.a.: EUR 142,250
Lettable space: 1,773 m²

Information acc. to energy performance certificate: Energy consumption: 82 kWh/(m²*a); energy efficiency class: C, district heating with warm water; built in 1975.

(Please quote property reference number 52109 when making your enquiry)