Dear Readers,

The year is drawing to a close and with it the ECB’s bond purchase programme. As of January, the European Central Bank is not likely to buy any more bonds, and this will certainly have an impact on the capital market. But interest rates are still low and real estate prices are stable. This makes it all the more important to assess the situation at the end of the year: Which costs can be reduced and which processes can be digitalised? How satisfied are your tenants? Which properties – existing or under construction – need closer attention in the new year? Our authors draw from a range of perspectives to shed light on the major challenges for successful residential investments. We hope you enjoy reading our last newsletter of 2018 and wish you a healthy and joyful end to the year.


Jürgen Michael Schick and Josef Girshovich

Guest Article

Jörg Homann Managing Director, Institutional Investment Group (2IG)

Joining the digital tenant conversation

Communication on social media never stops and it affects all areas of life and business. Asset and property managers in the residential real estate sector cannot insulate themselves from this constant stream of communication, because both the buildings they manage and the landlords they work for are often the focus of tenants’ digital ire in these networks. In particular, younger tenants use the various digital platforms to exchange information about their own living situation. There are many long-standing Facebook and WhatsApp groups for tenants who want to share their news and experiences about a property, estate or neighbourhood. Often the primary topics of discussion are problems and complaints.

If something does not work, it is a natural reflex to seek advice and support from a like-minded community. Strikingly named group threads attract a lot of attention. After all, a heading that complains about something that has supposedly gone wrong acts like a digital alarm signal. Not infrequently, this attention leads to strong solidarity. Similar experiences and associated complaints are shared, adding fuel to other frustrations that are not directly related to the actual complaint. In such forums, landlords very rarely get to tell their side of the story.

In no time at all, you’ve got a ‘shitstorm’ on your hands that damages the image of not only the property manager, but also the landlord and the investor. The digital storm of indignation can develop its own momentum, lowering the threshold for future complaints. In the worst case, the property manager has no way of counteracting the digital escalation at an early stage because they weren’t invited into the group. However, none of this necessarily leads to a solution to the actual problem. In order to ensure that online communication not only targets, but also involves the landlord, it is necessary to tackle the topic of social media proactively and to shape it yourself. Landlords have to engage in the digital tenant conversation with the people who live in their properties.

The first step is to define the structure, i.e. to choose the playing field and set the ground rules. There are a number of user-friendly apps that enable tenants to join forces to form a digital housing community – with the involvement of the landlord. Property managers can collect information at an early stage and stay up to date on the condition of the property.

Investors in particular can benefit from this type of forum, because this allows them to streamline their complaint management procedures. Such apps serve as an interface, bundling all channels through which a complaint can be submitted, thereby facilitating efficient and clear reporting. It’s easy to forget a telephone call in a busy office, and even emails can be overlooked. A standardised documentation process, on the other hand, is the order of the day. Thus, the investor would not only be able to track the complaints received and the corresponding reactions, but could also digitally monitor the quality of the property management and external service providers, which has not so far been possible in this form.

The biggest challenge will be to convince the tenants to install and use the app. Many people are already used to using apps for various day-to-day activities. However, the added value must be clear to the user. It is therefore important to communicate convincing benefits and promote the advantages of networking to tenants: Up-to-date information, such as maintenance and work schedules, can be accessed almost instantly via an app. In addition, tenants can communicate their own concerns to the landlord at any time with just a few clicks – and thus receive a response to their enquiry as quickly as possible.

Such an app could also serve as a communication channel, a ‘digital bulletin board’ that creates a new basis for property-related data collection and documentation. For investors and property managers, such apps also provide insights into critical communication between tenants. A combination that benefits every asset and property manager.


Construction delays can put financing at risk – is your property developer to blame?

Of course, rental property investors should take a critical look at where their property is being developed. But they should also obtain detailed information about the property developer if they want to avoid unpleasant surprises during construction.

Construction delays, funding shortfalls, shortages of skilled tradesmen. These are problems that arise all too often when a property investor has chosen the wrong developer. Construction delays may be so serious that they derail a project’s entire financing. The developer, who is responsible for every stage of a construction project, from the purchase of the land to the completion of the building, can easily become a risk. If, for example, the developer faces insolvency, the situation can quickly become critical for the investor. Within the industry, there are more than enough examples of such cases.

Before making a major investment, one would expect private investors in particular to do their homework and find out all they can about the property developer they will be working with. However, many fail to do so. Given the overwhelming pressure to invest and the scarcity of suitable investment opportunities right now, many investors are turning to the first provider they can find, without initially checking the bona fides of the developer. To prevent their dream of attractive returns from turning into a nightmare, investors should consider the following important points:

– Investors should use Creditreform or another credit rating agency to check the financial standing of their chosen property developer. This will save the investor from commissioning a developer with a poor payment history, or one who is already subject to bankruptcy proceedings.

– Companies can also be checked using a simple Google search. Investors can combine their search for the developer’s name (or the name of the developer’s managing director) with terms such as ‘construction problems’. If several negative results appear, it is probably better to look for another developer.

Another approach involves the creation of a positive list. The investor can ask the developer to provide a reference list of previous projects. This list should contain detailed information on construction schedules, including the planned completion date and the actual project completion date. There should be no major discrepancy between the two.

There are other criteria the investor needs to clarify before they sign off on their investment. Many private investors live happily in spacious detached houses in more rural areas. When they decide to invest in new rental apartment buildings, they frequently tend to look for investment opportunities in the surrounding area.

However, given the fact that prices in many rural areas in Germany are currently static or threatening to fall, this approach is flawed. It would make far more sense to look for a development with direct connections to a city or major urban centre with attractive infrastructure and amenities. Such locations offer investors the best chances of stable, long-term returns.

In essence, it boils down to identifying locations that people will want to move to. Tenants are attracted to new residential complexes that are close to supermarkets, doctors, day-care centres and schools. Young people, in particular, want to have a place where they can get by without a car. They want an environment with well-developed cycle paths, good public transport connections or car-sharing facilities. They don’t care so much about whether they are moving to an A, B or C city. They are far more concerned about whether their new home is well integrated into existing urban infrastructure, whether the population is growing and whether the number of employees is on the rise.

Such aspects apply equally to new-build properties and existing buildings. An investor who is interested in a classic, existing property from the 1950s to 1970s, for example, should definitely consult an expert. This expert will be able to objectively assess the condition of the building, and forecast the cost of renovation and modernisation work.

In selecting an investment property, investors cannot rely exclusively on the opinion of a broker. Brokers have sales targets in mind and cannot be relied upon to always provide impartial advice. Even notaries only consider the legality of a contract and do not conduct cost-benefit analyses. In this respect, independent appraisers and freelance consultants have a key role to play in any real estate investment. This applies not only to professional investors, who in many cases already consult independent advisors before arriving at their investment decisions, but also to private investors, especially those looking to head off any potential problems as early as possible.


Thomas Meyer CEO, WERTGRUND Immobilien AG

The satisfaction paradox

Media coverage of housing is dominated by tales of rising rents and angry tenants. At the same time, representative surveys paint a contrasting picture of highly satisfied German tenants. And it doesn’t seem to depend on the type of landlord they have, be they private owners or real estate companies. So, how can we reconcile this disparity?

A majority of tenants are satisfied

According to the recently published Housing Service Monitor 2018, a clear majority of German tenants think they are paying an appropriate rent. However, numerous media reports misinterpreted tenants’ generally high satisfaction rates. For example, it was reported that the number of completely satisfied tenants fell by 18 percent in 2018. Although this is true, it does not mean that 82 percent of the survey’s respondents were dissatisfied. There is, after all, a big difference between “not fully satisfied” and “dissatisfied.” A vast majority of tenants is generally satisfied, although they would like to see small-scale improvements.

In a tenant report we prepared together with the Allensbach Institute for Public Opinion Research in 2016, a total of 89 percent of all respondents said they were either satisfied or very satisfied with their housing situation. Tenants with private landlords were the most satisfied, followed by tenants in apartments owned by private housing companies. The lowest levels of tenant satisfaction were registered among tenants with municipal landlords. In addition, our tenant report identified a significant price differential between urban and rural areas. While in rural regions only 30 percent of respondents felt that their net rent represented a large or very large financial burden, this figure rose to 60 percent in Germany’s five largest cities.

Significant differences between in-place and asking rents

One of the main reasons Germany’s rental market is subject to such mixed portrayals is the large disparity between in-place and asking rents. Asking rents have risen rapidly, especially in Germany’s A cities. Prices have been driven ever higher for a number of reasons. For example, construction has become increasingly expensive. As a result, landlords are forced to set asking rents of EUR 10.00 per square metre and more in order to turn a profit. For many project developers, the only other alternative would be to switch to a higher-priced segment. On top of these surging construction costs, land prices have also been rising and demand has been so strong that developers cannot hope to keep pace. Politicians have also failed to promote the construction of social housing in many markets in recent years. Between 2000 and 2016, the stock of subsidised apartments shrank by around 1.34 million units. Rent controls on existing apartments expired and nowhere near enough new units were built.

In-place rents have risen much more slowly than asking rents. Our tenant report registered an increase of just 13.3 percent over the past ten years. This is largely due to the fact that German tenants tend to remain in their rented apartments for many years. At the same time, private landlords rarely adjust in-place rents. When they do, they tend to implement moderate increases to avoid the need for a new lease. Tenants in Germany move only once every eleven years on average.

Joining forces to combat the locked-in syndrome

It is important to understand that German tenants are nowhere near as dissatisfied as media reports might suggest. Nevertheless, politicians, investors and property companies urgently need to work together to counteract the sharp rise in asking rents. Should the gap between in-place rents and asking rents continue to widen, there is a real risk of the market being paralysed by locked-in syndrome. What this means – as the medical term implies – is that tenants are unable to move freely within a city due to financial constraints, even though they would like to, or have to, for personal reasons.

Politically, regional subsidy programmes for social housing construction should be closely coordinated with the real estate sector. A new national legal framework is also required. In order to promote the construction of housing by private investors, this new framework should include the recently approved special depreciation allowance, which is a prerequisite for the provision of sufficient affordable housing. There is also a need for action in the real estate sector. The Housing Service Monitor 2018, for example, criticised the fact that private housing companies only focus on new residential developments while neglecting existing tenants. Companies should take this seriously if they want to maintain the high satisfaction rate among German tenants.


Jürgen Michael Schick President, IVD

Berlin’s obstructionist housing policies serve as a warning to all

No relief in sight yet: Real estate prices for owner-occupied apartments in Berlin continue to rise and supply is becoming increasingly scarce. Since 2011, prices for condominiums in mid-range locations have more than doubled, with the core purchase price currently standing at EUR 2,650 per square metre – an increase of 12.8 percent over the previous year, as can be seen from the recently published report from the real estate price service, IVD Berlin-Brandenburg. In mid-range locations, new-build apartments cost as much as EUR 4,200 per square metre – on average. Core rents are also continuing to rise and have already hit double-digits in prime locations: the price per square metre is EUR 10.50.

By Berlin standards, housing prices are now at a high level. Prices in the German capital have risen rapidly – in 2011, a condominium in a mid-range location cost just EUR 1,300 per square metre. Sections of the local population have been left behind and are struggling with the new price level, which has brought Berlin into line with other major German cities. The social consequences of such a tense housing market are striking: mistrust of politicians and investors is growing; the atmosphere is becoming increasingly harsh. The main reason for this is the supply shortage: the provision of housing is not keeping pace with population growth. Berlin’s politicians continue to look on from the sidelines and, rather than addressing the situation, they side with tenant activists and initiatives that stymie housing construction.

Yet not so long ago, the housing market faced quite different problems. It might be hard to believe now but, in the early 2000s, there was actually a housing surplus in Berlin, in part due to the population declining in the mid-1990s. This trend was expected to continue in the following years. The high vacancy rate and the gloomy population forecasts meant that housing construction almost came to a complete standstill – politicians from the SPD and the East German communist party’s successor, the PDS, even wanted to tear down large blocks of housing at the time. Between 2000 and 2007, the housing stock grew by only 25,000 units, while the number of households rose by around 118,000 over the same period, flying in the face of all forecasts. The population also developed extremely strongly in the following years; between 2011 and 2017 alone, Berlin grew by 275,000 inhabitants. We, the representatives of the housing and real estate industry, have warned of the impending bottlenecks for many years. But politicians have deliberately ignored the issue.

The solution for the resulting housing crisis is obvious: supply must be increased and housing construction given a massive boost. In view of the sharp rise in demand, the need for housing was already evident in the early 2010s, but Berlin’s politicians continued to stick their heads in the sand. While the number of households increased by 86,500 between 2011 and 2016, the housing stock grew by just under 45,000 units during the same period. And even today, when hardly any other topic in Berlin is more discussed than the housing shortage, new construction still lags far behind demand.

Berlin’s left-wing coalition government has introduced a raft of ideologically driven regulations and bans; housing construction is neglected and often even actively prevented. Private investment is becoming increasingly difficult, and the housing shortage cannot be remedied without the private sector. State-owned housing companies have fallen well short of even their own targets for new construction, which in any case would have been nowhere near enough to cover the demand for new construction on their own. According to the Senate’s calculations, Berlin needs 20,000 new apartments each year. The municipal companies are expected to build 6,000 of these units – the rest will have to be provided by the private sector.

There are number of ways to achieve these ambitious targets, in particular through densification. Hardly any other major German city has such a high densification potential as Berlin, a city full of gaps between buildings and backyards. In view of the sudden rise in land prices mentioned at the beginning of this article, there are enormous possibilities in densification, which also includes systematically converting attics into new living space. But here, too, politicians are blocking progress, making densification difficult and unprofitable by imposing excessive amounts of red tape. As a result, the number of approvals for new apartments in existing buildings fell by 19.4 percent in 2017. What a scandal!

In Berlin, the failure of left-wing obstructionist policies has been clear for years. Instead of tackling the problems that have caused the tense housing market, Berlin’s politicians are playing to their parties’ core constituencies. Milieu protection areas, pre-emptive rights, building bans and all the other restrictions that the Senate and districts have devised at great cost to the tax payer might benefit a handful of tenants, but their obstructionist policies are a catastrophe for the population as a whole. The situation on the Berlin housing market simply cannot change if supply is not given a major boost. This is not a secret, it is clear to everyone in the industry. But the red-red-green obstructionists refuse to see the error of their ways.


The wrong question: “What should I do with my money?”

Why aren’t more property owners taking advantage of recent price hikes and parting with (at least some) of their properties? Many property owners are asking themselves: “If I sell now, what should I do with the money I made?” Unfortunately, there aren’t many alternatives to reinvest the proceeds of a sale. This is probably the main reason why many owners are not exploiting the opportunities offered by high prices.

Indeed, bonds with a high credit rating (at least in Germany) still do not earn interest; other asset classes, such as equities, are also too expensive from the point of view of some investors. And real estate? If I sell a property because the price level is very high, then the purchase of a ‘replacement property’ is also probably going to be expensive. Of course, there are exceptions, and those who are looking may find the needle in the haystack somewhere. For example, some investors sell in A cities and reinvest in B or C cities, where prices seem low because, for example, instead of paying a GRM (gross rent multiplier, i.e. ratio of price to annual rental income) of 30, they only have to pay a GRM of 20 in B and C cities. But does it represent good value if a property is now on the market at a GRM of 20 when, just a few years ago, the same property was available at a GRM of 10? It’s like saying: I’ll sell my Mercedes and buy a Fiat with the proceeds because it’s cheaper.

Of course, the GRM is not the only factor in making investment decisions: Potential rent increases are often cited as an argument as to why high GRMs are paid for existing properties. However, if rent control is tightened and tenants get wind of the new regulations, some assumptions about potential rent increases will prove unrealistic. In this case, forecast calculations based on the assumption that high GRMs will later be compensated for by corresponding rent increases will fall flat.

Why not do “nothing” for a couple of years?

The fallacy lies in the unspoken assumption that the proceeds from a sale must be reinvested immediately. This may be true for institutional investors, but not for private investors. They have the privilege of being able to do nothing for a few years. But what exactly does “nothing” mean? You can park your money in an overnight money account (which I wouldn’t do for very large amounts, though), or – a little more expensive – invest in short-term government bonds. Of course, you’ll lose money. The combination of negative interest rates and inflation means that you may lose two to three percent per year. This is psychologically difficult for most people to cope with, although – historically – this is by no means the first time that interest rates on high-quality bonds have been very close to or even below the inflation rate.

It’s about the alternatives: If I now sell my property at very high prices and then reinvest immediately, it is highly likely that I will make a loss. Because I will pay a high price for any new property I buy, plus transaction costs, which are particularly high for real estate. To put it simply: If I now buy at a GRM of 36 and the market corrects to a GRM of 24, then I lose a third of my investment, plus the transaction costs. That’s a far worse alternative than parking the money for a few years and losing three percent per year. However, this calculation will only pay off if there is a substantial correction in the near future, which will then allow a much more favourable market re-entry (for example at a GRM of 24 instead of 36).

And if prices do continue to rise?

What if prices keep rising? First, it is likely that prices will continue to rise if you sell now. Otherwise, you would have hit the historical high point, and this is extremely unlikely. Those who act counter-cyclically will at best succeed in buying near the lowest prices and selling near the highest prices. As a rule, after any real estate acquisition, you’ll have to sit by and watch as prices continue to fall, and after any sale, you’ll see how they continue to rise. Many investors cannot bear this uncertainty and decide on the worse alternative, namely not to sell.

Of course, when deciding whether to sell as a private investor or not, there are a number of other considerations to bear in mind. For example, very few private investors will buy a property and sell it within ten years; most will prefer to wait the full ten years, and enjoy a tax-free profit.

Anyone who really believes that prices will keep on rising should certainly not sell. If, on the other hand, you – like me – expect the financial crisis to flare up again in the next few years, you will consider a sale and wait for the opportunity to return to a much more favourable market environment.

Berlin Residential Investment Market


No Let Up in Criticism of the Housing Summit

In order to achieve the target of 1.5 million new apartments nationwide by 2021, a housing offensive was announced during September’s housing summit in Berlin. The raft of proposed measures included more direct investment in the construction of social housing, a help-to-buy scheme for families with children, more streamlined procedures for the zoning of federally owned land, and a special tax depreciation allowance to encourage the construction of new rental apartments. In addition, a standardised building code was announced to reduce the red tape surrounding building permit applications and approvals. A new expert committee has been appointed to develop a ‘Sustainable Building Land Mobilisation and Land Policy’ and will play a key role in this process. Under the stewardship of Marco Wanderwitz, State Secretary at the Federal Ministry of the Interior for Building and Home Affairs, the committee will develop specific action plans to improve and accelerate the zoning of land for residential construction. The first results are to be presented in summer 2019. Leading representatives from the real estate industry, however, have expressed scepticism – especially with regard to proposals for new regulatory measures. In a recently published statement, the real estate associations DDIV, GdW, Haus & Grund, IVD and ZIA criticised proposals to broaden the scope of municipalities’ rights of first refusal and to extend the reference period for official rent indexes from four to six years. According to the GdW, rent indexes are not a policy instrument, they are a mirror that should reflect the market rent in cities and municipalities. They also pointed out that Germany is not short of regulation, it is short of housing. It would therefore make far more sense to concentrate on creating a healthier investment environment. In addition, the GdW warns that the proposed special tax depreciation allowance is likely to fuel immense price increases.


Construction delays for apartments in Berlin

Although there has been a noticeable uptick in construction activity in recent years, there have also been significant delays in the completion of apartments in Berlin. This was among the key findings of a study conducted by the research company bulwiengesa on behalf of the BFW Regional Association Berlin/Brandenburg. In the German capital, the number of completions has remained well below the number of permits issued since 2008. In fact, completions have averaged just 54 percent of permits issued. According to the study, the disparity is largely due to Berlin’s lengthy development plan processes and other regulatory procedures. Having analysed the development plans approved in 2017, bulwiengesa found that gaining final approval took an average of 12 years. In contrast, delays caused by the buying and selling of land with building permits is much less significant. Completion delays are all the more problematic in Berlin and across Germany because the number of building permits being issued is also in decline. In 2017, the number of permits issued fell by 7.3 percent. The study also shows that in Berlin’s new-build segment, 70 percent of completions are rental units and 30 percent are condominiums. While the proportion of condominiums being developed in central districts is higher, more rental units are being developed on the outskirts of the city. 19 percent of the new rental units are subject to rent control.

BFW Berlin/Brandenburg was alarmed by the results of the study and has called for comprehensive measures from politicians to speed up the construction of new housing.



Apartment Buildings and Forward Deals

Top location in Berlin-Mitte

This seven-storey residential and commercial building was completed in 2000 and is accessed via a staircase with a wheelchair-friendly elevator.
The building comprises three modern retail units, five office units and seven luxurious apartments. The offer includes a building permit for the conversion of offices into smaller apartments with balconies. There is considerable potential for rent increases. The property is located centrally, in Berlin-Mitte.

Price:€10,000,000 plus 7.14% sales commission (incl. sales tax)

Residential space: 825 m²

Commercial space: 1,149 m²

Information acc. to energy performance certificate: not available

(Please quote property reference number 51714 when making your enquiry)


Stucco adorned period building on Treptower Park

This four-storey property was built around 1910 in the Berlin district of Treptow and features a full basement. The apartments’ floor plans range from 47 m² to 107 m² and a building permit has been issued for the construction of two penthouse apartments. A certificate of completion has been issued for the property. A declaration of division has been applied for. The current average rent is €5.37.
The property is close to Treptower Park and Plänterwald forest.

Price: €3,300,000 plus 7.14% sales commission (incl. sales tax)

Price per m²: €3,264

Information acc. to energy performance certificate: Final energy consumption 131 kWh/m²/annum), incl. warm water; gas central heating; built in 1911

(Please quote property reference number 51786 when making your enquiry)


Classic, centrally located building in Berlin-Tiergarten

This well-maintained residential and commercial building in Berlin’s Tiergarten district was built in 1910. The property, an attractive classic building, consists of a front building and a side wing and comprises two ground-floor commercial units and 18 apartments which are accessed via two staircases. The apartments’ floor plans range from 23 m² to 113 m². A programme of continuous modernisation has ensured that the property is well maintained. The inner courtyard has been converted into a small garden, which features a pond and bicycle parking spaces. The average net rent is €7.62/m² for the residential units and €5.25/m² for the commercial units.

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

Price per m²: €3,580

Information acc. to energy performance certificate: not available.

(Please quote property reference number 51790 when making your enquiry)