Editorial

Dear Reader,

The first quarter of 2018 is drawing to a close, but housing construction is not yet really firing on all cylinders – a situation we’ve become all too familiar with over the last few years. Nowhere near enough housing is being built and politicians are struggling to define an overarching urban development concept. This major issue is the primary focus of our latest newsletter. Firstly, Sebastian Fischer, CEO of PRIMUS Immobilien AG, explores the potential for intelligent densification in our cities. Secondly, Markus Wotruba from BBE Handelsberatung discusses the subject of developing housing on top of supermarkets. We know that if policymakers did more to promote densification and encourage upward extensions of existing buildings, much could be done to combat the stubborn shortage of housing in our cities. Instead, officials are doing the exact opposite: Housing construction is being strangled by red tape and regulations – as highlighted by Rainer Zitelmann, who has a great idea for a blockbusting bestseller – The Black Book of Impediments to New Housing. Our conclusion: Prices on the housing market continue to skyrocket and the one thing the political environment needs to do: improve.

Best regards

Holger Friedrichs and Jürgen Michael Schick

Guest Article

Sebastian Fischer Member of the Management Board, Primus AG

Developing courtyards as an approach to modern, urban living

By aiming to create more social diversity in central districts, our municipalities have set themselves an honourable urban development goal. Recent decades, however, have seen a multitude of failed attempts to achieve such goals. Municipal programmes to construct social housing, for example, created ghettos in high-rise housing estates, especially in the 1960s and 1970s.

At present, the greatest risk is that our inner-city districts could become the exclusive preserve of high-earners. A large section of Germany’s population can no longer afford to live in newly developed housing, especially in its major cities. This is largely due to the lack of development land in the most sought-after locations. Urban planners are now looking to post-densify, at least where existing building structures allows, in courtyards, on parking lots and on undeveloped land.

The concentration of wealthy residents in central locations is a phenomenon that is being felt well beyond Germany’s metropolises. In London or New York, for instance, this has long been the prevailing reality. In particular, one of the major challenges now facing Germany’s capital is how best to maintain the city’s social diversity. After all, that’s precisely what people tend to love most about Berlin. One possible approach to solving social problems could be the redevelopment of characteristic courtyards of late-nineteenth-century apartment buildings, better known as Hinterhöfe.

Developing these courtyards would help maintain the sustainable social mix in densely populated neighbourhoods. Above all, social diversity and coexistence is only possible with a healthy mix of housing types – street-front buildings, side wings, rear buildings and garden houses. The best housing combines a range of affordability levels and a variety of floor plans. There are an increasing number of courtyard developments in Berlin, especially in Prenzlauer Berg. This central district is home to people from many different backgrounds, all living together in harmony – young and old, singles and families, students and successful entrepreneurs.

Negative attributes, such as a lack of natural light or ventilation, are often mitigated by lower density construction. And even where traditional housing density endures, many appreciate its distinctive, historical charm.

In today’s urban environments, Berlin’s courtyard architecture needs to be reinterpreted. There are a host of innovative approaches. In place of fully enclosed courtyards, a series of loosely connected courtyards can be developed with the creative use of set-back structures and narrower buildings. It is also possible to create attractive open spaces and playgrounds instead of cobblestone pavements, while roof gardens can provide additional green spaces. In addition, new forms of housing are being developed: Neighbourhoods are now frequently blending residential and commercial spaces. Offices and apartments are no longer completely separate, but are located in the same building complexes, just with different entrances.

Of course, solutions must always be tailored to suit the individual situation. It goes without saying that courtyard housing is not a panacea for our urban centres. As urban planners consider how best to prevent a single, social group from taking over a specific district, such developments can serve as a positive example. Developing courtyards to create more living space, and preserve Berlin’s unique social mix, is certainly worth a try.

Markus Wotruba Head of Location Research at BBE Handelsberatung GmbH

Living over supermarket shelves

Increasingly, supermarket chains such as REWE and Lidl want to open stores in areas where there is supposedly no space left, particularly in traditional residential and commercial buildings. Just recently, Aldi Nord announced that it is planning to develop a total of 2,000 apartments at 30 sites across Berlin. We spoke with Markus Wotruba of BBE Handelsberatung about supermarkets’ newly discovered love for housing.

Mr. Wotruba, competition between discounters and supermarkets in the city centres has taken on a new quality lately.

Food retailers are under enormous pressure to transform. Since 2008, these retailers have been observing a shift in sales revenues from larger, suburban locations to the densely populated centres of large and medium-sized cities – a consequence of continued migration into urban areas, but also of cultural factors, such as the fact that younger people no longer feel that they need to own a car. Customers who were once prepared to drive to the outskirts for their big weekend shopping are less and less likely to do so. At the same time, retailers are responding to the ever greater “Amazonisation” of their industry by reassessing their location requirements. Within the industry, fears are growing about the rapid expansion of delivery services, such as Amazon Fresh. For food retailers, this means moving closer to urban customers with smaller and more flexible concepts. Customers are demanding fresh and convenience products for quick consumption on the go, as well as special ranges of regional, lactose-free or gluten-free products – preferably everywhere and round the clock.

At first glance, however, food retailers appear to be dealing with this transformation pressure differently.

That’s quite right. One solution that is currently causing a stir is Aldi’s plan to build apartments over its stores in Berlin. This plan is based on a clever strategy, as combining retail with new housing makes it easier for the company to obtain building permits in densely populated central districts, even for large stores. Of course, this is not completely new, because both Aldi and its direct competitors have already done so on several occasions in German cities since 2008. In contrast to the frenzied reporting on the current housing crisis, the media response back then was far more muted. If anything, these expansive supermarket chains were quite happy to avoid the headlines as they did not want to be contacted by local councils asking whether they could possibly open a modern store in every small village.

Another strategy involves the miniaturization of retail space, allowing stores to fit into the lower floors of traditional residential and commercial buildings. These compact concepts have been launched under names like Edeka Xpress and REWE City. And their success is evident: In large cities, such as Munich or Berlin, the closer you get to the city centre, the higher the density of stores.

Let’s stay with the strategy of moving into existing buildings. How does that actually work? Many residential buildings are older and were not designed for this purpose.

I have already seen discounters squeeze their stores into just 290 square meters of sales area. Even the smallest sites are no longer taboo. Typically, discounters want at least 1,000 square meters. Until recently, even progressive market participants considered 400 square metres to be the absolute lower limit. However, more innovative sales concepts seem to undercut even this limit.

For developers, these mixed-use properties are certainly a marketable product, as the integration of commercial space on the ground floor allows for a broader tenant mix.

And that’s not all. Food retailers fulfil an important supply function that benefits residents and can even increase the value of their homes. However, converting to mixed use is not entirely without its stumbling blocks, especially for owners who have so far invested in pure residential or office real estate. Even if the business premises are in good condition and used by a long-term tenant, it may be necessary to make changes in the medium term. As e-commerce continues to grow, more and more retailers are developing omnichannel concepts aimed at combining online and offline retail experiences. Especially in prime locations with a high volume of walk-in customers, they can guarantee both personal service and access to a wide range of goods normally only available online. Therefore, letting managers need to be flexible in their approach to renovations if they want to secure the long-term loyalty of their tenants.

Thank you so much for talking with us, Mr. Wotruba.

Jürgen Michael Schick Owner MICHAEL SCHICK IMMOBILIEN GmbH & Co. KG

The new Grand Coalition’s housing and construction policies: It could have been much worse

The compromises agreed during the final round of coalition negotiations, especially on housing and construction, are better than general commentaries suggest. Personally, I was relieved when I finally got my hands on the final coalition paper from the housing and construction working group set up by the CDU/CSU and SPD. Just to recap: The centre-left SPD needed to achieve tangible successes during the coalition negotiations, and secure concessions above and beyond those they had wrung out of the first round of exploratory talks. After all, the SPD leadership is well aware that it has to sell this agreement to its rank and file members if it wants a second term as the junior partner in a Grand Coalition (GroKo). Overall, the SPD managed to get most of what it wanted from the negotiations, including a generous portfolio of ministerial posts. Against this background, the result could certainly have been far worse concerning housing and construction. But it wasn’t, hence my relief and general satisfaction.

As a real estate broker, my company has always advocated the exclusive representation of a single party in any real estate deal. In fact, it is the owners of real estate that pay for our services in about a third of all deals. Nevertheless, I have always opposed the introduction of the so-called “single agency principle” for real estate transactions. It was Florian Pronold, Parliamentary State Secretary, who raised the issue during the negotiations. In the end, however, it wasn’t included in the final coalition agreement. And for very good reasons: The state would once again have driven real estate prices higher – because sellers in tight markets would have simply passed on their commission payments to buyers. And buyers would then have had to pay more real estate transfer tax as a result of the higher purchase price. I’m pleased that we dodged this bullet.

In terms of tenancy law, I was worried that politicians would take a harder line. Yes, landlords now have to declare the rent a previous tenant was paying if they want to claim an exception from the rental price brake (Mietpreisbremse), but no one should really be surprised that this requirement has been included in the coalition agreement. After all, the CDU/CSU and SPD all supported this idea, even before September’s election.

However, the negotiating parties remained completely divided on all other tenancy law issues. The fact that the rental price brake is now up for review, possibly as early as this year, and especially in view of recent court rulings, is a favourable outcome. In my opinion, reducing the amount of modernisation costs that can be passed on to tenants each year from 11% to 8% is plainly a mistake. But, in view of the SPD’s far-reaching demands, this is a workable compromise. As I said, it could have been much worse, especially as the SPD needed to secure concessions and be able to claim that it had scored more points during the negotiations. The fact that the regulation only applies for five years is, in my opinion, a deft solution. Of course, experts know that if fewer buildings are modernised, climate protection targets will become even more difficult to achieve.

My greatest concern in terms of tenancy law related to the possible introduction of what many have referred to as the “rent index manipulation act”, i.e. the proposal to extend the reference period for determining local comparable rents from the current four years to six, eight or even ten years. The only outcome of such a measure would be a reduction in comparable rents, which are the benchmark for determining the legality of rent increases. It is a great success for Angela Merkel’s Union block that the coalition partners have merely agreed to examine the issue, rather than implementing it now. The partners now have an entire legislative term to argue about the measure’s merits. One thing is for certain: There will be no consensus. One certain change involves extending the validity of qualified rent indexes from the current two to three years. This also reduces the level of comparable rents and saves municipalities 50% of the costs of compiling their rent indexes. Fortunately, it also relieves the pressure to introduce the “rent index manipulation act”.

Admittedly, not all of the outcomes are good. The introduction of a property tax class C for undeveloped land that has been approved for development failed when it was introduced in the 1960s. If anything, it is nothing more than a massive diversion. It is based on the false premise that buyers and sellers of land are solely responsible for rising land and construction prices, rather than politicians who refuse to increase the supply of development land or speed up their time-consuming approval procedures.

The coalition agreement does not herald a new golden age of housing construction. But it certainly could have been much worse. Let’s take advantage of the time we now have. Personally, I am eager to find out how active Horst Seehofer’s department will be in shaping construction policy.

A book that, unfortunately, will never be written: The Black Book of Impediments to New Housing

This book could be a bestseller – but I’m afraid it will never be written: The Black Book of Impediments to New Housing. At regular intervals, the German Taxpayers Federation publishes a Black Book of Wasteful Tax Spending. If anything, there is just as much to report on the daily obstacles and impediments faced by housing developers.

I know of hundreds of scandalous incidents because I have been talking to project developers every day for more than 20 years and regularly host events with leading project developers in Berlin, Frankfurt, Munich, Hamburg and Cologne. Everyone in the industry knows the problems, but they are hardly ever made public. Most regular citizens would be astonished to find out that the actual construction of a property is usually the least time-consuming stage between buying a plot of land and completing a building.

Before ground is ever broken, developers wage years of running battles with planning authorities and politicians. There are many reasons why this all takes so long:

– A majority of municipal authorities are chronically understaffed. If the official who can issue a permit falls ill, a development can easily suffer delays of six months or even a year.
– Many officials do not see themselves as service providers acting on behalf of local communities. And they view investors – for ideological reasons – as enemies to obstruct.
– In cities like Berlin, local politicians are under pressure from self-appointed “citizen action groups”, whose primary goal is to wage a war against “capitalist” investors.
– In many cases, there are delays because, for example, a tree may not be felled, or some species of insect or other small animals could be negatively affected. Definitive reports on the number of creatures in question can take a long time to draft, and, in some cases, even expert findings are not accepted by the authorities. This of course means that a second expert opinion has to be drafted. Even after this lengthy process, procedures then need to be developed and implemented, such as artificial puddles to attract insects, or climbing installations to allow animals to leave the property. Naturally, this also takes a long time. As a result, approval procedures are delayed – in the best case by months, but in many cases by years.

Every developer could talk for hours about their own experiences. But, of course, none would ever do so on a public stage. Journalists never hear these tales. Developers are scared of irreparably damaging their relationships with the politicians and officials they depend on. Therefore, The Black Book of Impediments to New Housing will, unfortunately, never see the light of day. This means that the general public will never know why it can take ten years or more, and rarely less than five, from the purchase of a plot of land to its final development.

Berlin Residential Investment Market

Berlin-News

Coalition agreement announces housing summit

Several of the IVD’s demands appear in the final coalition agreement between the CDU/CSU and the SPD, including a housing summit. After years of pressure from the IVD, the summit is now expected to take place this year. Representatives from the federal government, Germany’s federal states and municipalities will meet with representatives from the real estate sector, along with tenant and landlord associations. The summit’s primary aim is to agree on the basis for a legislative package to boost housing development. At the same time, the final coalition agreement also proposes the introduction of a government-backed mortgage guarantee scheme from the KfW bank, which would cover a proportion of the purchase price or construction costs for owner-occupied residential property. This would reduce the amount of equity needed by buyers of owner-occupied housing.

In general, the coalition agreement has raised hopes that there will be a new emphasis on policies to promote home ownership. In addition to the mortgage guarantee scheme, the agreement also proposes a help-to-buy scheme for first-time buyers with children. Families will receive €1,200 per child per year to help them buy a new or existing apartment – as long as their household income is under €75,000.

However, there are a number of disappointments in relation to tenancy law. As well as reducing the proportion of modernisation costs that can be passed on to tenants each year, the coalition partners have agreed to tighten the Mietpreisbremse, Germany’s rent control legislation. Landlords will now have to tell new tenants precisely how much rent a previous tenant was paying. Whether these policies will ever be implemented or not depends on the Federal Constitutional Court’s pending ruling on the legality of the existing legislation.

Aldi: a new player on the housing market

Real estate experts have been discussing densification for some time now. Now the food discounter Aldi Nord has attracted attention with its new plans: Over the next few years, it plans to build a total of 2,000 affordable rental apartments over its own inner-city branches in Berlin, about 30 percent of which will be subsidized. Construction has already begun at two locations in the districts of Lichtenberg and Neukölln, where around 200 residential units are to be built by 2019. One of Aldi’s competitors, Lidl, had previously completed two smaller projects in the sought-after district of Prenzlauer Berg, where housing is in extremely short supply. Aldi Nord is now the first food retailer to develop this strategy on a large scale.

Adding residential storeys to single-storey supermarkets is a sensible step towards making the most efficient use of scarce, inner-city building plots. However, delivering goods to supermarkets without disturbing local residents is a challenge. Fortunately, there are already a number of solutions: Firstly, loading ramps inside the buildings mean that goods do not have to be unloaded from the street. Secondly, soundproof doors are designed to dampen noise pollution. In order to make developments more attractive, some construction plans also feature landscaped gardens on the roof of the stores.

 

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APARTMENT BUILDINGS AND FORWARD DEALS

Refurbished, classic building at am Bürgerpark in Pankow

This four-storey street front building was built around 1900 and has a single staircase. The building comprises eight residential units, all of which are rented. The average rent is currently € 7.98/sqm. Additional balconies have been added to the rear of the property, which has been well maintained and is in good condition. The apartments range in size from 56 to 105 sqm. The property is located near Pankow’s municipal park in Berlin’s Mitte district, in a designated protected neighbourhood.

Price: € 1,800,000 plus 7.14% sales commission (incl. sales tax)
Yield: 3.2% ACTUAL

Information acc. to energy performance certificate: final energy consumption: 124 kWh, excluding warm water; energy source: natural gas; year built: 1900.

(Please quote property reference number 51628 when making your enquiry)

Apartment building with permit for three penthouses in Friedrichshain

This multi-family dwelling was built around 1910 and comprises a front building, side wing and rear building. It has 15 residential units, accessed via three staircases, and totals 1,474 sqm. The property already has a building permit for the conversion of the top floor, including roof terraces and the addition of further balconies. The newly built areas (337 sqm) will be served by two planned elevators on the front building and the rear building. There is significant potential for rent increases. The property is located on Petersburger Straße, a designated protected neighbourhood in Berlin’s Friedrichshain-Kreuzberg district.

Price: € 4,950,000 plus 7.14% sales commission (incl. sales tax)
Price per sqm incl. penthouses: € 2,489

Information acc. to energy performance certificate: final energy consumption: 130.9 kWh, excluding warm water; energy source: natural gas; year built: 1910.

(Please quote property reference number 51603 when making your enquiry)

Upscale, new city villa in Potsdam-Babelsberg

This 409-sqm city villa is divided into four residential units, ranging from 77 to 117 sqm. All apartments are equipped with premium materials and fittings, including underfloor heating, fitted kitchens and showers, and have balconies and/or loggias. New rental agreements for these units are valued at € 11.50/sqm. Parking spaces are valued at € 80.00/month. This results in a TARGET annual net rent of € 65,082.00. Construction is scheduled to begin in Q3 2018, with completion due in mid-2020. The large, green and family-friendly site is located in Potsdam-Babelsberg.

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Yield: 3.9% ACTUAL

Information acc. to energy performance certificate: Not yet available

(Please quote property reference 51629 when making your enquiry)