Six ways to cut construction costs
In view of constantly rising construction costs, it is becoming increasingly difficult to build the new affordable housing that is so urgently needed. But practice shows that politicians could use several levers to reduce construction costs and make housing more affordable.
1) Reduce the cost of building land
Problem: Currently, the average cost per square metre of building a new apartment in Germany is EUR 3,000, more than one-fifth of which is accounted for by the cost of the building land. That equates to between EUR 600 and 650 per square metre of living space. The price of land has more than doubled over the last five to six years. Zoning the huge unused areas in state ownership for housing construction would put an immediate end to speculation and inflation.
Solution: Federal and state governments must make more building land available. Building land is a scarce commodity and to a large extent in state ownership. The shortage of land for residential construction is exacerbated by the fact that authorities are not rezoning enough of the many former industrial and commercial areas that are suitable for housing construction. The federal government needs to free up the land it owns and create incentives so that the individual states and local authorities stop hoarding their land and make it available for housing construction.
Savings: 10 percent of construction costs.
2) Improve energy-efficiency requirements
Problem: Germany wants sustainable and environmentally-friendly buildings. But energy-efficiency requirements are often based on economic considerations. New buildings often have to be connected to municipal district heating networks. This doesn’t cut costs but is intended to ensure that the capacity utilisation of the local municipal energy suppliers. Modern houses are very well insulated, which means that they can no longer breathe at all and need to be retrofitted with air slots.
Solution: Putting ideology to one side, the Energy Saving Ordinance (EnEV) needs a targeted overhaul. For example, rather than blanket requirements for insulation, there should be specifications for south and west facing windows. Also, owners and tenants should not be asked to foot the bill just because municipalities want to fill their coffers under the pretext of saving the environment.
Savings: 4-6 percent of construction costs
3) Support building and planning authorities
Problem: The building and planning authorities are chronically understaffed and overworked. What’s more, building authorities are increasingly shifting the responsibility for decisions to property developers. Nowadays, when permits are required from other authorities and neighbouring property owners, developers have to get them themselves. Likewise, authorities no longer communicate their requirements to developers in one go, but step by step. As a result, property developers constantly have to update their plans throughout the pre-approval and approval process. Architects and planners have to make countless changes to the plans; every change adds to the costs. The glacial pace of building permit approvals, combined with the hoarding of building land, creates further breeding ground for speculation.
Solution: We need standardised and simplified authorisation procedures and to create transparent conditions for preparing permit applications for authorisation. The building authorities need to hire more staff and the red tape of approval procedures needs to be reduced to improve efficiency. What’s called for is a return to the days when building and planning authorities organised every stage of the building application process.
Savings: 2-3 percent of construction costs
4) Reduce excessive static requirements
Problem: Germany is a country that takes safety very seriously. Unsurprisingly, this preoccupation extends to building requirements, especially statics. In pursuit of ever safer buildings, these requirements are becoming stricter all the time. Today’s roofers need far more and thicker rafters to erect a roof frame than was the case 100 years ago. At the same time, the estimated service lives of residential buildings are much shorter than they used to be. We build for eternity, but the guideline for the useful life of a residential building is just 80 to 100 years.
Solution: The static requirements for the construction of residential buildings should be based on the service life. By withdrawing the unnecessary and excessive static requirements, construction can become both more sustainable and more economical.
Savings: 2-3 percent of construction costs
5) Reduce extra charges for general contractors
Problem: The extra charges for general contractors have more than doubled in recent years from 8 percent to between 15 and 18 percent. This is due to high demand for general contractors’ services and the increasingly challenging role of the general contractor. The complexity and swathe of requirements mean that construction works have to be coordinated more efficiently, there are many more construction stages and that the individual construction stages have also become more complicated.
Solution: Once a sense of proportion has been restored to energy-efficiency requirements (point 2), building and planning authorities have started to specify more constructive and fewer requirements (point 3), and static requirements better reflect a building’s service life (point 4), we will see a reduction in the fees charged by general contractors.
Savings: 5 percent of construction costs
6) Meeting demand for housing
Problem: Per capita living space is very high in Germany. In 1990, housing developers calculated on the basis of 33-35 square metres per person; by 2018, this had risen to 46 square metres. The amount of living space per person has also risen significantly in the social housing sector. Whereas in 1991, social housing provided 26 to 28 square metres per person, today’s subsidised housing allows for 40 to 45 square metres per person. Since any new housing development has to include subsidised housing, statistics show that the cost of new housing is being driven up by rising demand for living space.
Solution: When calculating individual living space requirements, the costs per square metre must be taken into account. By calculating less living space per inhabitant in newly developed subsidised housing, construction costs can be significantly reduced.
Savings: 5 percent
With construction costs averaging EUR 3,000 per square metre, there is potential for savings in many areas. A holistic and intelligent housing policy and a larger supply of building land can cut construction costs by more than a quarter.
Luxury market: Why Germany’s metropolises attract ever more potential customers
Monaco, Singapore, New York – these are the hotspots that automatically spring to mind when you think about the international jet set living in the here and now, looking to make the most of life in their penthouses or luxurious holiday homes. The image of Germany’s cities, on the other hand, is still shaped by the financially conservative nation of the late 1990s, by Prussian asceticism and a mentality that has consciously chosen penny-pinching over conspicuous consumption.
However, a paradigm shift has been taking place for some years now. The high quality of life1 and the wide range of educational, leisure and entertainment opportunities on offer in Germany are attracting growing numbers of owner-occupiers and investors alike. Germany’s metropolises in particular are catching up in the premium real estate segment. The buyers of tomorrow are attaching greater importance not only to beautiful nature and outstanding infrastructure, but also to healthy economic and demographic forecasts and a vibrant international cultural and art scene. In this respect, start-up metropolises such as Berlin and Hamburg in particular outscore other major European cities such as London.
So, it is hardly surprising that, according to Knight Frank’s Wealth Report 20182 the Berlin luxury real estate market recorded year-on-year growth of around 10 percent and thus ranks 12th among 100 world cities. And Berlin is not alone: Frankfurt ranks 6th with 12.2 percent, Munich 11th. The three top German cities even managed to outperform New York, Melbourne and Hong Kong. At -0.7 percent, London is far behind. This is not least due to the disruption caused by the UK’s Brexit vote.
At the same time, Berlin is attracting a growing number of internationally renowned digital companies, including Apple and Amazon. Then there’s Siemens, which is investing millions in Berlin-Spandau to create a future-oriented environment for working and living. As if this wasn’t enough, the purchasing power of the capital’s inhabitants is also rising continuously.
Entrepreneurs boost high demand in Berlin and Hamburg premium segment
The fact that successful companies are increasingly investing in Berlin is also due to the lower cost of living and comparatively affordable purchase prices for residential and commercial real estate. For example, a large office in the German capital only costs about one fifth of what it would cost in London. Office units in Germany’s major cities, such as coworking spaces in a Berlin-Kreuzberg courtyard or lofts in Hamburg’s trendy St. Pauli district, are much sought-after and still comparatively inexpensive. Demand is being boosted by the large number of start-ups and companies opening new offices. With 253 start-ups taking out loans from Germany’s KfW development bank in three years, Hamburg is, according to Gründungsmonitor, the start-up capital of Germany. In terms of 10,000 inhabitants, the Hanseatic city ranks just ahead of Berlin, which had 238 start-ups over the same period.
A large number of start-ups equals a large number of successful founders who come to Germany from all over the world. In addition to owner-occupiers, international investors are also increasingly turning their attention to German metropolises. Demand for premium properties in Hamburg’s Elbe suburbs and Blankenese, as well as in Berlin-Zehlendorf, Mitte and Grunewald, is increasing. At the same time, the supply of central, premium housing is also on the rise. For real estate brokers, it is becoming ever more important to make sure they position their properties correctly as they compete with other brokers for international buyers. Brokers need to hone their soft skills in both consulting and interior design. While floor-to-ceiling windows and rooms flooded with light are now a must for every development in the upmarket segment, too little attention is still paid to interior design. All too often, buyers are guided through clinically white rooms, which leave everything to the imagination and provide little in the way of inspiration or personalisation. Even computer-generated visualisations created especially for future developments frequently tend to appear colourless and sterile. There’s more to positioning a development than fitting the floors with light parquet, brokers also need to showcase the units with attractive furnishings and a well-equipped kitchen/living room.
Effective sales should be about making connections
Don’t get me wrong. I’m not saying that a sales department should double as an interior design office, but it can certainly create appropriate connections. It’s enough if it advises property developers and architects on interior design concepts and coordinates them accordingly. In this way, sales becomes an integral part of project development. And this also applies to international cities such as Hamburg and Berlin.
2 The Wealth Report 2018 – Knight Frank, 34, Luxury Residential Market Performance (Annual change December 2016 to December 2017).
“Horizontal apartment buildings”
Q: As a rule, private investors and family offices tend to invest in classic residential real estate in central locations in large cities. Your family office bank, Marcard, Stein & Co, which manages the assets of entrepreneurial families and foundations, has a slightly different philosophy. Can you explain?
Maik Rissel: It might surprise some people, but we invest in terraced houses. A few years ago, a property developer approached us looking to finance a portfolio of terraced houses. We supported him and have been actively engaged in the market ever since. As these are one to two-storey residential buildings, we coined the term “horizontal apartment buildings”. We haven’t looked back.
Q: Your strategy doesn’t involve selling the terraced houses, you rent them out. Isn’t the rent significantly more expensive due to the larger size of the residences?
Rissel: Of course, rents are always linked to floor space. But terraced houses are often no more expensive to rent than three or four-room, new-build apartments in the heart of the city. The rents are comparable because property costs are usually lower in the suburbs and exurbs. Tenants renting a terraced house are also willing to pay a premium for the extra freedom they gain. And, if the houses are built in series, they end up being cheaper than a classic, multi-storey apartment building. Our terraced houses command rents of between EUR 9.50 and EUR 11.00 per square metre, which is substantially less than in central locations.
Q: What is it tenants most love about living in one of your terraced houses?
Rissel: From a user’s perspective, terraced houses are an attractive rental product. Tenants love not having a communal entrance and greatly appreciate having a garden all to themselves. Many even invest in their rented property, be it in high-quality floor coverings, premium furnishings or elaborate landscaping. Finally, they also enjoy being spared the daily noise of city-centre neighbourhoods, which they would have to face in a badly insulated multi-family building.
Q: Terraced houses have a somewhat stuffy image. Aren’t they mainly home to middle-management pen pushers?
Rissel: On the contrary, our tenants come from across the spectrum – from young academic couples to families and seniors. In principle, terraced houses are perfect for anyone who is attracted to the peace and quiet of life on the outskirts of the city. Prospective tenants can choose between an entry-level model (three rooms and 80 to 95 square metres) and a classic, four-room model (between 100 and 120 square metres). Both are extremely popular.
Q: Is it a sustainable business model?
Rissel: Absolutely. Once the first tenants have settled in, they tell their friends and colleagues. As a result, each tenant acts as a multiplier, bringing up to three potential tenants with them.
Q: And what are the major benefits for investors?
Rissel: Terraced houses allow investors to be flexible with their investment strategies. If an investor owns several terraced houses and wants to liquidate part of the portfolio, the investor can, for example, sell a single house after ten years and invest the proceeds somewhere else. Terraced houses also generate reasonable returns. In multi-storey residential development, on the other hand, the situation is much more complicated. Especially where a community of owners is involved in all aspects of any sale. In such cases, owners don’t always have the final say.
Q: Is there anything else that investors and tenants are looking for?
Rissel: Of course, location is always the key factor. If the terraced house is on the edge of the city or even further out, road links to the city centre and public transport connections that can easily be reached by bike are important. In addition, it’s always good if the houses are not too far from day-care centres and schools, shops and doctors, especially for families.
Q: What role does the property developer play?
Rissel: If we’re talking about new terraced houses, then you need a developer with market experience to build them. The gardens should face southwest and the sun should shine into the living room during the day. And the colour of the tiles or the material of the floors should be variable. Because even with serial building techniques, it’s still important to be able to add a personal touch with the external and internal finishes.
Devastating for tenants and taxpayers alike
Three arguments against Berlin’s remunicipalisation initiative
Rent caps, neighbourhood protection areas, compulsory purchase schemes – no other city in Germany spends as much time discussing regulations as Berlin. The centre-left SPD, environmentalist Green and left-wing Die Linke parties are determined to manage the housing shortage, not eliminate it. By blocking the construction of new housing, the capital’s coalition government is exacerbating the housing crisis, which is the direct result of demand outstripping supply. Leftists, Greens and elements of the SPD, including the young socialists, have all come out in support of the latest remunicipalisation initiative.
1. With the money it takes to buy one existing apartment, you could build two new ones
As with any remunicipalisation, it is important to establish whether taxpayers’ money is being spent wisely. Berlin is no exception: One euro can only be spent once. In the case of municipal authorities’ right of first refusal, which has been exercised on numerous occasions, including the recent purchases of residential real estate on Karl-Marx-Allee and 1,821 prefabricated apartments in Kosmosviertel, it is crucial to ask what precisely our elected officials are doing with our tax money. In the case of remunicipalisation, apartments are transferred from private ownership to municipal housing associations or similar bodies. According to the left-wing Senate’s spokesman, and at peak prices, open-market rental apartments are converted into “secure dwellings”. The prices being paid frequently amount to significantly more than EUR 4,000/sqm including transaction costs. For the same money, urban housing associations could easily build new apartments. If the same amount of money were invested in building new housing rather than the latest “buy-back” programme, two new apartments could be built for every one that is returned to state ownership. In total, this would leave the city with three (!) housing units instead of a single “secure dwelling”.
2. Heavily indebted Berlin simply can’t afford it
Berlin has massive debts totalling EUR 56 billion. Berlin spends more money on servicing its debt mountain than it does on culture. The city’s infrastructure is ailing, local public transport is a permanent problem and schools and sports facilities are in a miserable state. While water literally drips through school roofs, the city is set to spend EUR 20-25 billion, or even more, remunicipalising apartments. Nobody knows the exact amount. And it doesn’t really matter that the initiative plans to pay “well below the market value” for the properties it buys.
No less absurd is the proposal from Berlin’s Mayor Michael Müller, who wants to buy back the apartments that used to belong to the state-owned housing company, GSW. These were sold for EUR 405 million in 2004. The apartments currently have a market value of well over EUR 5 billion. It would be almost impossible to find a better way to squander tax money more carelessly. And, as I said, not a single new apartment will be created as a result. And, as is patently obvious, new housing construction is the only effective remedy for the city’s tense housing market.
3. Remunicipalisation is historically, socially and constitutionally absurd
Top lawyers, such as Karlheinz Knauthe from Berlin, have described the proposed law as clearly unconstitutional. The nonchalance with which the city’s three governing parties (SPD, Greens, Die Linke) are promoting the expropriation of property owners in return for compensation that is “well below the market value” is enough to take one’s breath away. This year, Germany is celebrating the 30th anniversary of the fall of the Berlin Wall. Having swept away the kind of heavy handed, state-imposed regulation that East Germany was famous for, our local and federal governments now seem determined overstep the line between effective governance and unacceptable state interference. This has now gone far beyond being a debate about our housing industry and has become an issue of fundamental importance in defining who we are as a society.
The left-wing government’s refusal to get to grips with the housing shortage by expanding the supply of new housing is aggravating the crisis in service of politically and ideologically driven goals.
“We want to drive investors out of the city”
It’s a trope of American cinema: In order to get a suspect to confess, two police offic-ers take on the roles of good cop and bad cop. The bad cop is brutal and aggressive, the good cop feigns sympathy and kindness. And this is precisely the strategy being employed by Berlin’s three-party, left-wing state senate as it seeks to expropriate apartment owners.
The role of the “bad cop” is being played by the grass-root activists of “Deutsche Wohnen und Co enteignen”, who have attracted support from Berlin’s left-wing and green politicians. The governing Mayor of Berlin, Michael Müller, on the other hand, is playing the role of “good cop”. The activist group’s spokesperson, Rouzbeh Taheri, was extremely open about his group’s goals in a recent interview with the German broadsheet, FAZ: “We want to drive in-vestors out of the city”. At least to begin with, his campaign is targeting landlords who own more than 3,000 apartments. Taheri and his supporters have called for large-scale apartment owners to have their properties expropriated. All in all, around 200,000 apartments are in-volved.
Targeting both large and small ‘greedy’ landlords
But the campaign attacks all property owners, not just the big ones. The website promoting a referendum on expropriation (https://www.dwenteignen.de/) clearly states: “We are starting with […] Deutsche Wohnen in particular because it is the leading company in the Berlin real estate market and holds such a powerful market position. After all, small greedy landlords look up to the bigger landlords as role models. So, we approach the battle with the large-scale predatory landlords as a kind of apprenticeship for defeating the smaller ones. Putting a stop to Deutsche Wohnen will benefit any and all tenants in Berlin who are affected by rental infla-tion madness”. So: Even the “small greedy landlords” (i.e. small private landlords) will not es-cape unscathed – they are next in the firing line.
The tactics are remarkably simple:
Harassing landlords until they sell
Given her track record, Senator Katrin Lompscher from the left-wing Die Linke party should probably be referred to as the city’s Senator for Building Prevention. It’s no surprise that she supports the expropriation initiative. The environmentalist Greens have also signalled their support. Both have taken on the “bad cop” role as the game unfolds.
Berlin’s governing mayor, Michael Müller (SPD), has found himself in the “good cop” role, pursuing the same goal, namely the expropriation of private property, just by other means. He has not ruled out formal expropriation, but he’d prefer to try to achieve the senate’s goals an-other way if he can.
Müller refers to the Senate’s expropriation scheme as a “buy-back” programme. Whatever the name, property owners are being systematically bullied. Berlin’s authorities recently bought a number of apartments on Karl-Marx-Allee from Deutsche Wohnen by exercising the state’s complicated rights of pre-emptive purchase. Müller described the whole situation sur-rounding Deutsche Wohnen as becoming “increasingly unpleasant”. When asked what he meant, he complained that the company had launched a legal challenge against the city’s official rent index. “That does not create a positive impression”, he said.
The goalposts have been shifted
The expropriation initiative has called for the de facto expropriation of private property without appropriate compensation. After all, any compensation paid will be “well below the market value”. The compensation will, for example, be lower than Deutsche Wohnen’s liabilities to its banks. In effect, this amounts to expropriation without compensation. Many of you might pro-test: “Oh, it’s not nearly as bad as it seems”. Be very careful! This is a perilous and very slip-pery slope: Current demands for expropriation without compensation set a dangerous prece-dent. Real estate owners will be softened up by such threats for as long as it takes until they give up and – falling into Müller’s trap – sell “voluntarily” for well below market value.
The real estate industry is not defending itself
And where is the real estate industry in all this? It is being its usual defensive, anxious, sub-missive self. Where are the demos against expropriation? Why is the industry not running full-page ads in major newspapers to explain to the public how many new homes could be built for the money that is now being thrown out of the window pointlessly on Müller’s buyback scheme? Why isn’t the industry putting up huge billboards across the city to explain that Sena-tor Lompscher is to blame if the housing crisis intensifies? After all, it is under her aegis that the number of development plans being drawn up is at its lowest for decades. Doesn’t the real estate industry have the money to run such campaigns? Or has the industry already capitu-lated and given up the ghost? If so, the activists’ goal of driving investors out of the city has already been achieved through media coverage and daily harassment.
Following in the footsteps of Venezuela
It is Andrej Holm who is really responsible for housing policy in Berlin. He serves as Senator Lompscher’s housing consultant and used to be her State Secretary. When Holm was initially appointed, he concealed the fact that he used to work for East Germany’s secret police, the Stasi, and was forced to resign from his role as State Secretary. Nevertheless, since Febru-ary 2017, he has been a member of the advisory committee helping to draw up the Senate’s “Urban Development and Housing Plan 2030”. In numerous public appearances, Holm has effusively praised Venezuela’s housing policy as an exemplary model of “socialism in the 21st century” and a blueprint for Germany. He also praised the abolition of democracy in Vene-zuela in the book Revolution als Prozess: Selbstorganisierung und Partizipation in Venezuela (The Revolutionary Process. Self-organisation and Participation in Venezuela). Lompscher’s ex-State Secretary and current consultant also praised the fact that Venezuela had “officially departed from the model of representative democracy” in 1999 and at the same time granted the president “limited special powers”. He described Hugo Chávez as an “enabler”: “As a mat-ter of fact, most of the president’s decisions are very closely aligned with the demands of the grassroots movement and are used to strengthen participatory democracy”. And now, if Holm has his way, Hugo Chavéz’s strategy is going to be implemented in Berlin. The activists’ ref-erendum, if it happens, would see Berlin follow in the footsteps of Venezuela. And the refer-endum probably stands a good chance of success. According to the latest polls, a clear ma-jority of Berliners are in favour.