Homeownership, without breaking the bank
The long-term benefits of homeownership over renting are undisputed and well known. Homeowners are ahead of tenants in terms of building household wealth; they have made an important contribution to their financial security later in life; and they do not have to worry about skyrocketing rents. However, one thing that is less well known is that homebuyers also enjoy significant cost advantages over tenants. In fact, most people falsely assume that the opposite is true – that renting is cheaper than buying. The Cologne Institute of Economic Research (IW) has just calculated that homeowners have much lower housing costs than tenants do.
The ACCENTRO-IW Housing Cost Report regularly compares the housing cost burden for owner-occupiers and tenants. Currently, Germany’s homeowners enjoy an average 32.7% housing cost advantage over renters. This means that owner-occupiers have to spend almost one-third less on housing every month than if they rented a comparable apartment. In some major cities with over-heated housing markets, the advantage is even greater: in Berlin, for example, it is 34%, in Hamburg 38.6%.
Homeowners’ housing cost advantage is primarily the result of extremely favourable interest rates on home loans and mortgages. Due to the sharp fall in interest rates in recent years, homeownership has remained affordable despite the rise in property prices. Although interest rates are beginning to rise very slightly again, they are still at an extremely low level and are set to remain so in the near future. However, even if a homeowner needs to refinance their mortgage at 3.5% ten years from now, the cost advantage remains almost unchanged at 32.1% over the total financing period of 35 years. If interest rates rise to 4.5%, they still enjoy an advantage of almost 25%.
This significant cost advantage not only enables buyers to finance affordably their home, but also to pay for it during their working lives without higher monthly payments than tenants in comparable properties. Over 35 years, it is possible to completely pay off an apartment, including both monthly mortgage and maintenance costs, and still come out better than renting. Basing the calculations on a 35-year period shows that it makes sense for households to become homeowners as early as possible. By doing so, they can pay off their mortgage before they retire, with no additional expense.
However, young families in particular find it difficult to buy a home because German mortgage lenders require such large down payments. According to the ACCENTRO-IW Housing Cost Report, banks expected the average buyer in 2017 to pay 21% of the cost of the property upfront, which is difficult for younger households at the start of their working lives. Politicians therefore need to step in and introduce clear measures to help families become homeowners. There is a window of opportunity, and it is possibly wider now than at any time in the history of the Federal Republic of Germany. The government needs to take action now if it wants to increase the homeownership rate significantly, which stands at a comparatively low 45%. This would enable large sections of society to enjoy financial security later in life.
The IW in Cologne, like many other experts, has suggested that Germany’s property transfer tax should be cut. Property transfer tax accounts for the lion’s share of additional expenses on property purchases in Germany, and significantly increases buyers’ upfront expenses. A tax-free allowance, such as the one that exists in the UK, is already being considered. The recently elected federal government even promised to evaluate the proposal in its coalition agreement. It is high time they did so.
Leave the facade alone: How to reduce operating costs without touching the building
Just picture it: Net rents rise, while gross rents remain at approximately the same level. While the landlord increases both rental income and the value of the property, tenants’ costs hardly rise at all. This is possible when operating costs are reduced. There are several methods to do this – the most common is improving a building’s energy efficiency. However, structural upgrades, such as insulating a building’s facade, are expensive and time consuming. An easier, but far less frequently used, method is to renegotiate framework contracts for gas, oil, district heating and electricity.
While this method might not deliver huge benefits for the owners of one or two properties, the owners of larger portfolios can secure enormous savings, a potential that remains largely untapped. Imagine a residential portfolio with 100 properties spread across twenty different locations. The situation is similar for almost every residential property portfolio of this type and size: the supply of heating to individual apartments is very complex. In this example, each building has a different energy supplier – in some cases a municipal supplier, in others a large energy company. In addition, different heating sources (gas, district heating, oil, and geothermal energy), different heating technologies and a large number of different contractual partners (gas suppliers, contractors, etc.) make it difficult for property managers to maintain an accurate overview. In addition, if energy costs are to be reduced, this overview is precisely what is required. Instead, decisions are often made reactively, for example, when a heating system fails or the relevant contracts expire. Each of these contracts may make sense on its own from a cost perspective. Taken as a whole, however, 100 individual contracts are completely inflexible and overpriced in relation to their volume.
This situation can be remedied by a service provider who analyses the contracts and properties in detail and then bundles them into a package. Concluding contracts for several portfolio properties with a single provider generally secures savings that could not be achieved with individually negotiated contracts. Lower utility and service costs are also an important factor in letting management. Potential tenants pay more attention to energy costs, while existing tenants are happy to see their costs fall and are more likely to stick with their landlords – the best conditions for long-term tenant loyalty and secure returns on investment. The secret lies in understanding how energy suppliers pay their commissions. The service provider who analyses a property’s operating costs is paid by the energy supplier, not by the property’s owner.
For property managers, optimised energy management means significantly reduced workloads:
Firstly, uniform, multi-property energy billing – covering all properties at all supply points on a fixed cut-off date – reduces administrative expenses. Invoices can be provided in a variety of formats – including digital – by the supplier, and a contractual penalty system can be used to ensure that the supplier provides annual invoices on time so that property managers can also fulfil their reporting obligations.
Secondly, compiling, completing and benchmarking existing energy supply contracts makes information more easily accessible to property managers. Without this transparency, investment decisions on energy infrastructure are difficult and holistic energy management is impossible.
Thirdly, property managers are in a better position to provide information to tenants and investors. Thanks to strategic energy management systems, property managers are able to react to the requirements of tenants and investors, and to identify risks as early as possible.
Fourthly, by bundling their energy management processes, property managers experience a significant status upgrade vis-à-vis energy suppliers. Time-consuming telephone hotlines become a thing of the past. In addition, suppliers are more willing to negotiate better terms for fluctuations in demand when properties are added to the portfolio or sold – for example with special rights of termination in the event of a sale.
Consolidated purchasing – for example of gas, heating boilers or maintenance services – not only leads to noticeably lower operating costs, it also benefits landlords. By combining, simplifying and standardising contracts, landlords will also see a reduction in their administrative costs.
From Berlin to Paris for lunch?
Every morning, bumper to bumper, cars inch their way through Germany’s major cities. Moreover, when they are not stuck in traffic, drivers are busy trying to find a parking space. This is not what “efficiency” looks like. In the future, however, things will be quite different – because German cityscapes are set to change fundamentally over the next two decades. The driving force: state-of-the-art mobility concepts.
Over the last few years, the image of Germany’s car addiction has clearly faded. This is confirmed by a study published last year by the University of Duisburg-Essen’s Automotive Research Centre. The number of young car owners is in near terminal decline. Over the last 20 years, buyers of both new and used cars have become significantly older. In 1995, the average age of a new car buyer was 46.1; it has now climbed to 52.8 years. Anyone who really needs a car can easily rent one, at extremely short notice, via a car sharing service.
In addition,But this is just the beginning. In the very near future, automobiles will start to live up to their name and be able to drive autonomously. We will no longer be choosing a vehicle, but a destination. Above all, this will have a massive impact on how, when and where we park. Cars will no longer spend most of the day in an underground car park or on a parking lot, they will be in constant use. When they are parked, they will be out of town overnight.
Real estate companies need to make sure that they are not overtaken by such developments. The impact of innovative mobility concepts on the real estate world will be enormous. Road traffic, including parking, currently takes up a third of all urban areas. Freeing up these areas would create a wealth of opportunities to develop the new housing our cities so desperately need. As a result, we will need to reassess completely reassess where and how we build.
The same applies to the way we currently think of catchment areas. Take Elon Musk’s Hyperloop for example. It will be able to transport passengers from Washington to New York in 29 minutes. In Germany, this would mean that commuting between Munich and Berlin (or from anywhere else along the way) would suddenly be a realistic proposition. As would a quick trip from the Spree to the Seine for lunch.
Anyone who ignores developments like these has already lost. Investors should delete ‘already’ be taking action to significantly expand significantly their broker networks. After all, nobody knows the status quo and the potential of a market better than a local broker does. In other words, (delete colon) if you build the right relationships today, you will be able to act more flexibly tomorrow.
Attractive investments in terraced housing
For many years, terraced houses were regarded as a property development product for end-consumers who wanted to buy their own moderate homes on the outskirts of the city in order to realise their dream of homeownership. Indeed, the single-family house, a category that also includes terraced houses, is the most popular form of housing in Germany. They usually have compact, efficient floor plans: downstairs the living room, kitchen, patio and half bathroom, upstairs the family bedrooms and bathroom; behind the house, a small garden, and next to it the parking space or carport.
As I see it, the terraced house is also the ideal investment product. I know from a whole series of forward deals just how highly investors regard terraced houses when they are assessing investments in new housing developments. This is a great opportunity for property developers, who now have an attractive alternative to the once arduous path of retail sales: global sales. Investors are looking to add terraced houses to their portfolios Delete ‘And’ for good reasons.
The most important reason is certainly the relative affordability of terraced houses. They are much cheaper to build than multi-storey apartment buildings. If you are looking for affordable housing, this is where you will find the most attractive prices per square metre. From the transactions I have brokered, I know that many terraced houses are built without cellars. Sometimes with roof dormers, sometimes without. Clear architecture, with attractive and contemporary fixtures and fittings, ensures that terraced houses can be rented easily and profitably, which makes them an interesting investment proposition.
Unsurprisingly, the plots of land for terraced houses tend to be in the suburbs and exurbs. Naturally, in the hearts of our cities, we are going to use any available land to develop apartment buildings. However, given the fact that land in central districts is becoming ever rarer and more difficult to develop, attention has already shifted to areas that are more peripheral anyway.
That terraced houses are attractive to tenants is obvious, especially for families with children, who appreciate their affordability. However, they also offer attractive returns for investors and are marketed to a different tenant base than traditional apartments in the multi-family housing segment. Tenants in terraced houses tend to treat their home more like owners than typical tenants, who, as is well known, are not always as careful with a property as they could be. Once the children are well settled in local schools, such tenants rarely ever consider moving somewhere else. The plots and small gardens of rented terraced houses look almost identical to those of owner-occupiers. In our office, we affectionately refer to the difference between terraced and inner city developments as “garden gnomes instead of graffiti groans”. The fact that tenants behave more like owners also makes it easier when investors decide to make their exit via retail sales to their tenants. The household incomes of these tenants usually mean they can buy their homes later.
Terraced houses in forward deals are available in a wide range of packages. Whether ten houses or several hundred, these new developments are attracting growing interest. Demand is strong among every investor group from family offices to institutional investors. Based on my experience, developers should focus more on the global sale of their terraced house schemes and seek the appropriate, expert advice. After all, for investors, this is a highly exciting opportunity to purchase new buildings at an attractive price point.
Escalating dispute among experts over prices on Germany’s real estate markets
Investors need a devil’s advocate
For some time now, Professor Harald Simons from the empiricia Institute has been about as popular among real estate developers as the Tenants’ Union is among housing investors. In 2017, in a report from the Council of Real Estate Experts, he prophesied drastic price corrections on the German housing market. He repeated his warning in this year’s report. One real estate newspaper, the Immobilien Zeitung, stated: “One man, Simons – it seems – stands alone against everyone else”. Andreas Schulten, CEO of bulwiengesa AG, among others, has protested against Professor Simon’s predictions of collapsing prices.
Dispute among real estate experts
The backstory: The German Real Estate Federation (ZIA) published the report, which deals with the housing market and other submarkets. According to the federation’s President, Andreas Mattner, ZIA is “watching developments with great concern”. The Immobilien Zeitung reported: “ZIA doesn’t seem to have many options left. The most likely outcome is that Simons will have to resign”. The empirica researcher is already being undermined behind the scenes. “I know that the industry is really angry with me because I’m ruining some people’s businesses. I’m the killjoy”, was how the newspaper quoted Simons. His opponent, bulwiengesa’s Schulten, has dismissed attempts to get rid of Simons: “Friction is good because it sharpens our focus, and it is good for ZIA because it livens things up… If you get rid of Simons, you take the spice out of life”.
Schulten is right. We all need critical opinions from people like Simons. And especially now, after years of price increases. More than a year ago, on 27 April 2017, I invited leading real estate experts to my BERLIN REAL ESTATE ROUNDTABLE. The event’s provocative title was “Apartment prices to crash by 30% – irresponsible alarmism or real danger?” Alongside Simons, the speakers included a representative from bulwiengesa, Professor Just from IREBS, Jürgen Michael Schick and several renowned housing developers. I am a firm believer that only such controversial discussions between academics and real-world practitioners can bring us closer to the truth. In my view, truth-finding is like a trial: You need a public prosecutor to collect and present incriminating facts and a defender to present exonerating facts. If both are good, the judge can then form an opinion based on all of the facts. Fierce controversies are also common between academics. Without such controversies, it is very difficult to gain knowledge.
Who is afraid of pessimism?
Anyone who seeks to muzzle uncomfortable counter-opinions does the greatest damage to themselves. There are good arguments to support the pessimistic view put forward by Simons, just as there are good arguments against it. In reality, every developer and everyone who is involved in the real estate market in general has been asking themselves for years whether prices can keep on rising for much longer. I have the impression that some people’s aggression towards Simons is primarily motivated by wanting to torpedo their own nagging doubts. But that’s precisely where the greatest danger lies.
Researchers have devoted a great deal of attention to the phenomenon of over-optimism. “In terms of its consequences for decisions, your optimistic bias may well be the most significant of the cognitive biases”, wrote Nobel Prize winner Daniel Kahneman. The effect of optimism or over-optimism is ambivalent, i.e. it is often helpful, but can also sometimes be damaging. Entrepreneurs are almost always optimists, but, when markets are euphoric, a healthy dose of pessimism can be helpful. The research psychologist Gary Klein recommends doing the following before starting any project: A group of people who are very familiar with the project should come together for a meeting that begins with the following statement: “Imagine, we are one year in the future. We have implemented the plan as it stands. The result was a complete disaster. Please take five to ten minutes to write a short history of this disaster”. The most important advantage of this “pre-mortem method” is that it creates room for doubt and encourages everyone involved in the project to look for possible risks that they had not yet considered.
One of the property developers I know has been in the business for more than 50 years. That’s a rare achievement. He once told me that he always views the glass as half-empty, not half-full. He admits that he might have missed out on some profits, but he has survived and been extremely successful. Within his own company, he always played the role of devil’s advocate.
Which brings us back to where we started: Has the market peaked or not? Will we see a price correction or not? Nobody really knows. We won’t know for a few years. But, after so many years of unprecedented housing price rises, we need sceptical voices now more than ever before – and, of course, we need people to disagree with them. Anyone who tries to silence critical voices serves no-one and does most harm to themselves. Too many people today spend their lives in a bubble, filtering out any opinions that do not conform to their own. They only pay attention to arguments that support their own view of the world.
Give us more facts!
I have a suggestion for both sides in this “squabble” – for bulwiengesa and empirica: Give us more facts! They spend so much time calculating things that no one in the real estate industry is interested in, for example their “city value” figures, which present the value of all of the properties in a single city. I have never met a developer who has the slightest interest in this. At the same time, there is a lack of key data that would actually be relevant to the industry – and also help to highlight indications of overheating and imminent price corrections. For years, for example, I have criticised the fact that there is only data on the purchase prices of condominiums, although this is only one part of the market. The other part of the market – global sales to institutional investors – is hardly covered at all. There is a lack of reliable data on the development of the price-to-rent ratios paid by institutional investors for portfolio acquisitions. At most, we have vague estimates with such a wide range that they are essentially meaningless. And, as far as the condominium market is concerned, a lot of relevant data is not collected at all, such as the proportion of foreign buyers. We know that in metropolises such as Berlin, Frankfurt and Düsseldorf, more than 50 percent of condominiums – especially in high-rise buildings and other prestigious developments – are sold to foreign buyers. How can one make statements about the development of demand if no data is systematically collected about it? Real estate researchers clearly still have a lot to do.