Smart Data meets analogue expertise
Whenever a property is offered for sale, its positioning depends on a number of “soft factors”. How family-friendly is the neighbourhood? How green is the view from the balcony? Until now, it has been practically impossible to evaluate such criteria in advance. Now, thanks to digital technologies such as Artificial Intelligence, the real estate industry can turn to smart data applications that not only save time but also provide a realistic assessment of the potential of any real estate investment.
On the basis of millions of separate pieces of data, it only takes a few minutes to evaluate microlocations for a huge range of factors, including distances to leisure facilities and schools, or the latest figures on purchasing power and job opportunities. Noise pollution can be assessed on the basis of distances to major roads, while a high density of leisure facilities would suggest that the neighbourhood is set to remain popular for many years to come. Real estate agents have the opportunity to enrich their marketing materials with the facts that are most important to them – without resorting to hollow marketing claims. And for developers, such tools serve to determine whether the right real estate concept is being developed at the right location.
Reviewing analogue marketing materials is extremely time intensive
These new digital tools also allow property-related information to be collated at the click of a mouse. In future, no one who receives property marketing materials will ever again have to spend hours of painstaking work manually checking every detail for plausibility. It will be possible to analyse real estate completely and without error in no time at all on the basis of one billion data points covering everything from existing lease contracts to offer prices, market values and other key performance indicators. At the same time, such detailed analysis can be used as the foundation of reliable forecasts, for example about the future cash flow of any property.
For investors, this method will provide a precise initial indication, revealing which potential investments should be pursued or examined in more detail – and which offers can be dismissed without further ado. For brokers and developers, new technology offers the opportunity to optimise their business cases: They have a raft of objective sales arguments at their disposal – or they benefit from an early heads-up regarding the potential hurdles they face when it comes to marketing their property.
Successful human-machine collaboration
I am convinced that Artificial Intelligence, if used correctly, can significantly simplify and streamline processes across the real estate industry. However, none of these new tools will be able to replace the real estate professional. After all, even in years to come, automatic analysis tools will not be able to replace the technical condition assessment of a building nor will they be able to replace an informative conversation with a long-term tenant.
The road to hell is paved with good intentions
I’m sure we can all name one or two well-intentioned laws that completely fail to achieve what their proponents intended. Germany’s ban on the misappropriation of living space is one such law – well-meant, but unfortunately completely misguided. And Berlin’s Senate has taken things one step further by creating its own unique version, which works as follows: Any developer who demolishes an existing residential building in order to develop new housing and, in many cases, increase the volume of living space within the same building footprint, is obliged to provide discounted replacement areas. According to the wording of the ban on misappropriation, landlords are not allowed to charge more than EUR 7.92/sqm per month for replacement living space. And all of this needs to be registered in the land register.
The clear message is that developers who densify should replace existing affordable housing by creating replacement areas in their new buildings. The legislator assumes that developers will offer any additional living space at a higher price. The EUR 7.92/sqm is a flat rate – the law does not make any provision for dynamic progression.
Who needs parquet when laminate floors will do?
As a developer, I calculate differently: Suppose I calculate a conservative EUR 1,000/sqm for the development plot and EUR 3,000/sqm for construction costs and marketing. Then I estimate a margin of ten to twelve percent – and I deduct any interest and other expenses from the margin, by the way. That’s another EUR 500/sqm. Then I market the apartments at a price of EUR 4,500/sqm. For a construction price of EUR 3,000/sqm, you won’t achieve luxury standards at the moment, but that’s not what most potential buyers want anyway. After all, who needs parquet when laminate floors will do? instead of a ceramic bathtub, a plastic tub will do and, instead of stone tiles on the walls, you can use waterproof paint from a hardware store. And surely, it’s always possible to shave off a few centimetres on the ceiling height.
Having paid EUR 4,500/sqm and being required to rent one of the apartments out for EUR 7.92/sqm equates to a price-to-rent ratio of 47 and an unadjusted initial yield of two percent. Of course, this still sounds better than a negative interest rate. But, all in all, it is a fiasco.
It is almost impossible to cross-subsidise the affordable housing prescribed by politicians with open-market housing. Even where a developer is able to double the amount of living space on the same plot, the sums simply do not add up. To balance the books, landlords would have to have to base their calculations on significantly higher, practically unpayable rents of EUR 20.00/sqm and above in their regular apartments. Clearly, this is as far from a win-win situation as anyone could imagine.
Politicians want to support people low-income households. However, what started life as a well-meant idea to link the demolition of dilapidated and inefficient residential buildings to the creation of subsidised housing turns out to be a declaration of economic and political bankruptcy. The requirement to provide replacement housing does nothing to promote the development of new housing, it prevents it.
At least that’s how I interpret the law. And it’s a massive shame, especially as politicians claim they want to support the desperately needed construction of new residential units – in Berlin and elsewhere.
Serviced living is all the rage – but there aren’t enough offers
The population of older adults living in Germany is on the rise. In 2017, over 65-year-olds represented 21 percent of the population and the number of senior citizens has continued to grow in the two years since. Demographic change is transforming society – and with it the real estate industry. After all, when it comes to living space, senior citizens have special wants and needs. They are looking for homes that maintain their independence for as long as possible. They also want comfort and peace of mind. Most are willing to move – and many would like to move into a serviced housing complex. So far, however, supply in this area has lagged far behind demand. Or, to put a more positive spin on the current situation, the segment has a huge amount of untapped investment potential.
Demand across Germany as a whole
It is clear from the length of waiting lists for existing facilities just how large a gap exists between supply and demand in the serviced housing sector. And, thanks to a recent TERRAGON study of serviced accommodation for senior citizens in all German municipalities with more than 5,000 inhabitants, it is now possible to accurately quantify the shortfall. TERRAGON’s findings: across Germany as a whole, there is a shortfall of 550,000 housing units and 94 percent of the surveyed municipalities do not have enough serviced apartments for their older residents. The demand for new serviced housing is high and investor interest is growing. One of the biggest difficulties at present is the provision of suitable development plots, especially in large cities. Although the supply in major cities is generally better than in small and medium-sized cities, even the 30 largest cities only have an average of 3.3 suitable units available per 100 inhabitants aged 65 and over. In North Rhine-Westphalia in particular, many large cities are significantly undersupplied ¬– Duisburg (0.9 percent), Gelsenkirchen (0.7 percent) and Monchengladbach (0.5 percent) are the least well supplied among the top 30.
No shortage of purchasing power
The lack of supply is in no way due to a lack of interest, or money, on the part of potential customers. In fact, the opposite is true. The purchasing power and preferences of Germany’s older population have also been examined by several market researchers, including empirica and JLL, and the result is clear: More than half of the population over the age of 50 is attracted by the idea of moving into a serviced apartment, and baby boomers have significantly more money available to them in old age than previous generations. In many regions, more than three-quarters of all households in or just before retirement can afford to spend up to €1,000 month for rent and services without having to restrict themselves in other areas. To put this in perspective: The monthly costs for rent and services in a two-star senior residence (using gif e.V. classifications) total roughly €900. Almost one-third of senior households could actually afford to live in a four-star facility. In the four-star price class alone, there is demand potential for around 100,000 residential units with an investment volume of €33 billion.
Serviced housing offers are diversifying
Of course, serviced apartments are needed in all price categories if every market segment is to be well served. In response to such broad demand, developers and operators have been diversifying their offers in recent years. New concepts have emerged and there is now a suitable facility for almost every budget and every taste – but not everywhere and, above all, not in sufficient quantity. In metropolitan regions and conurbations in particular, demand will continue to surge as more and more senior citizens move to major urban centres. Older residents want to be integrated into society and remain active, and this requires direct access to mature and efficient public infrastructure. In rural areas, such infrastructure is often lacking and it is almost impossible to compete with the cultural, dining and retail offerings in the city.
Intense competition for development land
There can be no doubt: Demand for serviced housing from Germany’s older population is strong and getting stronger. The investment potential across Germany currently stands at around €64 billion. The potential is greatest in urban locations, where demand is highest and is growing fastest, but this is precisely where development land is most scarce and competition with traditional residential construction is fiercest. Serviced apartments for senior citizens would be an ideal addition to the existing housing mix: for investors who can count on better returns; for senior citizens who can find apartments that meet their needs; and for communities that want to offer attractive living space to all of their residents.
The next request? A rent freeze for commercial real estate
Berlin’s Senate has just added another proposal to its already long list of regulatory schemes. Hot on the heels of the rent freeze for residential apartments, Berlin’s legislators are now calling for a cap on commercial rents. The government seems must be working on the principle of equal rights for all. On 13 August, Berlin’s senators voted to take their latest initiative to the Federal Council, the Bundesrat. This will give Germany’s 16 federal states the opportunity to designate which areas across Germany have the most intense commercial rental property markets. Once these markets have been selected, the new rent cap regulations will be applied.
I now find myself wondering whether regulatory zeal has blinded Berlin’s Senate to reality – both legally and factually. In the case of the rental price brake for apartments, they at least attempted to link the policy to the principles of the welfare state. But how can anyone justify interfering in the property rights of commercial property owners? Housing may be a basic human need, but running a convenience store is probably not.
There’s also the legitimate question of whether it makes any sense to introduce rent controls in the commercial property sector that have already failed in the rental housing market. After all, there is a blatant shortage of supply in the rental housing market, which is driving up rents. This is not the case for commercial rents. Small and medium-sized enterprises are not being driven out of their traditional locations or prevented in large numbers from renting by exorbitant rent increases.
Thus far, there have only been a very small number of what could be classed as exorbitant rent increases for businesses in Berlin. Where such cases have been reported, they have mainly involved ultra-prime locations on Kurfürstendamm and Friedrichstraße, or ultra-trendy neighbourhoods such as Prenzlauer Berg and Friedrichshain-Kreuzberg. In many shopping streets in secondary locations, however, rents have remained largely unchanged over the past ten years. In many cases, they have even declined, for example, on Gorkistraße in Tegel, Karl-Marx-Straße in Neukölln and Reichsstraße in Charlottenburg. It is also worth noting that while commercial space in prime locations tends to be fully occupied, there are often vacancies in secondary locations just around the corner. This contradicts the supposed assumption that commercial rents have reached excessive levels.
It is simply not true that retail rents are skyrocketing due to high demand and lack of supply. On the contrary, rents are under considerable pressure in the face of expanding online retail. For more than ten years now, e-tailers have been taking an ever-larger share of consumer spending increases. At the same time, sales in the stationary retail sector have stagnated. Many retailers have responded by restricting some of their services to online platforms and reducing their space requirements. Commercial landlords have already reacted to this trend by reducing the sizes of the commercial units on offer. From a retail tenant’s perspective, they benefit from cost-optimised retail space. And this trend towards smaller commercial spaces will continue. I don’t know of any high-street investors who have recently included a disproportionately high potential for rent increases in their business plans. Online competition is not set to disappear and the stationary retail trade will no longer need such large units.
And what about Berlin’s Senate, which seems to announce a new policy proposal almost every week. If there were a top ten chart for the most pointless regulations, the new commercial rent cap idea would be heading towards the top spot. Let us just hope that this Berlin proposal – like so many before it – is met by disbelief at the federal level before being nixed.
PS: Let’s hope that Berlin’s Senate doesn’t decide it wants to take on the online trade anytime soon.