The trouble with preemptive property purchase rights
Premiere in Berlin-Neukölln: June saw the district’s authorities exercise their preemptive rights of purchase for the very first time. A private investor was poised to buy an apartment building in Neukölln’s Reuterkiez neighbourhood when authorities took advantage of the district’s “protected neighbourhood” status to preempt the investor. Members of the Green Party in Neukölln were enthusiastic in congratulating themselves for the decision (Neukölln’s urban development department is run by the Greens) and the media was happy to adopt the party’s narrative that tenants had thereby been saved from a predatory real estate speculator. But are things really so black and white?
Investors are being held to ransom and dictated to
Under neighbourhood protection regulations, potential investors in neighbourhoods such as Neukölln’s Reuterkiez are frequently being asked to signed what are known as Abwendungsvereinbarungen. These agreements require investors to accept numerous restrictions in terms of what they are allowed to then do with their property, including modernisations or the conversion of rental apartments into condominiums. If they do not keep their side of the bargain, investors face the very real prospect of municipal authorities exercising their preemptive purchase rights. This is exactly what happened in the case of the above apartment building in Berlin-Neukölln’s Reuterkiez. Because the investor wasn’t prepared to accept the conditions set out in the Abwendungsvereinbarung, local authorities made good on their threat and exercised their preemptive purchase rights.
Any refusal of such an Abwendungsvereinbarung can easily be presented as confirmation of an investor’s greed, although, in actual fact, many investors simply don’t want to be held to ransom or dictated to. Ultimately, this is what investors are being threatened with, especially when municipal authorities play to the media gallery when they enforce such Abwendungsvereinbarungen and/or exercise their preemptive purchase rights.
When the facade starts to crumble
This is a crying shame. And not just for the investor, but for the tenants too. After all, without investment, the housing stock falls apart. Facades crumble, sanitation systems break down, energy-inefficiency means that heat and warm water are wasted and the consumption of electricity is overly high, while older tenants struggle up five flights of stairs because no lift has been installed. This is exactly what happens if investors are vilified and driven off, or if they fail to take care of their properties.
Modernisations are already strictly regulated in protected neighbourhoods, and the new Abwendungsvereinbarungen and the prospect of preemptive purchases only serve to aggravate the situation even more. Berlin’s municipal authorities are already doing everything they can to discourage investment in the city’s residential neighbourhoods. It won’t be too long until the penny drops for the city’s inhabitants and they realise exactly what this all means.
1960s apartment buildings: Potentially arttractive returns for patient investors
Anyone looking to invest in residential property in Berlin right now is probably either on the lookout for a magnificent apartment building built at the start of the twentieth century, or a modern apartment building built this century. However, the reality they face is often quite different – the markets have been swept clean, and the few prestigious properties that remain are changing hands at astronomical prices. As a result, investors are increasingly turning their attention to apartment buildings that were constructed during the 1960s, properties that many had previously given the cold shoulder to. Investors have come to realise that these are among the very few undervalued assets left on the German real estate market – and that profitable investment s are based on more than just subconscious concepts of architectural beauty.
Extremely high levels of demand for housing in Germany’s metropolitan regions, combined with the lower costs of investing in 1960s apartment buildings, have created attractive yield potentials in this asset class. Nevertheless, taking full advantage of these potentials and successfully creating lasting added value requires patience and care. As with pre-war properties, investors need to constantly bear in mind a number of special regulations and characteristics that apply to 1960s apartment buildings.
One important consideration is that the fabric of the building may be structurally weak. These properties are a product of their time, an age dominated by a massive housing shortage and a lack of appropriate building materials. In many cases, corners were cut and builders used excessive amounts of rubble. Some buildings even have crooked lift shafts, which is one reason why such buildings should always be modernise and repaired, not completely gutted. Modern lifts can be installed, but only with a great deal of extra effort and significant investment. In any case, most people can’t even tell the difference between a completely new lift and one that has been thoroughly reconditioned.
Caution is also required when it comes to carrying out plans for loft conversions. In many cases, it is not possible to increase a buildings floor area ratio with spacious penthouses, even though many of these 1960s apartment buildings were originally constructed with flat roofs. Depending on the building, timber-framed post-constructions with setback storeys may be an option. And that isn’t the worst piece of news – you still get a penthouse with a 360-degree panoramic balcony.
Compromises will probably also have to be made when it comes to noise insulation. Due to the thin walls installed in many 1960s buildings, it is almost impossible to retrofit insulation or install new windows that fully comply with modern standards. But younger tenants, in particular, will frequently be happy to find out that street noise has been somewhat reduced. After all, they aren’t generally disturbed by the general hustle and bustle of big city life.
Some investors withdraw from a potential purchase as soon as they hear the word ‘asbestos’. In my opinion, they are wrong to do so. Of course, it is important to give detailed consideration to the condition of any building. Asbestos was a commonly used building material, particularly for the flat roofs of apartment buildings and garages, but also mixed with adhesives to manufacture linoleum flooring. After all, it was considered an excellent insulating material and the health risks were not sufficiently understood at the time. But as long as the asbestos hasn’t dried out and crumbled, which is what releases asbestos fibres into the air, or asbestos dust hasn’t be released, for instance by drilling, then the material poses no health risks. As you can see, the over-hasty refurbishment of an apartment building’s roof can actually do more harm than good.
By setting new aesthetic accents, patient investors are able to revive the charms of the 1960s, whether in the form of intricately tiled mosaics, sweeping bay windows or neon signage. With judicious modernisation, it is entirely possible to create comfortable living space and homes that don’t have to fear comparison with other asset classes in the residential property segment. For investors in 1960s apartment buildings, the investment they make in creating quality apartments will frequently deliver attractive returns, while tenants enjoy being transported back through time to savour the best of the 1960s.
Premiere of digital property investments for institutional investors in Berlin
Crowd-investing via online platforms is one of the fastest growing methods offering small-scale investors the opportunity to invest in the real estate sector. In addition to subordinated loans for end-customers, a select number of platforms are now also offering higher-volume investment opportunities in the form of secured and fixed-interest bonds. They are creating vehicles for attractive real estate investments with short to medium-terms of between 12 months and 5 years. The first of this new generation of financing projects is now on the starting blocks at Berlin’s Eisenzahnstraße.
German crowd-investing platforms raised roughly EUR 41.2 million from private investors in 2016, a sum that has already been beaten by the EUR 45.8 million raised during the first half of 2017 alone. The end-customer side of the business is booming – although the funding limits are often too low for institutional and semi-institutional investors. For this very reason, a new product is being developed specifically for the institutional sector. The product involves collateralised securities in the form of partial bonds and is targeted at projects with a total financing volume in the two to three-digit million range. Some of the companies that started out as purely online crowd-investment platforms are clearly now evolving into professional investment platforms.
Attractive yields and high levels of transparency
A secured, fixed-interest bearer bond reduces the risk of total losses in comparison with the subordinated loans frequently issued to end-customers. A second important aspect is the statutory prospectus obligation for securities investments. This delivers high levels of transparency, for instance requiring the publication of profit and loss forecasts and disclosures of any relationship between the issuer and property developer.
By carefully selecting the financed properties, investment risks can be reduced even further. For example, it is possible to finance the refurbishment and restoration of existing properties, which benefit from high current market values and well-established local infrastructures. In the residential segment, this might involve repositioning an existing building ensemble at a highly desirable location.
The countdown is underway at Berlin’s Eisenzahnstraße
With its “Eisenzahnstraße Beautique Apartments”, a 13,000 sqm ensemble of three buildings containing both residential and commercial space, the online real estate investment platform iFunded is launching the largest real estate crowd-investment project Germany has ever seen. A bond issue is set to raise a total of EUR 10 million for the property near Berlin’s world-famous Kurfürstendamm. With the help of the capital it raises, iFunded wants to revitalise the buildings and create 281 modern micro-apartments.
The term of the bonds is 3.5 years. Initially, as part of the private placement, institutional and semi-professional investors will be invited to invest in the project with minimum investments of EUR 100,000. The second phase will allow private investors to participate by buying bonds with crowd-investments of up to EUR 1,000. Investors will receive an annual return of 5.5 percent, whereby the issuer of the bonds via iFunded.de retains the option to distribute yields for this project on a six-monthly basis. The platform is thus expanding its product portfolio, offering investors secured investments in the form of bonds and, as one of Germany’s pioneering digital real estate investment platforms, is taking its first step into the world of regulated financial investments.
Berlin is still Germany’s most important market for apartment buildings
The German investment market for apartment buildings continues to be dominated by Berlin’s impressive sales figures. The German capital’s market for mixed-use residential/commercial buildings remains by far the largest in the country, a fact confirmed by the latest IVD real estate association’s apartment building investment report. Having extensively analysed the reports published by official Land Valuation Committees in Germany’s 50 most important cities, the IVD has calculated that transactions on Germany’s multi-family apartment building market totalled EUR 15.1 billion in 2016. Berlin contributed EUR 4.2 billion to that total, equivalent to 26 percent of the entire market. Berlin was not quite as dominant as just one year earlier, when the city’s share of the apartment building investment market amounted to 33 percent.
A total of 1,155 mixed-use residential/commercial buildings changed hands in Berlin last year, placing Berlin at the top of national rankings in terms of absolute sales as well as transaction volumes. Across Germany as a whole, 11,464 apartment buildings were bought and sold last year. Second place in terms of transactions went to Cologne (611), followed by Leipzig (594), Essen (495), Wuppertal (493) and Hamburg (438). Despite its first position, 1,155 transactions is by no means a record for Berlin. In fact, transactions in the ‘City on the Spree’ are trending downwards. Just three years earlier, in 2013, there were 1,790 transactions involving multi-family apartment buildings, while in 2011, the total stood at 1,863.
In Berlin, the market for apartment buildings accounted for 47 percent of all transactions involving developed plots in 2016. In comparison with other major cities in Germany, this figure is extremely high. As far as transaction volumes are concerned, Hamburg ranked second in Germany, with apartment building transactions totalling EUR 1.5 billion, and was followed by Munich (EUR 0.98 billion), Dresden (EUR 0.95 billion) and Cologne (EUR 0.77 billion).
The average cost of an apartment building in Berlin now stands at EUR 3.64 million (a year-on-year decrease of 1.36 percent; in 2015, the average was EUR 3.69 million). The average prices for apartment buildings are higher in Potsdam (EUR 4.34 million) and Munich (EUR 6.2 million).
What is the future of the Mietpreisbremse?
There is one thing they all agree on – the real estate associations and tenants’ unions, the CDU, CSU, SPD, FDP, Greens, Linke and AfD – rent control in the form of the Mietpre-isbremse simply does not work. The law of supply and demand beats the law of rent control hands down. It’s the shortage of housing in Germany’s major metropolitan areas that is driving rents ever higher.
Many private landlords are simply ignoring the Mietpreisbremse, often because no one seems to be clear on how the regulations should be applied. To take just one example, the Mietpre-isbremse’s regulations do not apply to apartments that have been “extensively modernised”. Unfortunately, lawmakers forgot to specify exactly what they meant when they used the term “extensive modernisation”. Then there’s the legislation’s key reference value, the local com-parable rent, which can only be exceeded by 10 percent for apartments when they are re-let. But a whole host of cities don’t even publish rent indexes, while other cities have published indexes that are based on questionable data.
The election will decide
So, what will happen next? That depends on the result of the elections – at federal level and then in the individual states. Federal Mietpreisbremse legislation gave state parliaments the power to issue rent control implementation orders. But that also means that the Mietpre-isbremse can be abolished at state level. Steps in exactly that direction were recently an-nounced by North Rhine-Westphalia and Schleswig-Holstein. The FDP is the junior coalition partner in both states, and the party is committed to abolishing the Mietpreisbremse entirely. In states such as Berlin, governed by a coalition of SPD-Linke-Green, such a move is, natu-rally, not to be expected. Landlords who own residential property portfolios in such states can only cross their fingers and hope for a good result in the federal elections. This is the result that will decide the future of the Mietpreisbremse. With the most likely result being a Merkel-led government, it is likely that the CDU/CSU will adapt its policies depending on its eventual coalition partner. The potential scenarios:
Continuation of the Grand Coalition
If the CDU/CSU and SPD find themselves as partners again, it is less than likely that the Mietpreisbremse will be abolished. This is despite the fact that Angela Merkel has conceded that the Mietpreisbremse isn’t working as intended, and the criticism she has faced from with-in her own party’s ranks. The SPD, in contrast, has based its campaign on a massive tighten-ing of the Mietpreisbremse. Based on the last legislative period, experience has taught us that, if anything, it was the SPD that managed to force the agenda on a number of issues, and not the Union, which means that more stringent regulations are entirely possible. In the best case, the parties will arrive at a compromise and agree to leave most of the regulations untouched, with a degree of fine-tuning and “tightening” in certain areas. This could require, for example, landlords to disclose the rent paid by a previous tenant.
In this scenario – which is fortunately extremely unlikely – a red-red-green government, formed by the SPD, Greens and Linke, would massively sharpen the regulatory teeth of the Mietpreisbremse. All three parties have said as much in their manifestoes and throughout the election campaign. In particular, they would ensure that rent indexes are calculated on the basis of rents from the previous ten years. In addition, tenants would be able to demand that their landlords pay back any excess rent they may have paid since day one of their tenancy.
If the election results in a coalition of the CDU/CSU and FDP, there is a chance that the Mietpreisbremse will be abolished, or at least be permitted to expire from the statute books after five years. The FDP is the only party to call for the rental price brake to be abolished as part of its election manifesto. A significant number of politicians from within the Union’s own ranks are also less than enamoured with the Mietpreisbremse. But the abolition of the Mietpreisbremse is still far from certain, especially as the CSU traditionally represents the in-terests of tenants’ unions and no one can be sure what sacrifices may be made during the “give and take” of coalition negotiations. With this coalition constellation, there would be a near to zero chance that the Mietpreisbremse would be sharpened in any way.
A coalition government comprising the CDU/CSU and Greens would not abolish the Mietpre-isbremse. They would either retain it in its current form, or tighten the regulations, which is ex-actly what the Greens would like to do if they were given the chance.