German land prices creating two-tier market

German land prices are rapidly diverging, with land prices in some cities soaring to 35 times those in their less sought-after counterparts, according to a report published this month by Swiss investment manager, Empira.

While the average price per sqm for land in 2017 was €175, in Munich, this figure rocketed to €2,418.79, fully 35 times more than the price per sqm of €69 in Chemnitz. Even in cities like Düsseldorf, the cost of land has risen by 450% since 2000, 14 times more than the cost of inflation.

‘We expect a further increase particularly in the ‘Top 7’ cities due to the ongoing attractiveness of those locations,’ Professor Steffen Metzner, head of research at Empira, told REFIRE. ‘Munich will not lose its top spot in the foreseeable future and we definitely see no signs of a decline in land prices in Munich.’

Overall, southern Germany is the most expensive region, with the spread increasing from €262 per sqm in 1997 to €477 per sqm in 2017. ‘The economic fundamentals are very robust in Southern Germany, driving net migration from other parts of Germany as well as internationally,’ Metzner said. ‘There are some highly expensive locations in Southern Germany that make it the most expensive region overall, like Munich, Ingolstadt, Regensburg and Stuttgart.’

And while rising land prices understandably spell bad news for would-be homeowners, investors are also feeling the strain, according to Metzner: ‘Unless investors buy land to develop it themselves, their margins will be affected when acquiring real estate,’ he said. ‘That is why they should look to enter the value chain at an earlier point than they did in the past, in order to benefit from vertical integration and insourcing potential. Private home buyers who do not have this option should look at less in-demand locations, both at a macro (city or region) and micro (neighborhood) level.’

With a value of approx. €5.5trn, land for development in Germany is one of the most important economic resources, according to Empira. To put it into context, the total asset value currently corresponds to about five times the market capitalization of all DAX companies (at prices for end-Dec 2018), twice the German money supply M1 (cash and demand deposits) and more than 1.5 times Germany‘s GDP. There is typically a strong correlation between the economic strength of cities and regions and the cost of land there. For example, provider of property process solutions On-Geo puts the value of land for the economically robust Bavaria at €1.6trn, compared to just €34bn for Thuringia. Cologne and Frankfurt am Main have correspondingly high land values of an estimated €118bn and €117bn respectively, whereas Leipzig’s land value is put at around €27bn. Supply and demand largely dictate the value of land, as does its scarcity in some areas. Overall, just 9% of land in Germany is used for construction, for either residential or commercial use, according to Empira.

In addition, the local labour market, distance from economic centres and average income can have an impact on land prices, according to Metzner. ‘Therefore, there are not only two price levels but a continuous adjustment of the prices to the underlying conditions. The chance to buy homes in cheap markets is less interesting for young professionals or families, because they need to live close to the companies where the well paid jobs are. Retired persons might be more flexible and can move to those cheaper markets. We also see smaller businesses and self-employed persons here. If smaller cities can enhance their advantages and attract a broader ‘target group, they will develop very robustly.’

There is also a strong correlation between cities with the highest purchasing power and the high cost of land. The difference in price per sqm for landbetween cities with more than 500,000 inhabitants and less than 250,000 inhabitants rose from €132 per sqm in 1997 to €489 per sqm in 2017. The biggest cities have experienced the sharpest increase in land prices, on average. ‘This underlines a trend of metropolisation we have been witnessing in Germany,’ Metzner said. ‘That is not to say that medium-sized and smaller cities have not seen price increases, too. It is fair to say, however, that the ‘Top 7’ remain particularly interesting to institutional investors because of the size of the market.’ (ssk)