Project development market seeing new players, new risks

In the May issue of REFIRE we carried an article about the status of real estate project developments in Germany, and looked at some reasons why the project development market in Germany's top 7 cities appears to be collectively stagnating, at about 25.4m sqm, valued at €122bn.

Market research group BulwienGesa has just published a study of 3,400 real estate project developments in the top German cities of Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne, Munich and Stuttgart (the Big 7). The study - "Projektentwicklerstudie Deutsche A-Städte" includes all current, planned or completed projects between 2013 and 2020, across the asset categories Office Residential, Hotels and Retail. The study is the tenth such study by the BulwienGesa researchers, and the most authoritative that we know of.

BulwienGesa CEO Andreas Schulten points out that not all markets are stagnating or in retrenchment. In certain market segments he sees a fresh willingness to take on more risk, with about 10m sqm being developed by new players such as land bank owners, larger project investors and municipal housing associations. Office is the favoured speculative segment, as office vacancy rates fall nationwide. This current volume is about 4.9m sqm, or about 600,000 sqm less than at this time last year. The proportion of investor-developments, where the investor now takes on the building risk as well, is now at about 43%, says BulwienGesa.

However, the combination of federal, state and municipal building restrictions, lack of building space with planning permission, rising construction costs, and the difficulty of getting classical financing from hamstrung banks, means that project developers have been turning more to the residential market. Residential is up by 1.1m sqm this year to 17.1m sqm, but not enough to compensate for the fall off in sectors such as office or hotel development.

Among the biggest cities, Berlin is seeing the most project developments, with Munich displacing Hamburg as second-biggest, with 4.5m sqm, largely thanks to residential development (like Berlin, seeing a rise of more than 10% this year). Stuttgart is also growing, while the other big cities are seeing shrinking volume.

All the big developers have full order books for residential projects, with more than 17.1m sqm of new residential, a rise of 1.1m sqm since last year. However, this is lower than the average 1.3m to 1.7m sqm annually on the books since 2010. In other words, growth is slowing, at a time when it needs to be rising fast, and is running well below the 300,000 to 400,000 units now required annually. The big cities are increasingly attracting inward migration, whether migrants from more rural areas or recently-arrived refugees.

Even in residential, project developers are starting to shy away from enough new housing projects. Germany's Bundesverband Freier Immobilien- und Wohnungsunternehmen (BFW), a lobby group for German housing associations and private property owners, recently surveyed its 1600 members for their views on the residential market's direction. As with the BulwienGesa study, the BFW sees an urgent need to influence government policy to encourage more investment.

BFW president Andreas Ibel commented recently at a conference in Berlin, "In the lower and mid-price segment it's become almost impossible to build. Rising costs and expenses, not enough building land, unilateral amendments to the tenancy laws in favour of the tenant, and continual fresh regulations for energy-efficient building mean that the authorities will have to come up with something drastic to encourage the necessary investment."

 The last round of new energy-saving regulations since the beginning of the year alone have been rsponsible for an increase of 7% in building cost, claim the BFW. And this to save 0.02% on the nation's energy bill, they say. This partly explains the surge in planning permissions granted in January and February, says BFW chief executive Christian Bruch, as they resulted from applications made in 2015 in advance of the new regulations, which were only now being approved.

The BFW and other pressure groups are now lobbying for the reintroduction of tax relief to encourage construction, with subsidies for building in the (numerous) areas in German cities that are experiencing housing shortages. A condition would be that the buildings are priced at €3,000 per sqm or below, or in the 'affordable' category. The government coalition of CDU/CSU and SPD initially showed enthusiasm for the proposals, but are now dragging their feet. Plans to discuss the proposals, initially scheduled for mid-May, have now been put on ice.