Project development market stagnates for first time since financial crisis

Germany’s project development market is stagnating for first time since the financial crisis, as rising costs put the brakes on growth in many major cities, according to Bulwiengesa’s‘Project Developer Study 2018’, published this month.

For many cities, the situation has become critical, according to the report. Overall, the trading development volume (development with a view to sale) has fallen by 0.3% (2017: +3.8%) to 26.9 m sqm.

‘The stagnation in the development market is not because of the lack of demand but due to the scarcity of permitted projects,’ CEO of housing developer, Instone Real Estate Group, Kruno Crepulja, told REFIRE.‘We have projects in all of Germany's ‘Top 8’ and we think pressure on the sales prices will increase, not least because the vacancy rate in these markets (referring to all asset classes) is just 1% on average, or zero if we are talking about new builds.’

Offices and housing show massive nationwide differences

One of the most interesting changes this year can be seen in the housing sector, with marked differences across major cities. The development volume in Munich has risen by 6.9%, yet it has fallen by 3.5% and 5.1% in Berlin and Hamburg, respectively.

One active housing developer is recently-listed Instone, which is the most active housing developer in Frankfurt, according to the study. Its project pipeline currently comprises 48 projects, or more than 8,000 housing units, which are either in planning, under construction or already have backing. It is forecasting revenues from this portfolio of around €3.4b. ‘We are proud to once again be one of the most important project developers in Germany, but will not be resting on our laurels, as demand for housing in Germany’s big cities remains high,’ said Crepulja. ‘In the medium-, we want to construct over 2,000 housing units each year, generating revenues of up to €1b. Our project pipeline is well filled and we have an excellent positioning in the market that will allow us to profit from the long-term trend towards growth in the German real estate market.’

However, the federal government needs to do more to facilitate construction, Crepulja warned: ‘It needs to do more to increase the availability of land as well as to push building permits through faster. Overall, 93% of our projects are in the Top 8, with the remaining 7% in prosperous cities such as Bonn and Ulm, where we see upside potential.’

Given the lack of available land, Instone is also interested in conversions, he said. ‘We're also very interested in converting offices or vacant commercial buildings into apartments. It takes a lot of preparation and competence but there is less competition for assets.’

Offices, for their part, tell a slightly different story. After several years of muted development, volumes are now on the up, rising by 5.5% or 290,000 sqm. Here, too, there are significant differences from city to city: In Berlin, development has rocketed by 26%. In Munich, however, it has fallen by 23.5%, compared to a drop of 3.1% in Hamburg.

‘Project developers are reacting to the lack of office space, particularly as the price difference between offices and residential stock has become very narrow,’ explained Andreas Schulten, a board member at Bulwiengesa. ‘What the financial crisis of 2009 couldn’t rock is now being thwarted by the spiraling costs we’ve witnessed in recent years – further growth in larger German cities,’ he added.

Project developers seeking to diversify geographically

Predictably, project developers are now seeking to diversify geographically. Many of them are turning their attention to B and C cities or to areas in close proximity to A cities. This strategy is less evident in Frankfurt amd Munich with their distinctive affluent suburbs than in large-scale cities such as Berlin.

‘The ‘Big 7’ suffer from an availability of land combined with regulatory restrictions,’ Schulten said. ‘The keywords remain the approval status via the overloaded responsible authorities, inflated additional costs due to official requirements regarding the construction of social housing or energy saving measures.’

This is backed up by statistics: between 15% and 20% of projects have pushed their completion dates back, compared to last year. Around one third of these projects are in Berlin.

Hotel project development on the up

For the third consecutive year, the hotel trading development project volume has increased for the ‘Big 7’ by 13.4% or more than 200,000 sqm. Only in Frankfurt did the volume decrease. However, the market remains volatile, largely due to its small size. (ssk)