Project development volumes unchanged, but shift in risk acceptance

German market research group bulwiengesa has just published its 15th annual study on German project developments, which show a remarkable similarity to this time last year - perhaps not surprisingly, as a level of stagnation had already set in (albeit at a high level) in the country's Top-7 cities even before the onset of coronavirus nearly 15 months ago.

The study covered more than 5,200 individual projects, breaking down structure and volume on a city-by-city basis, and focusing on the asset categories office, residential, retail and hotel.

The study shows that investor-developers are still taking risks on to their balance sheets that trader-developers are no longer willing to take on. Investor-developer projects increased by 1.3m sqm (+6.3%), more even than in the previous year, and particularly in both residential and office space. Hotels and retail showed lowered project activity - in the case of hotels, very much lower.

By contrast, the 'classic' trading developments, destined for a sale to a new investor, were down on project volume by 1.3m sqm (-4.7%), and heading further downwards, extending the trend of the previous year. With lots of projects now postponed, this mainly affects office, retail and hotels.

According to Andreas Schulten, bulwiengesa's chief representative, "Two trends are increasingly feeding project developments in German cities: The favourable treatment of real estate investments in the current capital market is leading private companies to pursue a strategy of land banking, i.e. the strategic purchase of land. At the same time, publicly funded companies are intervening in project development with political motives in order to protect public interests. This, however, involves growing economic risks."

Andreas Ibel, president of the BFW (Federal Association of Independent Real Estate and Housing Companies), which has been a long-term supporter of the annual study, commented: "Our companies are being driven out of the A-cities by bureaucratic hurdles and overregulation. Project development is increasingly unattractive and uneconomical here. Public housing companies are moving in, but they cannot meet the demand for affordable housing on their own. Moreover, the same framework conditions apply to them, meaning they also bear immense economic risks, for which the taxpayer is ultimately responsible."

The study points out that Corona has had little effect on the residential housing market, with the downward trend of the previous year largely unchanged, up 34,000 sqm or 0.1%. But the trend to project developers pulling out of the A-cities for trading is intensifying - what we ARE seeing is a strong rise in investor-development, for developers' own books, with a rise in volume of 1.2m sqm (+14.7%). This clearly shows developers' interest in the housing market - not just in the private sector, but among state-owned housing companies, who are becoming increasingly active, especially in Berlin.

Still, many residential project developers are reviewing their strategies carefully in the light of increasing regulation, such as minimum thresholds for social housing, rent freezes, and the introduction of a CO2 tax on buildings. Andreas Schulten says, "The upcoming elections will lead to further political course-setting, because the situation in the tight housing markets is an important election campaign issue. The will to provide affordable housing still suffers from a lack of building land availability and high construction costs. As a result, construction activity continues to shift from the cities to the surrounding areas."

Offices: The coronavirus pandemic has undoubtedly put a damper on the office segment, which had been experiencing a boom in new modern office space in the big cities. Speculative development has given way to close scrutiny of the type and needs of usage in the future, in an era of increasing home-working. As Schulten says, "Offices will still have to be built or comprehensively refurbished in the coming years. Vacancy rates are very low in most German A-cities. But the question as to 'where' those offices are is now very relevant, with both city and satellite offices likely to shape our working world in the future."

The trend for developers shifting their activities towards the suburbs and surrounding hinterland of big cities has been evident for some years, and for commercial property, the annual bulwiengesa study has long been incorporating those figures. For this year's study, several residential 'trading' developers also contributed their project details, helping to give a more rounded picture as to what's going on further out from the big city centres. Future studies are (hopefully) thus likely to have even more access to comprehensive project development data from the main asset groups.