This is why German residential prices will keep going up and up

Roland Koch knows his way around politics. Or at least, he did, when he was the prime minister of Hesse and a close colleague of party boss Angela Merkel, back in the day.

Koch was even seen as a potential chancellor himself – but as the world knows, Angela Merkel has never felt comfortable with pretenders to her throne sniffing around too closely. Whips get cracked. The prospective rivals tend to get the message soon enough, and slide off to take lucrative positions in industry.

Now, with Merkel’s days numbered, some of her old colleagues are fancying their chances again, and have re-appeared on the scene. Ex-CDU fraction leader Friedrich Merz was years ago despatched by Merkel to political ignominy and took himself off to the industrial wilderness, where’s he’s been grinding out a multi-millionaire income since as the Germany boss of BlackRock, the world’s biggest asset and wealth manager. He swears he’s willing to give it all up, including his two private planes, if he’s voted back as the CDU party leader this December, the position that Merkel is vacating as part of her long goodbye tour. Although it’ll be a much shortened tour, if Merz gets back in.

Koch left politics to take up a job as CEO of Bilfinger Berger, Germany’s second largest builder. Like many politicians, the rhetorical skills that had served him so well in the cut-and-thrust of political maneuvering proved less than adequate when it came to the more mundane business of running a bricks-and-mortar business. As a lawyer, he should be well-equipped to deal with the €100m lawsuit that Bilfinger is suing him and other former executives for damages for alleged breaches of duty during his ill-fated stay at the helm, which ended in 2014 after less than four years in the job.

Last week Koch was back on the stage as a keynote speaker at the Real Estate Finance Day organised by the Frankfurt School of Finance and Targa Communications. The event is now firmly established as a key fixture on the German real estate calendar, and this year’s event didn’t disappoint, packing in a full programme for more than 240 delegates.

It’s clear that Koch hasn’t lost his touch – helped by one of his current jobs, as supervisory board chairman of UBS Deutschland, which will be keeping him very au courant with compliance requirements and political interference in the worlds of finance, building and construction.

The thrust of Koch’s message was very clear. The current wave of regulation and red tape snarling up efforts to get more housing built in Germany – and in particular, more affordable housing for those earning modest incomes – will only get worse, much worse, before there’s any real light at the end of the building regulations tunnel.

If the real estate industry expects that the political establishment would take up the cudgels to unblock the constipated supply pipelines for the required building programme in anything like the envisaged time frame, as they surely would for any other key branch of Germany’s famed industry, they are going to be sorrily disabused of that notion, he said.

His own experience has shown him, he told us, that almost no regulations relating to perceived improvements in quality, safety or more latterly, sustainability in housing construction have ever been modified, diluted or dispensed with. It’s always the opposite – more, deeper, dearer – allegedly in the interest of the citizen, tenant, or consumer. It appears unstoppable.

Digitisation, the underlying theme of the day’s conference, is only exacerbating the problem, stressed Koch, as with increasing transparency the fear of politicians and municipal councillors to be seen as not having acted in accordance with market principles – in other words, selling building land to the highest bidder – is career suicide.

This is compounded by a problem unique to the housing industry, whereby the population is increasingly unwilling to accept that the housing market be governed by market principles, while the politicians no longer seek to promote housebuilding by offering economic carrots, but solely by regulatory incentives.

Privatisation, more competition, hands-off involvement by the state - all are seen as sacred cows when it comes to direct financial subsidies to entice builders to man up and do their economic duty. Without adequate returns for developers, that’s clearly not going to happen, as Koch left his audience in no doubt. Meanwhile the cranes are operating at full capacity building luxury lifestyle apartments for the well-heeled and the absentee global nomads.

Koch’s entree was followed, as if on cue, by Christoph Gröner, the founder and head of CG Group, the leading project developer in Germany providing affordable rental accomodation. The passionate, plain-speaking, self-made multi-millionaire Gröner has been in the property business for thirty years, and cheerily declares it to be the least innovative of any industry in the country in that time. He’s determined to change that for his own business.

He knows that the way to make headroads into the shortage of 1.5m housing units in Germany over the coming five years is modular building and BIM-controlled production. He’s converting sites across Germany – partly old office or industrial buildings, or even building from scratch – to create affordable apartments of about 45-55 sqm in downtown locations across the country. He’s doing it on a major scale.

He’s up against anti-capitalist demonstrators, municipal do-gooders, and political resistance at every turn, concocting new material and process regulations that make building his housing ever more expensive. He’s built a factory to create his modular units, and he’s using his undoubted power to push his concept through. He’s extremely rich, and doesn’t need the money. He’s not in it for charity. But he wants to build, and to do things his way.

He’s provided more housing than hundreds of other developers who are flooded with investor money, but are still hoarding land and hoping for higher prices. He’s not afraid to stand up at gatherings and tell his story. That’s a story of real achievement, and not just anonymous money management. He was roundly applauded for an authentic speech, and rightly so. We salute Mr. Gröner, and wish his company even more success.