Messe München GmbH
EXPO REAL
Messe München
Year-end surge already under way
This is the first time that Expo Real has fallen right in the middle of the year-end transaction spurt, says Timo Tschammler (CEO JLL Germany). Expo is typically the curtain raiser for the busiest time of year but this time the weight of capital in Germany is so great that the market has been in full swing from the 3rd quarter.
He says this is all the more remarkable given a cautious start to the year, but the continued low interest rate environment has meant that there is still a scarcity of alternative investments competing with real estate. The 3rd quarter of 2019 closed with a Q3 record transaction volume of €25 billion, the second best quarterly performance ever.
He reflects that this year’s Expo Real was a mix of optimism and realism. The overriding view is that 2019 will remain dynamic and finish well but the final quarter will not keep up the pace from Q3. He expects the full-year transaction volume to be around €75 billion, which is a little below the previous year’s record performance.
Does this mean that the market has now moved away from its customary investment cycle? Tschammler doesn’t think so, and his conversations at Expo indicate that the market will not necessarily see a shift - even under the current capital pressure - but will tend to move back to its orthodox schedule from the start of next year. One thing is clear: investors looking to make a profit will have to stay alert throughout the year and look to secure the right opportunities – they may even need to up their game a little.
“Investments, not regulations!”
Despite the generally upbeat mood at Expo, Wulff Aengevelt notes that the various presentations, forums and discussions were rather dominated by the residential programmes proposed by the Berlin Senate and German government, as their overall social and economic effects extend way beyond the real estate industry. With the recent climate change debate and the upcoming climate-related programmes plus the fall in contracts in the construction sector with the cancellation of refurbishment and building projects, there was much discussion of the dramatic collapses in turnovers in segments such as mechanical engineering and vehicle manufacturing and their dependent supply sectors. The effects on the job market in these industries and the resulting fall in consumer spending may bring about the downfall of a traditional mainstay of German economic activity.
He surmises that mere ideologies will not get apartments built. The unequivocal reaction from the Expo audience is incomprehension at the anti-market behaviour of Berlin, which up to now had been regarded as a high-growth region but is now under the spotlight, indeed has practically stalled, thanks to the inglorious rental price caps, expropriations and the like.
By contrast the well-attended residential forum on affordable housing presented by Aengevelt attracted great interest. The previously taboo subjects ranged from the housing situation in Berlin with its jungle of regulations preventing new-build construction on unused land to the change of use of agricultural land to development sites close to the city of Düsseldorf. He concludes that this year’s Expo was a highly effective working fair with exciting topics and reports on a multitude of top drawer lettings and sales, making it a “must do” for German and international market participants.
Please see below for a quick-fire commentary on the pressing issues of the day from this year’s Expo Real participants:
Peter Schürrer (MD DAVE, Schürrer & Fleischer): The times of great euphoria are now over. Although this year’s Expo has shown that demand is still in excess of supply, there is now greater emphasis on focussed investment decisions. Investors are now approaching the market and transactions with clearly defined strategies. Nonetheless, the impending economic slowdown is not yet fully reflected on the real estate market. DAVE expects that the Top 7 cities will now see a sideways movement in terms of pricing or tend to stabilise at a high level.
Matthias Wirtz (KSK-Immobilien): Between the lines we’re hearing tentative noises as players realise that the real estate sector must face sociological discussions like the shortage of housing and exorbitant rental prices. The planned rental price cap in Berlin is making that market a “no go area” for investors.
Gerhard Alles (Schürrer & Fleischer): My business partners here at Expo are looking for commercial investments - not just in Berlin but in other Top 7 cities and also in second tier cities and tertiary locations.
Jens Lütjen (Robert C. Spies): The issue of affordable housing will need to be addressed in many areas of the real estate economy in close consultation with the policy-makers. It is critical to co-operate more intensively with the various towns and cities. This is the only way to prevent investors from increasing their investments in office properties as a reaction to the strict regulation in the residential sector.
Axel Quester (Armin Quester Immobilien): One thing is already clear: there is strong demand for second tier and tertiary cities and specialised forms of residential property such as micro apartments, student housing, assisted living and care homes.
Alexander Schlömer (KSK-Immobilien): The demands on urban district planning are becoming ever more complex, particularly as regards age-appropriate and multi-generational living. DAVE is seeing a consistently high demand from abroad. There were plenty of French investors showing great interest here at Expo.
Sven Keussen (Rohrer Immobilien): A key issue is the comparatively upbeat economic situation in Germany together with the level of purchase prices and gross rent multipliers plus the supposed growth potential.
Prof. Dr. Nico B. Rottke (aamundo Immobilien Gruppe): In a situation when no alternative impulse comes from outside, we tend to carry on as before – those appear to be the rules at least. But there are increased concerns as regards the interest rate situation and overinflated purchase prices. Plus the issue of Berlin, which is rather like an overheated boiler letting off steam into the surrounding area in the direction of Brandenburg.
Tobias Drasch (MD RATISBONA Handelsimmobilien): Expo Real is evidence that there is no end to the boom in the food retail sector. In addition to the renewal of their store networks, expansive retailers are urgently looking for new locations, and investors are still under pressure to invest. We see no signs of a short-term trend reversal. Retailers are particularly focussed on the densely populated core areas, and the predominance of mixed-use concepts has increased significantly. This type of property will become increasingly targeted by investors.
Sandra Günther (MD Stoneset Partners): Companies understand that it is time to implement value-driven business models and not only to take on digitalisation as a catchphrase, but to embrace a total transformation. This refocuses on the individual, the staff member and the manager, anchored more than ever by the respective corporate culture. Only holistically agile companies will be fully-equipped for the future.
Alexandre Grellier (CEO Drooms): There is a much greater realism in terms of the digitalisation of assets noticeable at this year’s Expo. The increase in digitalisation brings with it an increased risk of cyberattack. There is a great desire for efficiency and transparency, particularly in the case of asset management – but not at any price.
Investment flashpoint and shortfall of apartments does not amount to a housing crisis
In a report contrasting the current situation on the German residential market with a genuine housing emergency in the immediate post-war period, Dr. Günter Vornholz of the EBZ Business School argues that we should not be unduly alarmed by headlines heralding a housing crisis when the situation on the residential rental and investment markets is in reality driven by a combination of economic factors.
Whilst there is certainly a shortfall in the supply of apartments, there is also an excess demand on the investment markets as investors look for higher-yielding alternative investments and turn their focus to property.
By contrast there was a real housing crisis in the occupied zones of western Germany after 1945 when over 40% of the total housing stock had been destroyed or suffered extensive damage during the war. The result was a shortfall of 5.5 million apartments which cannot be compared to today’s situation or explained by mere statistics.
The housing crisis was exacerbated by millions of returning soldiers and refugees from eastern Germany, many of whom could only be accommodated by friends or relatives or held out in the ruins. Average household size almost doubled from 3.6 to 6.0 within just a few years.
On the current letting market, Vornholz explains that rents across Germany have actually risen less than the inflation rate over the last 10 years. Demand for rental apartments has now outstripped supply in the major cities and conurbations, which is reflected in rising rents and falling vacancy levels.
The average asking rent in the Top 13 German cities was €11.20/m²/month in 2018, which equates to a hike of 50% in the period 2010 - 2018. Rents in the higher priced residential locations in the Top 7 cities grew by over 70% in the period 2005 – 2018, an increase of 4% p.a.
The scarce supply on the residential markets is also indicated by the vacancy level. In Berlin CBRE/Empirica estimates the market vacancy at around 15,300 apartments or just 0.9% of total stock.
The rental price increases and the fall in vacancy in the cities are down to a number of fundamental trends which have resulted in excess demand, including dramatic increases in incomes since the mid-2000s, organic population growth and migration. The destination of most inward migration is the major cities. This combines with a decrease in average household size, which has meant an increase in the total number of households.
There is a shortfall in the numbers of new completions, such as that experienced in Berlin, where 90,000 new-build apartments have been completed since 2005, whilst the number of households rose by around 105,000, which again explains the growth in rental prices.
The market for condominium apartments and houses either for owner-occupation or as investment properties has grown at a significantly different rate from rents. Purchase prices have exploded in the Top 7 cities over the last 10 years, having more than doubled in the upper price bracket since 2010, due to the strong demand from investors. Demographic factors and rising incomes have also contributed to the increased demand.
Vornholz also mentions the impetus resulting from European Central Bank’s (ECB) monetary policy: there is a strong correlation between the start of the ECB quantitative easing programme and the period of greatest purchase price growth. The average growth rate has doubled to 9.6% over the last 5 years compared to around 5.9% in the 10 years before.
He argues that any outcry relating to a “rental price explosion” or a “housing crisis” is out of place in the overall context. Rental price increases in the order of 5% p.a. are no indication of a genuine housing emergency, but moreover indicate the scarcity of apartments in the major cities.