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Real estate in Germany – Current situation isnt a housing crisis

The reasons why you can’t call the current situation in Germany “housing crisis”

While there is a shortage of supply, it does not equate to a crisis in residential housing

Dr. Gunter Vornholz of the School of Business publishes a report on real estate in Germany, stating that the current situation is not the same to what we are used to consider a crisis. In this report he compares the situation in residential real estate immediately after the war – a real crisis – and the situation today, and its conclusion is that we should not be alarmed by the headlines in the newspapers, but understand that the situation is driven by the reality of the market.

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Real estate in Germany

Real estate in Germany – decrease in sales volume of healthcare

A shortage of assets in the healthcare market in Germany leads to a decline in the volume of transactions

The decline represents 52% in the first half of 2019 compared to last year

Lack of large-volume deals is the main reason for this figure, according to experts from the brokerage firm CBRE. While many investors are looking to invest in real estate designed for health care, the market is suffering from a shortage of supply.

However, some momentum can be seen beyond the sales of a large portfolios. In those years without large transactions, the current volume of transactions this year would have been the volume of the entire year. The lack of major deals is felt in the proportion of transactions made by international investors, which fell by 31 percentage points to 53%. International investors tend to be more interested in large portfolio transactions.

Yields for nursing homes remain unchanged compared to the first quarter, standing at 4.75%. Thus, yields in the healthcare market are higher than those offered by office real estate, with yields barely exceeding 3%. However, this figure should also decrease in healthcare real estate.

Despite the high demand, especially from international investors, large portfolio transactions are not expected in the second half of 2019. Experts expect the total volume of transactions in this area in Germany to reach around € 1.25-1.5 billion this year.

One company that has invested heavily in the industry is a Belgian healthcare company called REIT Aedifica, which recently signed another € 20 million deal. In addition, the company previously purchased a health care complex in the state of Saxony and built another campus in the town of Schwerin in northern Germany at a cost of 12 million euros.

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Real estate in Germany – Rent differences in center and outskirts

Gaps in rents in central Berlin and the city’s margins

Berlin’s historic center is the most expensive, but other neighborhoods continue to come close in price

Officially Berlin is divided into 12 major neighborhoods, but the real estate reality is much more complex. We have collected data on the demand for rents in the 190 postal codes of Berlin according to which the current situation in the city can be better understood.

At first glance, the picture is clear: 9 of the ten most expensive rental areas are located in the historic center of Berlin, Mitte. However, much of the new construction in the city is being built in other neighborhoods (for example, just north of the main station – in the Wedding and Moabit neighborhoods), while there are many old buildings in Mitte where people with very low purchasing power live. New construction is one of the main drivers of rise in rents: in areas with new construction, until 2015 asking rent was under 10 euros per square meter, and by 2018 it rose to an unprecedented rate of 15 euros per square meter and above.

The only area in the top ten in terms of rental levels that is outside of Mitte is the neighborhood around Lugwigkirchplatz in Wilmersdorf (postcode 10719), south of the famous Ku’damm Avenue. Other neighborhoods with a high rent of € 13-14 per square meter are the popular Kreuzberg-Friedrichshain neighborhood, Prenzlauer Berg and the Grunewald villas area in the west of the city.

Not far behind are the Charlottenburg-Wilmersdorf, north of Neukölln and Schöneberg neighborhoods. 42 additional zip codes make up the largest share of the city areas in terms of rent, where it stands at € 9.00-9.99 per square meter. The unifying feature of all these areas is the relatively big distance from the city center. There are only six zip codes in the lowest category of asking rents today with a rental price below € 7 per square meter.

Purchasing power is not uniform in all areas considered relatively expensive in terms of rent. For example, you will find households with high purchasing power in Mitte, Charlottenburg-Wilmersdorf and in Prenzlauer Berg – meaning people living in these areas can afford to pay the high rent and still have a good balance for extra expenses. Households with lower purchasing power but high rents are mainly located in the Kreuzberg-Friedrichshain and Neukölln neighbourhood.

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Real estate in Berlin – Trends in construction

New construction of residential real estate in Berlin: trends of 2019
An increase in new construction projects in all parts of Berlin

As of this moment, there are 286 projects already in various stages of construction or in advanced planning stages of new construction in all 12 districts of Berlin. Almost 43.000 apartments are expected to be built in these projects.

Despite the issues such as the difficulty in obtaining a building permit and a significant increase in construction costs, construction in Berlin does not stop for a moment. Recently, a clear trend of expansion of new construction projects in the city has been seen geographically: a lot of new projects are also being built in the areas outside of the Berlin Ring.

As demand for housing in Berlin rises and prices in central regions increase accordingly, more and more people choose to leave to the more remote parts of the city. For example, the Lichtenberg district is in second place in terms of the number of residential units expected to be built (6,000).

This is not to say that the Berliners are neglecting the center: about 9,000 real estate units are expected to be built in Mitte where more than half of them are built especially for rental. The TempelhofSchöneberg district, which is partly in the city center, is also developing rapidly. The emphasis here is on small to medium sized projects with less than 100 apartments each, and the main building is focused at the sub-district of Friedenau.

The pace of new construction in Friedrichshain – Kreuzberg is not particularly impressive, but at the same time, housing prices continue to climb upwards, with some prices only starting at € 5,000 per square meter.

In the northern part of the district of Neukölln, too, a lot of construction is planned: about 2400 apartments in 14 projects in the district are under construction or advanced planning – a significant increase compared to previous years. However, most of the construction will take place in the north of Neukölln with few projects south of the Stadtautobahn road.

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Real estate in Germany

Real estate in Germany – Trends in real estate prices Berlin

The various trends in real estate prices in Berlin 2019
Real estate prices in Berlin have been rising steadily and fast, but not uniformly

Housing in Berlin is still considered cheaper than this of the bighest cities in Germany such as Düsseldorf, Munich and Hamburg – but prices are rising at a dizzying pace. Even though the level of unemployment in the city is relatively high, the positive migration and the lack of new construction are forcing Berliners to spend more and more on the living within the city.
Significant increases were recorded last year in the city’s most expensive segment (a 7.1% increase to rent of € 17.13 per square meter), as well as in the cheapest segment (up 4.7% to € 6.46 per sq.m.).

As expected, the geographical location of the property in the city still plays an important role and greatly affects the asked rents. The three inner districts of Berlin, Friedrichshain-Kreuzberg, Mitte and Charlottenburg-Wilmersdorf (in this order) are at the top.

In terms of the percentage of year-on-year rent increases, Friedrichshain-Kreuzberg is at the top, while in terms of price per square meter, Mitte bypassed the other districts with prices that pass the 20 euros per square meter.

In terms of real estate purchase prices in Berlin, similar trends were recorded: in the Mitte district, the median price first passed the price of € 5,000 per square meter. Not far behind, prices in the Charlottenburg-Wilmersdorf district now stand at 4,873 euros per square meter, and even in the cheapest housing the city is now difficult to find housing cheaper than 2,000 euros per square meter.

Only in neighborhoods farther from the city center, one can still (rarely) find real estate with price that does not exceed the 2,000 eur/m2 limit. Prices in the Neukölln district, which is partly located within the city center, rose relatively slowly with an average increase of 2.6%.

Only in the most distant districts of the center of Berlin – Marzahn-Hellersdorf and Spandau, located in the most eastern and western parts of Berlin respectively – there was a drop in prices, albeit quite small (-0.8% in 2019 compared to 2018).

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Investments in Berlin – Salary to rent ratio

Where in Germany will the rents be low compared to the average salary?

The housing portal immowelt.de and the job portal StepStone jointly conducted a study to find out what is the ratio of salaries to rents in German cities

In the more popular cities in Germany, a significant portion of the salaries of those living there go to rental payments. In smaller cities, on the other hand, there are differences that enable professionals to choose the optimal ratio between the amount of the salary and the monthly rent. Professionals in Munich will earn an average of € 66,800 gross per year. An apartment of 80-100 square meters will cost them around € 1,500 per month (net rent). Thus, the rent will constitute about 27% of the salary.

The ratio of the two figures is also very similar in Frankfurt. The average salary in the city thanks to the many banks is the highest in Germany and stands at € 67,700. Relative to this wage, residents of Frankfurt can afford to spend only 21% of their total income on rent.

Many want to live in big, popular cities like Berlin, Hamburg and Munich, but not many can afford it. Employers in medium-sized cities can attract professionals with a very high level of training because of the relatively attractive rents.

In this respect, Dortmund is among the best places in Germany. Its half-million residents are forced to part with only 12% of their salary on rent, which is worth about € 580 a month. The city of Essen is also close to this figure with a rent of about € 590 per month, which is equivalent to 13% of the average salary in the city. In other regions, too, there are cities with an attractive rent-salary ratio: in Dresden and Stuttgart salaries are relatively low, but their rents generally do not exceed 19%.

The study is based on 15,100 apartments in the 14 largest cities of Germany. The reference is to gross salary and net rent.

Based on REFIRE Volume 10, Issue 170, July 30th, 2018 p. 12

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Investment in kindergartens

An increase in investments in kindergartens in Germany
Investments in kindergartens are gaining momentum as investors try to diversify

Although this market is still considered very “niche”, more and more investors are deciding to invest in kindergartens throughout Germany. According to a senior executive at JLL, this is a natural continuation after investing in real estate such as senior housing and student residences – a trend where investors choose smaller real estate niches.

According to him, municipalities will probably want to sell more kindergartens as long as there is no change in the use of the property.
One of the investors setting his eyes on the kindergarten market is the company Omega Immobilien based in the city of Cologne, Nord Rhine-Westphalia. The Rhineland, which includes the middle and lower Rhine regions, is one of the most densely populated areas in Germany with about 10 million inhabitants. Omega Immobilien focuses on ongoing projects with professional kindergartens as well as existing day care centers. The lease is for a long term of 20 to 30 years and is protected by government agencies.

Already there is a shortage of more than 70,000 day-care centers or kindergartens in Nord Rhine-Westphalia due to rising birth rates and rising demand for places. Municipalities are expected to seek more kindergartens as a result of the legal right to such a place, which makes the project interesting, according to Omega Immobilien.

However, kindergartens are usually sold for between 1 million and 3 million euros, which means they are below the threshold of € 5 million for many institutional investors. “For this reason, retirement homes can be more attractive as an investment because they are larger, and the kindergartens offer equally safe income because local authorities pay part of the rent and have long-term leases.”

Taken from REFIRE – Volume 11, Issue 175, December 20th, 2018

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Increase in office rents

Experts predict that office rents on the outskirts of Berlin will jump by over 50% in the next five years

Dizzying pace of price increase and lack of availability in the city center force companies to move to the city outskirts

Due to the fact that rents in the center of Berlin are rising at such a rapid pace, coupled with the fact that there is almost no supply for vacant office spaces in the city, it is very difficult to find a space of 6,000-7,000 square meters in the center of Berlin.

It is estimated that over the next few years a shortage of 1.5 million square meters of office real estate will be created in Berlin, and then companies will have to compromise on less central locations, such as Teltow, which has an estimate of 6,000 sq.m of free offices.

In addition to that, the renting prices there are half the amount required in the city center. Rents now stand at 9-10 euros per square meter in an old building, or € 14-16 per meter in new construction.

For the sake of comparison, in the center of Berlin companies will have to pay at least € 28 per square meter, and even in Potsdam, which is a fairly small sub-market, the price will not be less than € 20 per square meter.

Not only are the rent for office space in central Berlin extremely high, they are also constantly rising. In prime locations in the city, such as the Charlottenburg-Wilmersdorf district, rent rose to 32 euros per square meter in the third quarter of 2018, compared to only 21 euros in 2013.

The rise in rents in Berlin is also the highest among other major cities in Germany. While the rise in prices from second to third quarter in 2018 was relatively high and stood at + 1.9% in Hamburg and Düsseldorf, and + 1.3% in Munich and Frankfurt, Berlin led with an impressive increase of + 3.2%.

Another factor that makes Berlin’s outskirts a more desirable place is a relatively low business tax. In Germany this tax consists of a federal tax base and a tax that is imposed by the municipality independently. Thus, in Munich or the center of Berlin this tax will amount to about 30%, while in remote areas such as Teltow, half of the amount can be paid.

The only problem is finding funding: many German lenders will refuse to finance the development of offices outside the city center, even despite price increases.

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professional immigration

The German Interior Ministry is considering easing immigration to address the shortage of real estate experts

The German government will discuss bills that will facilitate immigration from countries outside the European Union into Germany to compensate for the shortage of skilled workers, in the field of real estate among others

Germany’s Interior Minister Horst Seehofer is expected to present a new proposal to the Bundestag in the near future, according to which citizens of third countries (i.e., non-EU members) will be given the option to seek employment within Germany in predefined areas.

Areas in question are ones where there is currently a shortage of professionals in Germany. According to the proposal, these individuals will be able to go to Germany and look for employment for a period of six months.

This is on the assumption that they prove that they have completed relevant education. At the same time, the proposal seeks to revoke a previously valid clause called “priority review,” according to which it was mandatory to check in advance whether there is a German citizen who can fill the relevant position before the foreign national.

Seehofer believes that this is a necessary and important step, and that it will create a good framework for professional migration. So far, many professionals from countries such as Poland and Romania have arrived in Germany from within the European Union, but it seems that the time has come to examine other options as well.

At present there is another system in place in Germany – the “blue card” method, which until now has been given mainly to IT professionals coming from India. The new proposal, on the other hand, is expected to attract more experts to Germany in a wider range of areas, including real estate.

So far Germany has had a hard time finding real estate professionals: out of 100 job openings in all fields ranging from plumbing to civil engineering, only 49-55 have been filled by a professional with matching skills.

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Student housing in Germany: the real estate market that is skyrocketing

Transactions in student housing in Germany are expected to reach € 1.5 billion this year

This is in contrast to five years ago, when the market consisted of only 250 million euros in transactions. Experts say that this market segment has recently become “luxurious”.

However, the housing market for students varies greatly from city to city within Germany, and the supply of apartments is very fragmented and ranges from apartments with several rooms in which students choose to share, to single flats or micro-apartments in ad-hoc large complexes.

The modest supply of student housing and the rising price in the cities of Germany’s major universities is beginning to be felt by the students. In popular cities like Berlin, Frankfurt, Hamburg and Munich residential prices are high and continue to rise at a dizzying pace.

In Berlin, for instance, prices rose by 39% between 2011 and 2018. The rents in the different cities in Germany is varying significantly. For example, in Berlin, renting a room in a shared flat as of 2018 will cost an average of € 363 per month, an increase of 6% compared to the previous year. Berlin is still relatively cheap compared to other cities where most students come.

At the other end of the spectrum is Munich with a rent of about 616 a month in a room in a shared apartment, Stuttgart with monthly rent of about 485 euros and 410 euros in Hamburg.

With increases both in demand and in prices, the real estate market in Germany adapts itself. Real estate companies plan to build more housing units for students and not only: micro-apartments are planned to be built in large complexes designed for young professionals as well.

However, the rent increase is not sustainable in the long term. Prices will have to align according to the German Mietspiegel. But for the time being, the idea of affordable student housing sounds to most students in Germany as something completely unrealistic.

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