German Residential Property Markets: Interesting or Too Much Interest?

8/13/2019 German Residential Property Markets: Interesting or Too Much Interest?

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Think Tank der Deutsche Bank Gruppe

German Residential Property Markets:Interesting or too much Interest?

Dr. Tobias Just

London, 28 November 2005


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Dr. Tobias Just 28.11.2005 - 2

Overview

11 German Real Estate: Biggest Market in Europe

22 Residential Property: Short-term developments

33 Portfolio investments: Why and how?

44 The Demographic Challenge

55 Concluding Remarks


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Gross fixed assets in Germany- 2005 -

Total: EUR 10.9 tr

Real estate assets account formore than 80% of all fixed assets

in Germany that is more than

EUR 9 tr

Roughly 40m dwellings areestimated at gross asset values

of more than EUR 5 tr

More than 40% of private

households assets are invested

in residential real estate(EUR 3.2 tr)

Residential

Real estate 47%

Non-residential36%

Miscell.

1%

Machinery &

Equipment

16%

Source: Fed. Stat. Office


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Owner occupancy rate is sti ll very low

75 71 69 66 6459 59

53 51 51

43

82

0

20

40

60

80

100

ES IE IT UK PT FI EU-

15

SE FR NL AT DE

%

Source: Eurostat


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Households in single-family houses *)

81

67 67

57 54 5248 45

39 3833

92

0

20

40

60

80

100

IE UK PT NL FR FI EU-

15

SE AT ES DE IT

%

*) Households not living in apartments, 1998

Source: Eurostat


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Population in cramped housing conditions*)

32

27 26

19 18 17 16 16

10 9

4

35

0

10

20

30

40

PT IT ES IE EU-

15

FI FR AT DE SE UK NL

%

*) more than 1 person per room, 1998

Source: Eurostat


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Houses with low standards*)

5 5 5 4 4 3 3 31

11 10 97 6 5 6 4

1

18

36

0

10

20

30

40

PT IE FR AT EU-15 FI IT ES DE NL

All households Households w ith pensioner

%

*) Houses where at least one of the following basic elements (bath/shower, indoor WC,

hot running water) is missing, 1998

Source: Eurostat


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Overview


22 Residential Property: Short-term Developments





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The buyers perspective: Is this market attractive?

-8

-4

0

4

8

12

16

1991 1993 1995 1997 1999 2001 2003

CPI Price f lat (stock)

rent (stock) rent (new )

% gg. Vj.

Prices for owner-occupied flats

have been falling for years

Rents for new-builds stagnate,

after strong declines in the

second half of the 90s

Rents for secondary flats are

increasing only marginally less than overall inflation

Average of 50 / 100 German

cities in East and West Germany

Sources: BulwienGesa, Stat. BA, DB Research


10/38

Dr. Tobias Just 28.11.2005 - 10

House prices in Europe: Germany is different

50

100

150

200

250

300

91 92 9394 95 9697 9899 00 0102 03 04

NL SP DK UK

IT FR SE DE

1991 = 100

While German house prices

are not much above their level

of 1991,...

... most European countries

experienced strong house

price growth in the last years

That implies a rising risk ofstrong price corrections

outside Germany

Stable house prices in

Germany might turn out as amerit in the near future

Sources: Nationwide, Nat. stat. offices, BulwienGesa, NVM


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Dr. Tobias Just 28.11.2005 - 11

Long-term interest rates are sti ll very low

0

2

4

6

8

10

12

1988 1991 1994 1997 2000 2003 2006

10-y gov. bonds

Mortgage rates

%

Long term interest rates are

still very low and only in the

last month picked up slightly

Facing the weak economic

outlook for 2006 a strong rise

is not very likely

Low interest rates make realestate affordable

Sources: Bundesbank, EZB, Deutsche Bank


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Dr. Tobias Just 28.11.2005 - 12

Houses in Germany are relatively cheap

- Deutsche Banks affordability index; All Germany -

0

50

100

150

200

250

300

350

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

0%

2%

4%

6%

8%

10%

12%

14%

Mortgage rate (ri) Flat price, new (le)

Nom. disp. income (le) Affordability index (le)

1975=100 %

Sources: BulwienGesa, Bundesbank, OECD, DB Research

The affordability index is calculated as the average mortgage payments for an average sized flat (80 m)

and a mortgage with 25 yr maturity in relation to Germanys disposable income per capita


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Dr. Tobias Just 28.11.2005 - 13

That holds even for the conurbations

- Affordability index, example Frankfurt/M -

40

60

80

100

120

140

160

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0%

2%

4%

6%

8%

10%

12%

Mortgage rate (ri) Flat price (le)

Disp. income per cap. (le) Af fordabilityindex (le)

1990=100

Sources: BulwienGesa, Bundesbank, OECD, DB Research

The affordability index is calculated as the average mortgage payments for an average sized flat (80 m)

and a mortgage with 25 yr maturity in relation to Frankfurts disposable income per capita


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Dr. Tobias Just 28.11.2005 - 14

Housing completions below medium term requirements

West Germany East Germany

0

50

100

150

200

250

300

1980 1984 1988 1992 1996 2000 2004

in single-family houses

in multi-family houses

'000

0

20

40

60

80

100

120

1994 1996 1998 2000 2002 2004

in single-family houses

in multi-family houses

'000

Source: Fed. Stat. Office


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Dr. Tobias Just 28.11.2005 - 15

Important changes ahead

- new government, new coalit ion contract -

Home ownership subisdy will be ended by 2006. This will have a negative price effect

on housing. However, overall effect is not very big, to our view Discussion of taxation of value gains within 10-year period. So far, privates could realize

tax-free capital gains, if they held their property more than 10 years. This will have

strong effects on the markets however, technical problems will postpone enactment

REITs have been positively mentioned in the contract. This is an important sign.However, it is not more than the signal of political will

House ownership is planned to be strengthened within the new (subsidised) capital-

based pension system (Riester-Rente). This is a strong argument for holding direct

property. However, it has proven to be difficult to translate the good idea into a workable

system


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Dr. Tobias Just 28.11.2005 - 16

Overview







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Dr. Tobias Just 28.11.2005 - 17

German Housing portfolio transactions

- Most important deals since early 2004 -

Blackstone buys

31.000 HU of WCM

Morgan

Stanley/Corpus buy

48.000 HU of Thyssen

Krupp

Mira buys 27.000

HU of Viterra

Cerberus/Gold

man Sachs

buys 65.700 HUof GSW

Fortress buys

82.000 HU of

GAGFAH

Babcock&Brown

buy 13.500 HU of

DAL

Oaktree buy

18.000 HU of

GEHAG

Corpus buys 5.100

HU of GHG

Deutsche

Annington buys

138.000 HU of

Viterra

Fortress buys 30.000

HU of NILEG

J an Feb Mr z Ap r Mai J un J ul A ug Sep Ok t No v Dez J an Feb Mr z Ap r Mai J un Ju l A ug Sep Ok t No v2004 2005

Cerberus

buys 22.800HU of

Baubecon

HU = Housing unit


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Dr. Tobias Just 28.11.2005 - 18

Development of portfolio transactions since 1997

0

20

40

60

80

100

120

140

160

1997 1999 2001 2003 2005

Max

Mean

Min

'000 More transactions than in the late

90s

Average portfolio sizes have

been moving up since 2003

But also smaller portfolios are

turned. We expect this to happen

more often in the future

Average prices have moved up

markedly in the course of the last

bidding-rounds (calculated as

average price per flat or averageprice per m)

Source: Deutsche Bank


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Dr. Tobias Just 28.11.2005 - 19

Modular business models for housing privatisation

from barries

size, and the problem of

recouped through higher prices

only if there is enough demand

shifted to the next stage But: high requirements of

and the returns fall investors; limited market depth

But: still not a final exit

Sales of partial portfol ios

- quicker and often easier

But: added value is then

Debt financing (leverage)

- securitisation

Flexibility is also reduced

- mazzanine financing

- tenant management

- preparing exit

Refinancing En bloc sales

remaining lots lowers the

value of the residual portfolio But:Politically sensitive

Increasing efficiency

- vacancy management

- exploiting synergies

Upgrading properties

- refurbishment

- special properties, freedom

Operative

plans

Financin

gplans

Real estate funds/REITs

Tenant privatisation Active management Repositioning

Direct sale to tenant

- relatively high returns

But: often limited market

- attractive returns

- exit strategy on a grand scale

- cost reduction (facility mngt)

- management can be retained

But:the costs can be

Indirect investments

than tenant privatisation

Source: Deutsche Bank


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Dr. Tobias Just 28.11.2005 - 20

Investor Friendliness (extract)

FR DE PL

Size of market

Volatility (rents)

Rental structure

Transaction costs

Total score 20 countries 10 5 20 11 1

SP UK

Market liquidity

Very good Good Average Sufficient Not good

Source: DTZ


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Dr. Tobias Just 28.11.2005 - 21

Development of Real estate stocks

- Compared to Eurostoxx -

0

200

400

600

800

1.000

1.200

1991 1993 1995 1997 1999 2001 2003 2005

EPRA (FR) EPRA (DE) EPRA (SP)

EPRA (UK) Eurostoxx

Jan. 1991=100

Source: DJ, EPRA


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Dr. Tobias Just 28.11.2005 - 22

European market for Real estate stocks

- Country weights FTSE EPRA Europe -

Source: Bloomberg, February 2005

Market cap Europe:110 bn EUR

Market cap Germany: 3.3 bn

EUR

ES; 3.6

SE; 5.4

Others; 8.

FR; 11.7

NL; 14.9

CH; 3.0DE; 2.9

UK; 50.3


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Dr. Tobias Just 28.11.2005 - 23

Europes long walk to REITs (part I)

REIT-like structures exist in NL, BE and FR.

In UK, DE, SP, FI and IT the introduction is discussed

Advantages REITs facilitate an easy comparison of indirect real estate investments also with other

asset classes

REITs are internationally well-known and well-received (US; AUS; JP). This can work as

catalyst for the introduction of a stronger real estate stock market

A more professional indirect real estate market enables investors to more efficiently

diversify their real estate portfolios

Empirically the discount to NAV (net asset values) is lower in countries that have

established REIT structures compared to countries that lag the development. Event the

announcement of REITs has reduced the disount (e.g. France)


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Dr. Tobias Just 28.11.2005 - 24

Europes long walk to REITs (part II)

Risks / Challenges

Tax authorities fear tax losses (double tax agreements). Only if this issue can be

resolved, REITs will be introduced in Germany Mobilisation as additional measure is important. As REITs are new vehicle on the

demand side, no increase of new supply would yield rising prices only

European REIT as final goal. National legislations as important first step

Beauty contest has just started. Countries that introduced REITs successfully canattract the expert jobs (first-mover advantages)

Some real estate stock markets look overvalued (Spain). A cooling of these markets

might have negative political impact


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Dr. Tobias Just 28.11.2005 - 25

German residential portfolios have come into focus of

foreign investors

Foreign investors have increasingly been buying residential property portfolios: In 2004

foreign Private Equity investors bought about 300,000 German flats 2005 will not befar below that value.

We do not expect this enthusiasm for German portfolios to ease in the near future

House prices today are not much above their level of the early 90s. This promises

stable cash-flows

As new-builds are close to historical minimum, and the number of households is still

increasing, there is some upward potential for the medium term

But, for 2006 and 2007 the consolidation process of the new government does not

promise much economic growth and low growth will not allow for strong price rises

The low interest rates combined with the slight decreases in house prices imply that

houses and especially flats are more affordable than in the mid-90s. However, this can

be partly explained by the special situation of reunification


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Dr. Tobias Just 28.11.2005 - 26

Overview







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Dr. Tobias Just 28.11.2005 - 27

Room to manoeuvre?

- The case of the two Germanys -

0

1

2

3

1952 1962 1972 1982 1992 2002

w est G. east G.

Children per w oman While West Germanys fertility

rate has been stagnant for more

than 30 years...

... efforts in East Germany have

led to a temporary rise in fertility

rates (Honecker-hump)

These efforts, however, can

neither be financed nor are they

adequate in a liberal society

Source: Federal Statistical Office


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Dr. Tobias Just 28.11.2005 - 28

Long live Europe!

- life expectancy at birth of European women -

Life expectancy has risen since

we started to record data

Some argue that there exists a

biological end to this process...

...others say that medical

progress will even allow linear

increases in life expectancy Here, we assume a weak log-

function

But, some nutritionists warn, that

lifestyle diseases areprogressing rapidly in Europe

(Supersize me)60

65

70

75

80

85

90

1950 1970 1990 2010 2030 2050

Europe FR DE

IT PL ES

UK

years

Source: UN Population Division


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Dr. Tobias Just 28.11.2005 - 29

Population Decline is on the Cards

70

80

90

100

110

2000 2010 2020 2030 2040 2050

Population Labour force

2000=100

According to forecasts of the

Federal Statistical Office, the

population will peak in 2012

Then, an accelarated decline

sets in

In 2003 and 2004 the number of

inhabitants shrank slightly, due toa sharp fall in inward migration

The labour force starts to shrink

earlier and stronger to keep

working population constant, wehave to work longer, start earlier

and increase the share of women

in the working population

Sources: Fed. Stat. Office (medium variant), DB Research


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Dr. Tobias Just 28.11.2005 - 30

We will be all old Europe tomorrow

Share of pensioners (>65 years)

of total population

Share of >80-year-olds

of total population

0

4

8

12

16

20

1950 1970 1990 2010 2030 2050

Europe FR DE

IT PL ES

UK

%

0

10

20

30

40

1950 1970 1990 2010 2030 2050

Europe FR DE

IT PL ES

UK

%

Source: UN Population Division


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Dr. Tobias Just 28.11.2005 - 31

Number of Households will continue to rise

32

34

36

38

40

42

90 00 10 20 30 40 50

0

10

20

30

40

50

No. of Households (left)

Share of HH >65-y. (right)

m % Average household size issmaller in older households

In the age cohort 35-45 the

average household size is 2.7

persons, in the age cohort

75+, the average household

size is 1.5 persons

Therefore the trend to smaller

household size in an ageing

society can offset thedemographic trend of a

shrinking population for some

time

Sources: Fed. Stat. Office, DB Research


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Dr. Tobias Just 28.11.2005 - 32

Demand for living space in West Germany

90

100

110

120

130

2000 2010 2020 2030 2040 2050

Saarl. West G.Bavaria Low er Saxony

2000=100

Until 2020 the demand for

living space will increase

strongly

Demand will not start to erode

before 2030

West Germany is not

homogenous strongdifferences between in- and

outmigration regions

Source: DB Research


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Dr. Tobias Just 28.11.2005 - 33

Demand for living space in East Germany

90

95

100

105

110

115

120

2000 2010 2020 2030 2040 2050

Brandenburg East G.

Saxony-A. Meckl-W-P.

2000=100

Muted development despite

immense backlog demand

Brandenburg profits from its

vicinity to Berlin but that is

only true for a small belt in

Brandenburg

Mecklenburg-WesternPomerania is offering coast

line and Germanys largest

lake district for recreation

Source: DB Research


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Dr. Tobias Just 28.11.2005 - 34

Age of dwelling stock

- varying need to renovate -

Sources: Eurostat

Age of dwellings implicitly hints

at the need to refurbish and

renovate

In Spain and the UK almost

40% of all dwellings are more

than 60 years old

In Germany the reconstructionphase after World War II led to

very intensive construction

activity

Spain has profited strongly

from EU-funds0

10

20

30

40

50

1980

ES UK FR IT DE

%


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Dr. Tobias Just 28.11.2005 - 35

Regional Differences are aggravated

Population growth

Red = Growth

Blue = Shrinkage

2000-2020 in %1990-2000 in %

Source: BBR


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Dr. Tobias Just 28.11.2005 - 36

Overview



33 Office Markets: Why and how?




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Dr. Tobias Just 28.11.2005 - 37

All in a nutshell: price trends

- how do the major factors contribute to price developments -

Growth regions Regions with outward

migration

1 Y 210 Y 1050 Y 1 Y 210 Y 1050 Y

Demographics Economic growth Interest rates

Al ternative invest. Gov. subsidies Prod. costs Total


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Dr. Tobias Just 28.11.2005 - 38

So, is German real estate attractive?

It depends!

PROS CONS

- Stable markets most otherEuropean markets have reached orare close to their peak

- Many companies and communitiesfeel that they have to sell this offers

opportunities

- German investors still avoid theGerman market

- New-builds close to historic low in

some west German centres this willlead to shortage

- Still very low interest rates

- Income growth has been very mutedin recent years; labour markets havenot yet improved. (BUT is it likely thatEuropes biggest country will lagforever?)

- Regionally very heterogeneous;regional knowledge is essential

- Demographics are less favourablethan in many other countries

- Interest rates have started to move up

- In east Germany, 1.3 m flats arealready vacant (16% of stock)

Documents

German Residential Property Markets: Interesting or Too Much Interest?