Ecnomic Factor Real Estate 2017 – Report on the Macro-Economic Aspect of Germany’s Real Estate Market

Ecnomic Factor Real Estate 2017 – Report on the Macro-Economic Aspect

of Germany’s Real Estate Market

Content

Summary 6

1. Specificities of theReal Estate Industry 8

1.1 Specificities of Real Estate 8

1.2 Specificities of Real Estate Markets 11

1.3 Implications for the Body Politic 13

2. Core Data of the Real Estate Industry 16

3. Real Estate Stock and Structure 18

4. Real Estate as Production Factor and investment good 20

5. Specificities of German Real Estate Financing 22

• TherealestateindustryplaysakeyroleforGermany’seconomy,withreal-estate-relatedbusi-nessactivitiesaccountingforaround18percentofthegrossvalueadded.Activitiesofthistypearepursuedbymorethan815,000Germancompanies,nearly3.9millionprivatelandlords,andaround16millionowner-occupiers.

• Ratherthanstandingoutjustbecauseofitssheersize,therealestateindustryismoreovercharacterisedbyitsstabilityandthereforethewayinwhichitcontributestotheresilienceofGermany’snationaleconomy.EspeciallyduringthefinancialcrisisaftertherealestatebubbleintheUnitedStatesburstin2006/2007,theGermanrealestateindustryhaddemonstrateditsstability.

• RealestateisthemostimportantrealassetclassinGermany.Outofagrossfixedassetstotal(atmarketprices)of17.3trillioneurosbyyear-end2016,built-upstructuresofonesortoranotheraccountedfor80.3percentor13.9trillioneurosthereof.Withaccumulateddepreciati-ondeducted,thesumtotalofGermannetfixedassetsinbuilt-upstructuresiscloseto8trillioneuros,whichbreaksdownintoc. 4.8trillioneurosinresidentialbuildingsand3.2trillioneurosinnon-residentialbuildings.ThetotalassetvaluetiedupinrealestateismorethanthreetimesashighasGermany’snetnationalincomein2015.

• Atyear-end2015,roughly82.2millionpeoplelivedinGermanyinwellover41.4millionflatsand19.4millionbuildingswithacombinedresidentialfloorareaofaround3.79billionsquaremetres.Atthesametime,workplacesoccupied,forinstance,around426millionsquaremet-resofofficespace,2.8billionsquaremetresofindustrialandlogisticsspaceand123.7millionsquaremetersofsalesareaintheretailsector(estimatesasofearly2015).However,thesefiguresarefraughtwithuncertaintybecausethecommercialrealestatestockinparticularisinadequatelycoveredbyofficialstatistics.

• TheaverageGermanhouseholdowns125,000eurosworthofrealestate,whichisarelativelymodestfigure.Inthelastfewyears,thevalueofrealestatestockshasbeenrisingsignificantly,though.Therearenow90billioneurostiedupinGermanrealestateusingthis investmentformat.Openendandclosed-endrealestatefundshavealsoreboundedinrecentyears,thefocusbeingincreasinglyoninstitutionalinvestors.

• Offundamentalsignificanceforallinvestmentformatsisthebriskgrowthinrealestatepricessince2010,whichhasbeenmost conspicuouswith residential real estateprices inmajorGermancities.Thethreatofaspeculativebubbleremainsnonethelesselusivebecausethereareplausiblereasonsforthepricetrend,andbecausethefinancingbehaviourremainsvirtuallyunchanged.However,itneedstoberememberedthatinterestrates,employmentfiguresanddemographicgrowthcombineintoextraordinaryfavourableparametersforthetimebeing,andthatthecomingyearsarelikelytobringmarketadjustmentsforoneorseveralofthesefactors.

Summary

• Drivenbyafast-pacedexpansionofnewlendingbusiness,theloanvolumeincreasedbyne-arly4percentin2016andthussubstantiallyfasterthaninpreviousyears.Intheyearssince2003,theannualgrowthratehadmovedinarangeof-1to+2percent.Buteventhemostrecentsurgefallsshortofthelong-termaveragesince1982,whichis4.7percent.Similarly,thecurrentboomisrathermodestcomparedtoothercountriesinEurope.Between2004and2008,theratesofchangeinGermany’sprivatehousingloanvolumeremainedsubstantiallybelowtheEuropeanaverage.

• Atthesametime,thechallengesthatbanksfacehaveintensifiedduetofoursimultaneoustrends:Thenumberofmorecomplexloans(e.g.moreprojectfinancingandmorefundingforsecondarylocationsandinsecondarycities)hasgrown.Moreover,theregulatorycostofequityhasincreased,andsohasthebanklevy.Inaddition,theorganisationaloverheadformeetingtheregulatoryrequirementshasgoneup.Thesetrendssuggesthighermarginrequirements.Thefactthatthesehaveprovenunattainablelatelycouldbeseenasasignforfiercecompe-titionamongGermanbanks.

• Meanwhile,bank refinancing isonsolidground: Investorsarebuyingupbondsascovereddebentures,andtheirvolumehasnoticeablyincreasedinthemostrecentpast

Assets plus 10 billion euros in cultivated assets. *Miscellaneous areas mining land and areas used for other purposes, not including cemeteries. Source: Federal Statistical Office (2016a, b). Proprietary chart.

Figure0:Ratiooffloorspaceutilisation(environmentalaccounting)toassetvalue(nationalaccounting)oftheeachrealestateindustryshareinGermany’smacro-economyofin2015

Assets

FloorAreaUse

Agriculturalarea184,332sq.km

Woodlands109,515sq.km

Equipment1,262bnEuros

Netexternalassets1,181billioneuros

OtherIntellectuallandproperty555bn491bneuroseuros

Watersurface8,552sq.km,

Miscellaneousareas*

settlementandtransportareas49,066sq.km(14%)

Buildingsandbuiltareas11,229billioneuros(76%)

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EXECUTIVE SUMMARY

At first glance, real estate represents a classof“normal”goods.Butthisisvalidonlyifyouapplyanarroweconomicinterpretation.Accor-dingtothelatter,thenormalityofthedemandfor goods implies that demand will positivelyrespondtochangesinincome.

If you take a broader view, real estate repre-sents in many ways a special type of good:They are large-scale, durable, fixed in place,thereforespecific,andrequirealargenumberof different market operators for their deve-lopmentandmanagement.Theyalsosatisfyademandthatinmanywayscannotbecoveredbyothergoods,whilesimultaneouslyinvolvingbasic needs. Real estate therefore plays notjustaneconomicallyimportantrole,butisim-portantinaculturalandofteninanemotionalsense,too.

As a result of these specificities, real estatemarket processes move at a comparativelyslowpaceand involve relativelyhigh transac-tioncosts.

Moreover, real estate markets are intercon-nected. Changes on the occupiermarket, forinstance, will have effects for the investmentandnew-buildmarkets,withthecorrespondingchangesinthebuildingstockaffectingtheoc-cupiermarketagain.

Inaddition, therearemany relationsbetweenregional and sectoral real estate markets.Changes on the housingmarkets will impactthemarketsforcommercialrealestateandviceversa,whilerisingpricesinthecorecitieswillalsoputpressureonthepricesinthesuburbs,andviceversa.

The sheer number of these connections andtheinertiaofthemarketprocessescantriggerdrasticrealestatecycles.Thatbeingsaid,thecycles in Germany tend to be comparativelylessintense.

The regulation of real estate markets needsto take thespecificitiesof thesemarkets intoaccountinordertomaketheregulatoryeffortbothefficientandeffective.

1.1 Specificities of Real Estate

Economists talkof“normal”goods if demandfor the goods in question responds positivelytoincomegrowth.Thisappearstobethecasewiththedemandforhousing.Mostpeoplewilllook for larger or nicer accommodationwhentheirincomerises.Accordingtothisview,realestate (inthiscase,housing)wouldqualifyasnormalgoods.Butthissortoftextbooktermino-logyisatoddswiththeday-to-dayexperienceofmostoccupiersofresidentialandcommer-cialrealestate,notleastbecauseitreducesthe

Chapter 1Specificities of theReal Estate IndustryChapter edited by:IREBSInternational Real Estate Business SchoolUniversity of Regensburg

Chapter 1 – Specificities of the Real Estate Industry 9

complexityofthemarketstoasingleaspect.Factisthatrealpropertiesare,inseveralways,aspecialkindofgoods.Residentialrealestateservestrulybasicneeds,namelytheneedforshelterandwarmth;commercialrealestateissimilarlyessential forbusinessesasameansofproduction.Foreitherassetclass,itisfairtosaythatthereisvirtuallynosubstituteforthem.AnofficebuildinginHamburgisnosubstituteforanapartmentyouneedinBayreuth.Norwilla shoppingcentre inBayreuthworkassubs-titute.Thismeansthatpeopleandcompaniesdepend in their consumption and productionactivityonavailabilityofrealestateinsufficientqualityandquantityattherightplaceoralter-nativelythattheycouldberaisedthere.

This actually defines the most conspicuousfeatureofrealestate:Itisfixedinplace.Aregi-onalchangeindemandcannotbebalancedbyusingexistingsupply(assumingallothercon-ditionsremainastheyare).Thiscontrastswithmanynon-discretionarygoodsandevenmanyinvestmentproducts:TextilesandfurnitureyoucanpackupwhenmovingfromBonntoWei-mar, to saynothingof stocks andbonds, butyoucannotpackupaterracedhouse.

Itisaspecificitythatpresentsachallengeinso-farasanothertwocharacteristicsofrealestatemakeitdifficulttocustomise:Ontheonehand,real estate is defined by its large investmentvolumes,while,ontheotherhandandinsyncwiththeaforesaidaspect,itismarkedbylongmarketeffectiveness,meaninglifecyclelength.Real property is built to last for decades, insomecasesevencenturies,andformostpri-vatehouseholds,itgenerallyimpliesthesinglebiggestinvestmentofalifetime.Byanalogy,thesameapplies tocorporates, forwhom invest-ments in realestate representvery long-termandcapital-intensivedecisions,especiallybe-

causetheywilldefinethebusinessactivityforyearsorevendecadestocome.

This explainswhy, in economic terms, the fi-nancing volumes and the access to fundingarehighlyimportantforthissector.Chapter5,below(seespecificallyFigure5-2),willdiscussthesubjectindepth.

Another specificity of real estate is that eco-nomiesofscaleplaylessofarolethanisthecasewithindustrialproducts:Theadage“eachpropertyisoneofakind,”whichsuggeststhattherearenoeconomiesofscaleatallinvolvedintheproductionandoperationofrealestate,would be an unacceptable oversimplification,because economies of scale do factor in theproductionofrealestateandevenmoresoinitsoperation.However,thepotential inecono-miesofscaleislimitedwhencomparedtotheindustrialmanufacturingofconsumergoodsorsimpleindustrialgoods,andbydefinitiontheyare hardly open to the group of small-scalelandlords, which happens to be an importantgroup(seespecificallyFigure2-5inthiscon-text).Onelocationisdifferentfromthenext,thestakeholders involveddiffer in theirrespectivegoalsandexperienceswhileoccupiersandtheregulatory environment vary as well, so thatthere are very different requirements a givenbuildingneedstofulfil.Accordingly,adeveloperforretailrealestatecannotsimplychangetacktobecomeahoteldeveloperoremploytheex-perienceshegatheredinGermanytobecomeactive in thesamelineofbusiness inFrance.These peculiarities, the capital intensity, thelengthoftheSoundplanningisoftheessence,notleastbecauseerrorsareveryhardtocor-rectonceconstructionisunderway–andtheoptions tocontrol thecostsaredwindling ra-pidlyasaprojectprogresses.Thisistruebothfordecisionsinthepublicsector,e.g.inregard

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to thedevelopmentofnewbuilding land,andfor private decisionmakers, e.g. in regard totheconcretedesign.

It necessitates an advanced and professionaldivisionof labour in theconstructionand realestateindustry.Thelatterrequirestheprofes-sionalexpertiseofengineers,architects, townplanners, attorneys, geographers, businessadministratorsandeconomistswhoworkforawidevarietyofcompanies, includingarchitec-turalfirms,financialservicesproviders,facilitymanagersorprojectmanagers.Tocoordinateall of theseplayers requires timeandmoney,andthisisaggravatednotleastbyradicaldif-ferencesbetweenthevariousgroupsofowners(or their agents), which range from owner-occupiers and private small-scale landlords,tomunicipalandcooperativehousingassocia-tions,andallthewaytomajorlistedrealestatecompanies(foravisualisationofproviderstruc-tures,seespecificallyFigure3-15).Hencetheusualestimatesofthedirecttransactioncosts,meaning thecostsof themarketprocess,10to12percentofwhicharecommonlybrokendown intoestateagent fees, notarial chargesandrealestatetransfertax,areultimatelybuta fractionof the total transactioncosts in themanagementandproductionofrealestate.

Thepriceofanytransactionisincreasedbyhightransactioncosts.Theydelayorevenhampermarket adjustments. Indeed, they cause fric-tionlossesthatfilterthroughtoothermarkets,e.g.thelabourmarket.Iftheworkingpopulati-onhasahardtimefindingaffordablehousing(transactioncosts included), itcankeepthemfromchanging jobseven if it isotherwise thesensiblethingtodo.Therearefewexceptionalcases where inflated transaction costs wouldbewelcome,forinstancewheneverlowertran-sactioncostswouldstimulatethemarketatan

inopportunetime.However,thisscenariowouldpresupposeextensiveandpurelyspeculativeorexaggerated transactions that arenot backedbyproportionateoccupierdemand.

Ofcourse,therichdiversityofplayersalsoim-plies that estimatesas to the sizeof the realestate industry have to be sourced from thestatistical data for highly different economicsectors, and implies above all that the realestate industry generates the second highestgrossvalueaddedofanysectoroftheGermaneconomy (thisbeingbest illustratedbyFigure2-3).

Finally,thereisoneotherpeculiaritytypicalofreal estate that slows its regulationandmar-ket analysis. Real property lend themselvesto thepursuit ofbothconsumptiongoalsandinvestmenttargets.Theconsumptiongoalsarebestillustratedbythenatureofprivatehomes.If housingwas all about accommodation andshelter, flats would need neither gardens norbalconies,andthesizeoftheroomswouldbelargelyas irrelevantas thesouthernorientati-onofthewindows.Butasitsohappens,mostpeople are willing to spend good money forsuchamenities simply because they associa-te themwith a certain consumption purpose.Bythesameargument,thelocationofagivenflatrelativetotransportationinfrastructure,lo-calsupply facilitiesorattractivegreenspacescanbevaluableforprivatehouseholdsbecausetheysavecommutingcosts,openupappealinglinesofsightorenhancethequalityofleisureoptions.Thissuggestsinturnthatstronglyex-ternaleffectsmaybeassociatedwithsomeoftheseconsumptionpurposes.Positiveexternaleffectsmayinclude,forinstance,theapprecia-tion of a given property after a large numberofotherpropertiesinthesameneighbourhoodhave been refurbished. Conversely, negative

Chapter 1 – Specificities of the Real Estate Industry 11

external effects could be precipitated by thedeterioration of a neighbourhood or if conta-mination by third parties is discovered. Suchcompound aspects are highly important fortherealestatemarketandwith it for therealestate performance. Occasionally, they evenjustifystateinterventionwhenexternalfactorsbecometoomassivetobecorrectedbyprivatetransactions.

Thisaspectisalsoimportantforthesecondob-jective thatpropertybuyersmaybepursuing:Theinvestmenttarget,whenrealestateisusedtogeneratereturns.Homebuyerswillsaveonrent, yet they pay interest on their financingarrangements instead.Asthesavedrentpay-mentsaddupover time, theproperty experi-encesappreciation,sothatrealestatereturnsalwaysconsistoftwocomponents:rentalyieldand capital growth. Since real estate comeswithalowerriskthanequitiesbutclearlyhig-her ones compared to gilt-edge governmentbondsbecauseof theaforesaiduncertainties,thetotalreturnforrealestateisgenerallyso-mewherebetweenthatofequitiesandthatofbonds.Accordingly,realestateinvestmentsareoftenasensible long-termprivateinvestment,althoughtheyneednottaketheformofadi-rectinvestment(seeChapter4.2).Thatowner-occupiedresidentialrealestatethusservestwopurposes,achievingconsumptiongoalsontheonehandandgeneratingreturnsontheother,is generally understood.But that the same istrue formany commercial properties is oftenoverlooked.Anofficeschemeisofcoursenotjustaproductiveresourcetoprovideservices.Itisalsoaplacewhereofficestaffspendalar-ge part of their lives. Since additional factorsbeyond the sheer existence of a workplaceplaysaroleforhigh-skilledemployees,aspectsquite similar to those that qualify residenti-al real estate come intoplay: comfort, safety,

inspirationand location–ofcoursealways incorrespondencewithcomparableplacesintheneighbourhood.

These specificities ensure that real estatemarkets do follow the fundamental logic ofmarkets,meaning that thequantitystructuresrespond topricechangesand thatsupply re-spondstodemand.However,itisimportanttohighlight, not least with a view to the gover-ninghandofthepublicsector,thatrealestatemarketsinsomewayworkalongdifferentlinesthanstockmarketsorindeedmostmarketsforconsumergoods.

1.2 Specificities of Real Estate Markets

It hardly needsmention that real estatemar-ketsareconnectedtothemacroeconomicupsanddowns,becausethesameistrueformostmarkets for consumer goods and investmentgoods. Chapter 4 of this study discusses thesignificanceofrealestateasproductionfactor(seespecificallyFigure4-1inthiscontext).

Thedemand for realestate (ingeneral) isul-timately influencedby threecentraleconomicfactors: First:The trend in incomes is impor-tant,andwith it the trendon the labourmar-kets.Evenandespeciallybecause realestatequalifyas“normal”goodsfor thepurposesofthe aforementioned micro-economic nomen-clature,demandrisesinboomperiods,andwilldropduringarecession.Thisgoesforvirtuallyall real estate investment categories, albeitsubjecttotemporaldelaysandtodifferencesindegree.Thedemandforresidentialrealestateismore stable than the demand for office orlogisticsspacebecausethelatterarefarmoredirectly related to the economy’s productioncycle. Secondly: Since real estate, given its

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sheerdimension,israrelyfinancedwithequitycapitalalone,andsinceitrepresentsacommo-dity of long-termuse, demand for it dependsonthelevelofinterestrates.Thirdly:Demogra-phic growthmakes the creation of additionalresidential and commercial spacemandatory,whichexplainswhysuddenhikesinmigrationflowswill trigger drastic shifts in demand ontheaffectedrealestatemarkets.

Important to note here, however, is that thespecificitiesofagivenpropertyshouldbeusedtomake inferencesabout regionaland factu-al sub-markets. Surging demand inHamburgcannot be balancedby excess supply inMu-nich, and expanding the office stock will donothing to slow down the boost of housingrents. This also implies that the very fixationofrealestateinitslocationcancreateseveraldifferentkindsofimbalance.IfpeopleweretostartmovingfromChemnitztoMunich,itwouldintensifyshort-termvacanciesinChemnitzandthe housing shortage inMunich. Both trendsmay emerge within the same unifiedmacro-economicclimate, yet they require verydiffe-rentresponsesbytherespectivemarketplay-ersandthepolicymakers.ConcreteforecastsfortheregionaldemographicsinGermanywillbediscussedinChapter3(seespecificallyFi-gure3-12inthiscontext).

Market transparency is compromised by thesheernumberanddiversityof themanysub-markets.Theverycoarse-graineddata that issupplied by the official statistics suggests asmuch.

To be sure, with regards to market transpa-rency there have been notable improvementsin recent years, but for the commercial realestatemarketsinparticularthereisstillacon-spicuous lack of even themost basicmarketintelligence, such as real estate stock, rental

growth, or the trend in vacancy rates.Whileprivateprovidersmaybeabletofillmanyofthedatagaps,theirdatatendstobeavailableonlytoasmallnumberofmarketplayers.Asymme-tricaldistributionofinformationofthissortcanactuallyprecipitatemarketdistortions.

Moreover, the lack of market transparencyforces all players to undertake extensive andtime-consumingduediligenceinvestigationstoreviewmarketsandproperties.Duediligencesareperseaveryusefulthingtodo,butthepro-cessescouldbespedupbyaboost intrans-parency,andsocouldtheresponsetoimbalan-ces.Instead,thecurrentstateofaffairscausesdevelopmentand/ormarketingprocessestobeneedlesslyprotracted.Themarket’slowelasti-cityofadjustment,meaningtheslowresponsespeedinfaceofemergentmarketchanges,canresultinrashcyclesonrealestatemarkets.Theterm“pork cycle,” borrowed from agriculturaleconomics, has been used to describe them.Iftherealestatesupplyfailstorespondintimetochangesindemandbecauseofanumberofmarketdelays,thereisachancethatnewsup-plymightactuallycometoolate.Forinstance,iffreshhousingunitsraisedinanswertoariseindemandhitthemarketofagivencitywithadelayofseveralyears,theinitialsurgeinrentsandpricesduringtheboomphasewillbefollo-wedbyaplungeifdemandhasdeclinedduetothedown-cycleinthemeantime.

To cope with this sort of trend, you need tounderstand that several different real estatemarketscomeintoplayhere.Thepublicdebateadmittedlysimplifiesthingsbytalkingabouttherealestatemarketasifitwereahomogeneouswhole, but in the context of this adjustment,itmakessense todifferentiatebetween threesubmarkets: the occupiermarket, the invest-mentmarketandtheconstructionmarket.Theoccupiermarket takes centre stage.After all,

Chapter 1 – Specificities of the Real Estate Industry 13

thevalueofapropertyisestablishedbyitsuse.A permanently vacant flatwill eventually loseitsvalue.

Thesamegoesforunoccupiedofficesregard-less of location and building quality.The onlyway for a property to regain its value after alengthyvacancy isoftenbyputting it toalter-nativeuse.Theinteractionbetweenthesupplyinspacetoletandthecorrespondingdemandestablishestheso-calledheadlinerent.Priceson the investmentmarketsareclosely tied tothis rent. Higher rents will legitimise higherprices.Butinversely,itisalsosafetosaythatelevatedpricesarenotnecessarilybackedbya high rent level.Markets are interconnectedinanetwork,butthatdoesnotmeantheyarecongruent.Still,wheneverpricesgoupontheinvestment markets, it will attract propertydevelopers and thus cause the constructionmarket to gainmomentum, so that, once thereductionofpropertyhasbeendeducted, thesupplyontheoccupiermarketwillincrease.Inthisway,allthreemarketsarecloselysynchro-nised. Interveningontheoccupiermarketwillinfluenceboth the investments in theexistingstockandnewconstruction,andviceversa.Inthissense,eveninvestmentmarketspeculatorscanbegoodnewsfortheoccupiermarkets.

Buttheinterconnectednessofrealestatemar-ketsdoesnotendthere.Thereareclosereci-procal effects evenbetween the regional andfunctionalsub-markets.Ifrentsincreaseinthetowncoreofacity,flathunterswillexpandtheirsearchintothesuburbsortoothercitiesalto-gether.Thisgoesforhousingmarketsasmuchasforcommercialrealestatemarkets.Equallysafetosayisthatenlargingthehousingsupplyinagivenregionissensibleonlyiftheregionaljob supply and the concomitant commercialfloor area are sufficiently sustainable. Assu-ming thedemand for labour ina regiongoes

up,youneedtobuildnotonlynewofficesandmanufacturing plants, but also new housingandamenities.Ifthefinancialcrisishastaughtmarketparticipantsonethingitisthattheinter-connectednessofrealestatemarketsdoesnotstop at national boundaries anymore. Uphea-valsonforeignrealestatemarketscanimpactdomestic markets through interdependenciesbetweenthem,andbythesamelogic,migrati-onflowsdrivenbydepressedforeignmarketscanboostdemandonthedomesticmarket.Inthewakeofthefinancialandeconomiccrisis,unemploymentratesinSpain,Portugal,Irelandandmany Eastern European countries skyro-cketed. People emigrated to Germany by thehundredsof thousands,asthecountry’sbud-get policy as well as its real estate marketsandrealestatefinancingmarketsprovedmorestable and facilitated a very quick recoveryfromthecrisis(onthesubjectofthestabilityofGerman real estate financing, see specificallyFigure5-12).

1.3 Implications for the Body Politic

This report providesanoverviewof themac-roeconomicsignificanceof the realestate in-dustrywhileincludingnoconcreterecommen-dations regarding housing and town-planningpolicies. However, general messages derivedfrom six different aspects are suggested forconsiderationbythepolicymakers:

Realestate representsnot justan investmentclassof very largeassets,but theassetsareinseveralwaysunique.Thisistruebothfortheassetsandforthemarkets.Italsopresupposesspecificknow-howanddexterityonthepartofthepoliticalplayers.

Realestatemarketsareslowtorespond.Rus-hedmeasuresarerarelyhelpful,becausetheir

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effectsmaycometoolatetohavethedesiredeffectonthemarket(seeFigure2-4forillust-ration).

Politicalinterventioninrealestatemarketscanhaveavarietyofeffects:Forone thing, itcanhaveadirectimpactontherealestatemarketsasintended.However,itfrequentlytriggersun-intendedeffectson(other)realestatemarketsaswell,anditisquitecommon,giventhesizeandtheeconomicsignificanceoftherealestateindustry, for theeffects tospillover intootherindustriesorfactormarkets.Thecomplexityofthereciprocaleffectsmakethemveryhardtoestimateaheadoftime.Accordingly,measuresaimedsolelyatacertainsector–while igno-ringpotentialeffectsonotherareasofactivity–shouldthereforebeavoided.

Rather, it makes more sense to enhance theadjustmentflexibility.Thiscanbefacilitatedbyloweringtransactioncosts.

The geographic heterogeneity of real estatemarketsrarelyeverjustifiestheuseofstandardmeasuresonanationallevel.

Increasingthemarkettransparencyisneeded.Itbenefitssmallermarketoperatorsinparticu-lar.Expandingthedatamaterialthatispubliclyaccessible is therefore of the essence. Thisgoesinparticularforcommercialrealestate.

Chapter 1 – Specificities of the Real Estate Industry 15

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EXECUTIVE SUMMARY

• The real estate industry is one of thelargest and most important sectors ofGermany’s national economy. With agross value added of more than 500billioneuros,therealestateindustryac-countsfor18.2percentof thecountry’stotalvalueadded.Thismakesthereales-tateindustryafarbiggersectorthanthefrequentlyquotedautomotiveindustryortheretailtrade,forinstance.

• Atthesametime,therealestateindustryis an extremely small-scale sector withmorethan815,000companiesandano-ther3.9millionprivatelandlords.

• One of themost distinct characteristicsof theGermanrealestate industry is itsstability.Despitetheturbulentmacroeco-nomicparameterscreatedbythecrisisoftheneweconomy,thefinancialcrisisandthesovereigndebtcrisis,therealestatesectorhasshownasteadyperformance.

• Comparedtoothercountries,theGermanrealestate industry ismoreor lessave-rage,measuredbyitsshareofthegrossvalueadded.

• Therealestate industrycanbedelinea-tedinnarrowandbroadterms.Anarrowdefinition of the sector would includeowner-occupiers, landlords, real estateagents, propertymanagers and real es-tate traders (including property develo-pers),whereasabroaderdefinitionwouldmoreover includeany company involvedin the planning, building, financing andmanagementofrealestateduringitslifecycle.

• The German real estate industry in anarrow sense covers around 300,000companies which together generated aturnover of 145 billion euros in 2015.This means that the sector accountedfor9.3percentofallcompaniesand2.3percentofallrevenues,thecompaniesinthesectorbeingsmallerthanthemacro-economicaverage.Itsgrossvalueaddedequalled 302.9 billion euros at the lastcountor10.9percentoftheentireGer-maneconomy.

• Jobgrowthintherealestate industry inanarrowsensehascontinuedsincetheturnofthecentury.In2016,itaccountedfor a total of 252,000 employees liableforsocialsecuritywhilethetotalnumberofjobswas467,000inthesector.

Chapter 2Core Data of the Real Estate IndustryChapter edited by:IW Cologne Institute for Economic Research

Core Data of the Real Estate Industry 17

• Private small-scale landlords earned 55billioneuros ingross revenues in2015.Since 2011, the number of small-scalelandlords has grown by 330,000 to atotalof3.9million.makeitdifficulttocus-tomise: On the one hand, real estate isdefinedbyits largeinvestmentvolumes,while,ontheotherhandandinsyncwiththeaforesaidaspect,itismarkedbylongmarketeffectiveness,meaning life cyclelength.

EXECUTIVE SUMMARY

The purpose of this chapter is to analyse thereal estate assets and real estate stock ofGermany’snationaleconomy.

• RealestateisthemostimportanttangibleassetclassinGermany.Outofthetotalityofgrossfixedassets(atmarketprices)inthe amount of 17.3 trillion euros at theendof2016,built-upstructuresofeverykindaccountedfor80.3percentor13.9trillioneurosthereof.

• Withdepreciationtakenoutoftheequa-tion,thetotalnetfixedassetsofGermanbuilt-up structures adds up to nearly 8trillioneuros,whichbreaksdowninto4.8trillion euros in residential buildings and3.2 trillion euros in non-residential buil-dings.

• The total asset value tied up in real es-tate ismorethanthreetimesashighasGermany’snetnationalincomein2015.

• Inabsolutefigures,GermanythushasthehighestvalueinrealestateassetsinEuro-pe.Butrelativetoitspopulationtotaloritstotal income,Germanyonlyrankssome-whereinthemiddleamongtheEuropeancountries.

• Bytheendof2015,roughly82.2millionpeoplelivedinGermanyinwellover41.4million flats and 19.4 million buildingswithacombinedresidentialfloorareaofaround3.79billionsquaremetres.Atthesametime,theworkingpopulationoccu-pied around 426 million square metresof office space, for instance, 2.8 billionsquaremetres of industrial and logisticsspaceand123.7millionsquaremetersofsalesarea in the retail sector (estimatesfromearly2015).However,thesefiguresarefraughtwithuncertaintybecausethecommercialrealestatestockinparticularis inadequatelycoveredbyofficialstatis-tics.

• Home-owning households in the sameincome group tend to be wealthier onaveragethantenanthouseholds.

• Germany’s homeownership rate hasmademodestgainsinrecentyears.Still,it remains in thebottomsegmentof thelistofEuropeannationswithroughly45.5percent.Infact,theratehaslevelledoutorevendeclinedfortheyoungeragegroupsoflessthan45yearssince2013.Intermsofcapital-building,thiscouldimplyadisa-dvantageforGermanhouseholds.

Chapter 3Real Estate Stock and StructureChapter edited by:IREBSInternational Real Estate Business SchoolUniversity of Regensburg

Real Estate Stock and Structure 19

• A major share of the final energy con-sumptioninthebuildingsectorisattribu-tabletoactivitiesinpropertiesorrelatingto them.Theefficientuseof real estatetherefore plays a key role in the effortto bring down Germany’s energy con-sumption.Thefinal energy consumptioninGermanbuildingstotalled3,069peta-joulesin2015,areductionby11percentsince2008 thathighlights themoderni-sationeffortsof the realestate industry.Butfurtherinvestmentswillberequiredtoreachthegoalof2,761petajoules(whichwouldmean20percent less than2008and11percentlessthan2015)by2020.

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• Commercial real estate constitutes anessential basis for all sorts of economicactivity. Its significance is reflected in150 million euros in revenues that therealestateindustrygeneratedthroughitsdealingswithotherbusinesses.

• Propertyrentsandpricesserveaskeyin-dicatorsfortheappealofagivencity.Af-terall,thewillingnesstopayhighrentsorpricesriseswiththequalityofaproperty’slocationandofthelocalinfrastructure.Inaddition,pricesalsomirrortheeconomicprosperity of a city. The score of a city,understoodasapotentialmodeltoillust-ratetheprinciple,measurestheeconomicperformanceofagivencity.Forinstance,MunichoutperformsFrankfurtandHam-burg in a per-capita comparison. But acity’sscoremayalsorisewhenthefloorspacesupply isactively limited. Inwhichcaseitwouldbecomeanindicatorofare-strictingzoningpracticethathamperstheeconomicgrowthofthecity.

• TheaveragehouseholdinGermanyowns125,000eurosworthofnetfixedassets.AlthoughthistopstheaverageinGreeceandPortugal, it falls short of thefiguresreported from France, Italy or Belgium.Thedefinitivefactortoexplaintheranking

isthelowhomeownershiprateinGermany.

• In addition to directly owned property,however, the property stock market hasgained considerably in significance overthepast years.Therearenow90billioneurostiedupinGermanrealestateusingthisinvestmentformat.Especiallythego-ingpublicofmajorprivatehousingcom-panieshelpedtostimulatethemarket.

• Meanwhile, open-ended and closed-endpropertyfundswerebusycopingwiththeregulatory challenges posed by the newnationaladaptionoftheAlternativeFundsManagersDirective(AIFMD).Butbothfor-matsregisteredgrowthinthewakeofthereform,especiallywithspecialisedvehic-lesforinstitutionalinvestor.

• Offundamentalsignificanceforallinvest-mentvehicleshasbeenthestronggrowthin real estate prices since 2010, mostconspicuouslysowithresidentialreales-tate prices inmajor cities.The threat ofa speculative bubble remains nonethel-ess elusive because there are plausiblereasonsforthepricetrend,andbecausethe financingbehaviour remains virtuallyunchanged. However, it needs to be re-membered that interest rates, economic

Chapter 4Real Estate as Production Factor and investment goodChapter edited by:IW Cologne Institute for Economic Research

Real Estate as Production Factor and investment good 21

situationanddemandcombineintohigh-lyfavourableparametersatthemoment,and thecomingyearsare likely tobringmarketadjustmentsforoneorseveralofthesefactors.

EXECUTIVE SUMMARY

• Drivenbyafast-pacedexpansionofnewlending business, the private housingloanvolumeof2016increasedbynearlyfourpercentandthussubstantiallyfasterthaninpreviousyears.Intheyearssince2003,theannualgrowthratehadmovedinarangeof-1to+2percent.Buteventhemost recent rise lies still below thelong-term average since 1982,which is4.7percent.

• Similarly,thecurrentboomisrathermo-destcomparedtoothercountriesinEuro-pe.Between2004and2008,theratesofchangeinGermany’sprivatehousingloanvolumeremainedsubstantiallybelowtheEuropeanaverage.Thesituationintheye-arsthereafterdoesnotlenditselftoqua-lifiedcomparisonsbecauseitisdistortedbyburstinghomepricebubbles inothercountries.

• There is some evidence suggesting thatthe recent increase in private housingloan volumes in Germany could be duetocatch-upeffects in the real economy:Risingresidentialrentratespointtoaveryreal demand for new residential accom-modation.

• Thefavourableeconomictrendhasincre-

asedincomesandenabledthemtodeve-lopin linewiththeexpansionofhousingloans.The lowlevelof interestrateshaskept the financing of owner-occupiedproperty affordable, which means thatborrowers are able to cover their debtservice (interest and repayment) out oftheirincome.

• Substantially higher interest rates not tobeexpecteduntiltheEuropeaneconomyasawholeisbackuptospeedorunlesscapital drains from Europe; for the timebeing, an interest rate hike is thereforenot to be expected (see elaborations inChapter4).

• The spread (margin of the banks) hasbeen under noticeable downward pres-sure since2014.As recently as the ye-ars 2011 through 2013, themargins incommercial real estate financing hadcontinued to push up. But in 2014 and2015,marginsbegantosoften,andtheyremainedunderpressurein2016.

• At the same time, the challenges thatbanks face have intensified due to fourdifferenttrends:Theshareofdemandingloanshasincreased(e.g.moreprojectfi-nancing,ahigherproportionoffinancingarrangements in Grade B locations andClassBcities,moreloanshandedoutto

Chapter 5Specificities of German Real Estate FinancingChapter edited by:IREBSInternational Real Estate Business SchoolUniversity of Regensburg

Specificities of German Real Estate Financing 23

finance managed properties, etc.). Mo-reover, the regulatorycostofequityhasgone up, and so has the bank levy. Inaddition, theorganisationaloverhead formeetingtheregulatoryrequirementshasincreased. These trends suggest highermarginrequirements.Thefactthatthesehaveprovenunattainablecanbereadasasignforintensecompetition.

• Meanwhile, bank refinancing remainson sound footing: Investors are buyingupcoveredbondsas”Pfandbriefe”,andtheirvolumehasnoticeably increasedinthemostrecentpast.

BID Bundesarbeitsgemeinschaft Immobilienwirtschaft Deutschland

c/o ZIA Zentraler Immobilien Ausschuss e.V.Unter den Linden 4210117 Berlin Telefon:+49(0)30 - 20 21 585 - 0 Fax: +49(0)30 - 20 21 585 - 29 presse@bid.infowww.bid.infoVorsitzender der BID: Dr. Andreas Matter, Präsident des ZIA