Neckarsulm-Amorbach Project

Transcription

1 Feasibility Study Neckarsulm-Amorbach Project Prepared for Location Mr. Peter Boesche Tulcan Real Estate Management LLC 47 North Tatnall Street #14 Wilmington, Delaware 1981 April 3, 17 Neckarsulm, Germany located in the state of Baden-Wuettenmeberg, north of Heilbronn Project Summary The planned development and sell-out of six energy efficient prefabricated single-family semidetached houses ranging in size from 1m² (1,9 square feet) to 15m² (1,15 square feet) of two story design including an 18m² (193.7 square foot) an attached two car garage. Wert-Berater, Inc. Europe: Radlkoferstrasse, München, Germany USA: 14 Market Street, Suite, Denver, Colorado 8 T

2 Table of Contents Item Page Item Page Important Disclosures 3 Estimating Asking Prices for the Subject Project Houses 4 Executive Summary 5 Neckarsulm Market Unment Demand Analysis 4 Definitions 7 Postal Code 7417, Neckarsulm Housing Demand Analysis 47 Economic Feasibility 9 Floor Plans for Subject Project Houses 48 Germany Economy 9 Elevation Renderings for Subject Project Houses 49 Economic Feasibility Conclusion 13 Per M² Asking Prices 5 14 Company's Estimated Sale prices per House 5 Residential Marketing in Germany 14 Absorption 51 Analysis of the Residential Markets in Germany 1 Conclusion 51 Structural Risks 17 Financial Feasibility 5 Neckarsulm Market Risk Indication Subject Project Cost Estimate City Survey Risk Assessment Overview Discounted Cash Flow Analysis 54 Risk Return Ratio Internal Rate of Return 55 Market Value/Risk Rating Tables Sensitivity Analysis 5 Housing Stock in Germany 4 Breakeven Analysis Scope and Value of the Investable Housing Stock 4 Financial Feasibility Conclusion 4 Housing Construction and Completions in Germany 5 Resume of Analyst 5 Legal Frameworks 5 Research Summary Conclusion Germany Housing Market Outlook 17 7 Baden-Württemberg Market Area 37 Stuttgart Housing Market Overview 38 Heilbronn, Germany Market Overview 43 Neckarsulm, Germany Market Overview 44 Neckarsulm Area Asking Price Range 4

3 Important Disclosures This document has been prepared by Wert-Berater, Inc. based on information and The projected financial information contained in the document is based on opinions provided by third parties named as Source and the management of our internal market research and judgmental estimates and Tulcan Real Estate Management, LLC and its associates (herein after Company ) made by the management of Company, about circumstances and events that have and certain primary and secondary research carried out by Wert-Berater, Inc. on not yet taken place. Accordingly, there can be no assurance that the projected behalf results will be attained. In particular, but without prejudice to generality of of Company. This document does not purport to be all-inclusive or warranty whatsoever is assumptions necessarily to contain all the information that a prospective investor or lender may the foregoing, no representation of given to the desire investigating the opportunity, and may be subject to updating, revision and relation of reasonableness or achievability of the projections contained in the amendment. document or in relation to the bases and assumptions underlying such projections not the reasonableness, achievability and accuracy. This document is not solely intended to form the basis of an investment decision by any purchasers or investors in determining job creation or economic impact of the No representation or warranty, express or implied is given by the Promoters, project or lenders acting as a construction loan or permanent loan lender, the Company or Wert-Berater, Inc. its principals, managers, agents or guarantor and/or grant provider. Other interested parties should carry out their employees, directors, partners, affiliates, or advisors (and any warranty expressed own investigation and analysis of the subject Company known as Tulcan Estate or implied by statute is hereby excluded) as the accuracy or completeness of the Management Holding, LLC concerning any investment, offer, loan or guarantee or contents of this report or any such document or information supplied at any time or grant request. The information contained in the document will not constitute or opinions or projections expressed herein or therein, nor is any such party under any form part of any offer for sale of shares in the subject project or its Company, its obligation to update the document or correct any inaccuracies or omissions in it owners or managers of offer of equity, nor will any such information from the basis which may exist or become apparent. In particular, for reasons of commercial of any contract in respect thereof. Any investor must rely on the terms and sensitivity, information on certain matters may not have been included in this conditions contained in such a contract subject to limitations and restriction as document. Such information may be available at a later stage. may be specified therein. However, this document may be used by third parties such as business plan authors and economic impact or job creation economic studies as part of their investigation and analysis. 3

4 Important Disclosures No responsibility or liability is accepted for any loss or damage arising as of a result In no circumstances will Wert-Berater, Inc. or the promoters or any or its of this document and any and all responsibility and liability is expressly disclaimed subsidiaries or affiliates (including the Company) be responsible for any costs or by the Promoters, Wert-Berater, Inc. and the Company or any of them or any of their respective directors, managers, principals, partners, officers, affiliates, expense incurred in connection with any appraisal or investigation of the Company or for any other costs or expenses incurred by prospective purchasers in connection with the proposed investment in the Company. employees, advisors or agents. Wert-Berater, Inc. is acting as advisor to the Company, its lender and the legal THIS REPORT AND CONSTITUTE AN THE INFORMATION APPRAISAL UNDER CONTAINED THE HEREIN UNIFORM DOES STANDARDS NOT OF counsel only and to no other person. Neither receipt of the document nor any PROFESSIONAL APPRAISAL PRACTICE ("USPAP") AND SHOULD NOT BE USED OR RELIED information supplied in connection with any proposed investment in the Company by UPON AS SUCH. This material is not to be construed as providing investment or any person is or is to be taken as consulting the giving of investment advice or to appraisal services in any state, country or jurisdiction. This report is not warranted constitute any person as a client of Wert-Berater, Inc. in connection with any proposed EB-5 Visa Application, loan, investment or sale. This document should not be considered as a recommendation by Wert-Berater, Inc. or any of its subsidiaries or affiliates (including the Company) or their respective directors, by Wert-Berater, Inc. or any other party for accuracy, completeness or any other criteria. General Note on Rounding: Microsoft Excel was used in the calculation of the numbers presented in this managers, principals, partners, officers, affiliates, employees, advisors or agents document. Results are presented in whole numbers or rounded to two decimal to invest in the Company and each potential investor must make its own places where appropriate, however, the analysis itself uses figures carried to their independent assessment of the merits or otherwise of acquiring the issued share ultimate decimal places; therefore the sums and products generated in the analysis capital of the Company and should take its own professional advice. may not equal the sum or product if the reader replicates the calculations with the factors shown in the report. 4

5 Executive Summary March 7, 17 Mr. Peter Boesche Tulcan Real Estate Management, LLC (hereinafter Company) 47 North Tatnall Street #14 Wilmington, Delaware 1981 Re: The planned residential prefabricated detached single-family housing subdivision, (hereinafter subject project ) located at Neckarsulm, Germany. Dear Mr. Boesche: At your request we are pleased to provide this feasibility study concerning the referenced proposed residential for sale prefabricated energy efficient singlefamily detached housing real estate development project consisting of six houses. The purpose of this feasibility study is for internal uses, review by potential investors and lenders. Your provided information concerning the proposed project is contained in the Addenda of this report. In the event that there are substantial changes to the subject project subsequent to the effective date of this report, the reliability of this study is likely to change and should be reevaluated. The scope of this feasibility study includes a market, cost and financial analysis related to the purchase of a parcel for the subject project, site preparation, installation of prefabricated houses and their subsequent sale. The Company is seeking an investment of,5,, or about 41,7 per house. Because the houses are prefabricated, the Company is to pay for the houses and site preparation, install the houses and then commence sales, which differs from common ground-up construction whereas construction costs are paid over the course of a development as houses are constructed and released to buyers. Market research has indicated that it is likely that pre-sales will take place during the course of making the houses ready for occupancy, thus, the return of capital is anticipated in 18-months or less, including land acquisition, site preparation, installation and readiness of occupancy and sale of the houses. As part of the financial feasibility section of this report, a Discounted Cash Flow analysis is presented including sensitivity analysis to present Internal Rates of Return based on the project cost, sell-out time and potential profit. The Company is local to the project which is a benefit to the program. 5

6 Executive Summary Report Compilation This feasibility study was compiled based on research conducted independently by the staff of Wert-Berater, Inc. Questions concerning the content of this study should be addressed to the following persons who were involved in the development of this study. Donald Safranek, MSc Alexandra E. Usilova, LLB Wert-Berater, Inc. Wert-Berater, Inc ext dsafranek@wert-berater.com usilova@wert-berater.com Wert-Berater, Inc. 14 Market Street, Suite Denver, Colorado

7 Definitions Discounted Cash Flow Analysis (DCF) where DEFINITION of 'Discounted Cash Flow - DCF' Ct = net cash inflow during the period t A valuation method used to estimate the attractiveness of an investment Co = total initial investment costs opportunity. Discounted cash flow (DCF) analysis uses future free cash flow r = discount rate, and projections and discounts them (most often using the weighted average cost t = number of time periods of capital) to arrive at a present value, which is used to evaluate the A positive net present value indicates that the projected earnings generated potential for investment. If the value arrived at through DCF analysis is by a project or investment (in present dollars) exceeds the anticipated costs higher than the current cost of the investment, the opportunity may be a (also in present dollars). Generally, an investment with a positive NPV will be good one. a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the Calculated as: only investments that should be made are those with positive NPV values. When the investment in question is an acquisition or a merger, one might also use the Discounted Cash Flow (DCF) metric. Net Present Value NPV Entrepreneurial Profit Net Present Value (NPV) is the difference between the present value of cash The reasoning is based on the economic principle of Entrepreneurial Profit inflows and the present value of cash outflows. NPV is used in capital which is an economic theory by Schumpeter, J.A., 1934 (8), The Theory budgeting to analyze the profitability of a projected investment or project. of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle. The following is the formula for calculating NPV: 7

8 Definitions The theory indicates that Schumpeter distinguished between two different Some consider the capitalization rate to be, in essence, the discount rate of types of risk, the first one associated with the technical failure of a perpetuity, though the use of perpetuity in this case may be slightly production and the risk of commercial failure, but he emphasizes that misleading as it implies cash flows will be steady on an annual basis. none of these methods of evening out economic risks, in principle, creates profit. Commercial risk is essentially based on the idea that no entrepreneur would not consider contributing their time to a business without a minimum profit margin. Capitalization Rate The Capitalization Rate is the rate of return on a real estate investment Terminal Capitalization Rate The Terminal Capitalization Rate is the rate used to estimate the resale value of a property at the end of the holding period. The expected net operating income (NOI) per year is divided by the terminal cap rate (expressed as a percentage) to get the terminal value. Terminal property based on the income that the property is expected to generate. The capitalization rates are based on forecasts and estimates and changes based capitalization rate is used to estimate the investor's potential return on his on the person doing the calculation. When looking at longer periods of time, or her investment. it is a safe assumption that NOI forecasts will not be completely accurate as estimations become harder over longer periods. Therefore, it may be The capitalization rate of an investment may be calculated by dividing the necessary to include a risk adjustment to the rate. investment s net operating income (NOI) by the current market value of the property, where NOI is the annual return on the property minus all operating costs. The formula for calculating the capitalization rate can be expressed in the following way: Capitalization Rate = Net Operating Income (NOI) / Current Market Value The Discounted Cash Flow Analysis (DCF), Net Present Value (NPV), Capitalization Rate and Terminal Capitalization Rate will each be applied in the Financial Feasibility Section of this study when evaluating the subject project cost. 8

9 Economic Feasibility Germany Economy financial markets, could also have a negative impact on economic sentiment, The German economy expanded steadily over the course of 15. Moderate which might hamper the recovery in investment. Moreover, uncertainty quarterly GDP growth was recorded throughout the year. Overall, real GDP surrounding the inflow of refugees and its economic impact remains high. increased by 1.7 % in 15, driven mainly by domestic demand, after rising by 1. % in 14. The expansion is set to be driven by domestic demand. While investment has remained subdued, private consumption is expected to remain a key growth Economic growth is expected to be sustained in 1. In spite of recent driver. Steady employment growth and low inflation should continue headwinds from weaker export demand in emerging markets, Germany s supporting real disposable incomes despite an expected deceleration in wage economic growth continues to be supported by favorable labor market and growth. Slightly negative contributions to growth are expected from net financing conditions underpinning domestic demand, as well as by some external trade. Import growth supported by domestic demand should offset temporary factors such as the impact of low energy prices and high net the effect of the expected increase in export growth as the external migration. Overall, real GDP is expected to increase by 1.8 % in both 1 environment gradually strengthens. and 17. Corporate investment remains weak, and is expected to pick up only Downside risks relate to the external environment, including China s moderately. Investment in machinery and equipment has seen only gradual slowdown, and the recent financial market turmoil. Germany has the largest recovery with frequent setbacks, including in 15. Possibly also reflecting a direct trade exposure to China among the EU Member States and could correction in sales expectations and the impact of uncertainty, the therefore be directly affected by China s slowing economic growth as well as corresponding capital stock appears to have shifted to a less dynamic growth by weaknesses in other emerging market economies. In addition, this weaker path in the post-crisis period. external environment, compounded by the increased uncertainties in the. 9

10 Economic Feasibility Partly reflecting delayed replacement investment, equipment investment is The large influx of refugees is set to stimulate growth in the short term. expected to pick up moderately in the course of 1 in line with the While net migration to Germany had been on the rise for several years, this improving outlook and along with private nonresidential construction. trend was magnified in 15. Germany was one of the key destination Following the upswing in recent years, housing investment growth is countries for the unprecedented flow of refugees in Europe. Around 1.1 expected to remain broadly stable, partly due to the additional boost from million refugees (1.3 % of population) registered in Germany in 15 and high net immigration. further inflows are expected. In the short term, this is likely to provide some stimulus to GDP growth via additional public spending on refugees and In spite of recent efforts, public investment as a share of GDP has continued housing investment. falling, and in 15 public sector investment decreased in nominal and real terms. The share of public sector investment in GDP has been on a steady The medium-term impact hinges on the successful integration of the new decline in the post-crisis period and continues to fall short of the euro area immigrants into the labor market. The German labor market continued to average despite the existing backlog concerning public infrastructure perform investment. Public sector investment decreased in current prices and in real unemployment continues to stand at a record low (4. % in 15). Remaining terms in 15. unemployment is largely structural. Going forward, employment growth robustly in 15. Employment growth accelerated and should accelerate but a moderate increase in unemployment is expected in Moreover, net investment turned negative again in 14, implying that the capital stock shrank. In light of the existing fiscal relations, public investment at municipal level has been particularly weak. The Commission 1 winter forecast projects public investment to gain some momentum in 1-17 but measures do not appear to bring about a sustainable upward 1. Given the demographic structure of the newly-arrived refugees, the labor force is set to increase substantially, potentially helping to mitigate the negative impact of demographic change. But the labor market integration of refugees is set to take time and will require a targeted strategy, including upskilling, which explains the projected rise in trend. 1

11 Economic Feasibility unemployment. Despite the favorable labor market outcomes, poverty and the balance is expected in the coming years. This underlines the structural social exclusion have increased in recent years. The unemployed are nature of the current account surplus. particularly vulnerable, their at-risk-of-poverty rate is the highest in the EU. Rebalancing with the euro area has stalled recently. In geographic terms, the External factors continue to dampen inflation. Lower oil prices resulting in surplus is the greatest in relation to non-eu countries. The balance in negative energy price growth weighed heavily on headline inflation, which relation to China, which had improved sharply in the post-crisis years and stood at.1 % in harmonized terms in 15. Amid limited domestic price turned into a surplus since 1, has narrowed somewhat. At the same time, pressures, core inflation stood at 1 % in 15 but is expected to rebalancing in relation to the EU, and in particular the euro area, does not reaccelerate somewhat in 117. With the dampening effect of oil prices seem to have continued. The downward trend in the share of the German on energy prices expected to last until late 1, headline inflation in the surplus accounted for by the rest of the euro area observed since 7, when harmonized index of consumer prices (HICP) is projected to pick up only it peaked at around %, seems to have stalled in recent quarters. slightly in 1 before accelerating to 1.5 % in 17. Overall, limited price pressures have supported domestic demand via their effect on real disposable incomes. Credit growth has not picked up despite favorable financing conditions. Credit growth remains subdued, despite low interest rates and historically favorable credit constraints. On the household side, growth in loans for house External and sectoral developments purchases has accelerated slightly, resulting in total household credit growth The current account surplus further increased in 15. A large part of the which, while moderate, exceeds the rates seen in the past decade. The non- increase from 14 to 15 by 1 pp. to 8.8 % of GDP is explained by recent financial corporate sector continues to use internal funds for financing oil price and exchange rate developments. However, with a projected investment instead of relying on credit. However, its ample untapped funds balance of 8. % of GDP in 1 and 8.3 % in 17, no significant narrowing of are evidence that the weakness in credit growth is demand-driven. 11

12 Economic Feasibility Fiscal space exists for increasing public investment as public finances remain in a sound position. The general government budget surplus rose from.3 % of GDP in 14 to.5 % in 15. In the years ahead, expenditure growth is expected to accelerate and to outstrip current revenue growth. In particular, the influx of refugees is expected to boost government consumption and spending on cash benefits. Additional funds destined for infrastructure investment should gradually increase public sector investment, although adopted measures still do not appear to bring about a sustainable upward trend. Strong pension increases announced for 1 will also contribute to expenditure growth. Overall, the budget is expected to remain balanced in headline and structural terms in This means there is still fiscal space for increasing public investment, without endangering the rules of the Stability and Growth Pact. The gross debt-to-gdp ratio is set to decrease noticeably. The ageing society will remain a key challenge despite the But that would not be fully sufficient to mitigate the projected fall of almost potentially mitigating effects of recent immigration. Demographic change 3 % in the working-age population by and the associated negative will have a significant impact on a number of areas, including on potential impact on potential growth, which would require additional counterbalancing growth as a result of the sharp decline in the labor force in the medium term. measures to improve the sustainability of the social security system and The current inflow of refugees could help to dampen this trend, if their labor make full use of the existing labor force. market integration is successful. 1

13 Economic Feasibility Economic Feasibility Conclusion In Germany, land parcels sold to developers for specific uses, such as The forgoing analysis of the economics for Germany indicated that in recent residential single-family have already been part of the local land use plan years the economy has been steady to increasing concerning job growth and and are legally permissible whereas only specific building permits are overall economic performance. This is an important factor when considering required. Utilities also are part of the partially improved parcels whereas the development of a new residential subdivision. This section however, was offsite improvements including water, natural gas and electricity are stubbed limited to the general economic conditions because a more detailed analysis to the site. of the housing market for both Germany and the local economy is presented in the section of this study. Based on the overall economic climate in Germany, and housing market as more further described, availability of partially improved land legally and The subject project is a small six house development, however the risks physically ready for the preparation of a specific housing project, the associated with housing, as more further described in the Economic Feasibility is considered of low risk. section of this report are many, and the overall economy plays a role in the decision making process of both investors and owner-users when considering a real estate purchase. A specific land parcel was not presented by the Company, therefore, verification of land use plans, what is legally permissible and physically possible is not part of this study. These items are considered low risks because the management of the Company has expressed that part of their plan is to purchase land that is placed aside for housing development by the local municipality. 13

14 Residential Markets in Germany At the end of the 199s, the existing housing stock saw a net increase of Current Developments, Prospects and Opportunities Key Findings more than, units per year. In some regions, the housing stock is Germany has the largest housing stock of all European countries. The growing more slowly than necessary in view of prevailing demand. The low fundamentally investable stock for professional investors (apartment stock) levels of construction activity in recent years is also reflected in the age includes some 3.1 million buildings comprising approx..8 million structure of the German housing stock. The proportion of residential units apartments. This stock has a total floor area of approx. 1.4 billion square built from the year onwards is around just % of the total stock. More meters and an estimated value of more than trillion Euros. Of the.8 than 4% of all residential units are post-war constructions from the 195s to million units in the apartment stock, some 3 million are in the hands of 197s while a further 13% are of slab construction. owner-occupiers while approximately 8.8 million units are owned by small, The socio-demographic conditions for the German residential market are, on private landlords. the whole, challenging. The population in Germany has been on the decline The largest proportion is accounted for by professional commercial landlords for a number of years and this trend will accelerate in the coming decades. with some 8.9 million apartments. This group is dominated by three types of By, the population is expected to decline by 14-1% compared with owner; namely private housing companies (3.9 million apartments), 9. This is exacerbated by a drastic shift in the age structure of the municipal housing companies (.4 million) and housing associations (.1 German population. While % of all persons living in Germany today are million). In recent years, larger portfolios have been disposed of by the aged and above, by 5 this proportion is expected to be 34%. This also public sector to private-sector operators and it is to be expected that this presents a challenge for operators in the residential market. However, since trend will continue, albeit at a reduced rate. In the last 1-years, new these developments along with economic conditions show markedly different construction activity in the German residential market has drastically regional characteristics, it is insufficient to take a national view of the reduced. Net growth over the last decade equated to fewer than 5, units situation. per year almost without exception. 14

15 The regional differences in conditions are also reflected in the respective The situation in Germany is on the whole favorable in these respects residential markets. Rentals in cities with relatively favorable conditions, for according to Savills Research. The German economy has returned to pre- example, have risen significantly in recent years, whereas rentals in some crisis levels much sooner than anticipated and is also expected to grow at an weaker regions have appreciably declined. Between 1995 and 1, rentals above-average rate in the coming years, although temporary setbacks cannot increased by more than 8% in Greifswald and by more than 4% in Ingolstadt. be ruled out. This has positive consequences for the labor market and, thus, In the same period, average residential rentals in Leipzig, Görlitz and income levels of the German population, facilitating an overall positive Frankfurt (Oder) declined by more than %. The heterogeneous outlook for real economic stimuli affecting the German residential market. sociodemographic and economic conditions are also expressed in vacancy rates and figures showing rent as a proportion of net household income. On the financial side, investors are benefiting from historically low interest rates, while the relatively low yields on government and corporate bonds also In terms of prospects going forward, the residential markets are expected to grow yet further apart. Demand for residential property in one of the currently relatively economically underdeveloped cities is likely to continue to decline over the coming years, e.g. in Frankfurt (Oder), Dessau or Gera. Conversely, in other markets, the already strong demand for living accommodation is expected to show a continued increase. These markets include Ingolstadt, Munich and Freiburg (Breisgau), for example. In both scenarios, the developments pose specific challenges for local players in the residential market. Besides socio-demographic conditions, the attractiveness of the residential investment market is also influenced by financial and real economic key data and developments. promote investment in residential property. It was in 4, when financial and real economic conditions were similar to today s, that the German residential market first came into the focus of international investors. Between 4 and 7, more than 5, residential units per year changed hands in the form of larger residential portfolios with purchasers comprising predominantly Anglo-Saxon financial investors and, domestic private investors. Vendors of the portfolios were later, initially dominated by public sector bodies as well as non-property companies. From 5, the purchasers of previous years became increasingly prominent as resellers. With the outbreak of the global economic crisis, transaction volumes saw drastic declines in 8 and, for the last two years, have remained below levels seen in the years prior to the boom. 15

16 While present conditions are thoroughly comparable with those that It is not only the price levels but also the structural risks that vary prevailed at the start of the investment boom in the German residential significantly in the 17 residential markets studied. The socio-demographic, market and investment in residential property in Germany consequently economic and specific residential market risks were evaluated in all locations appears particularly lucrative, the market dynamics remain subdued. Large using a three-tier scoring system. The lowest macro-locational risk for portfolios comprising several thousand residential units in particular have investors was found in Munich, followed by Regensburg and Stuttgart. The changed hands very rarely during the last two to three years. On the one highest risk among the sample studied was shown by Halberstadt, Gera and hand, this is due to the more restrictive financing conditions for larger Frankfurt (Oder). As expected, the risk spectrum was overall very wide, transactions, particularly outside of the core segment and, on the other hand, meaning that the German residential market offers investment opportunities the supply of corresponding portfolios is lower today, not least because of a for both core and opportunistic investors. reduced willingness to sell from the public sector. In recent months, however, the market has been noticeably revitalized with particular demand for high- Across the entire risk spectrum, it is possible to identify markets that are quality properties in the German conurbations and is significantly more relatively strongly overvalued or under-valued. The latter in particular merit fragmented than in recent years. close attention from investors as these are more likely to produce relatively favorable investment opportunities than over-valued markets. The markets In keeping with the occupational markets, the individual residential investment markets in Germany are also highly heterogeneous. Between and 1 multipliers across the 17 largest residential markets fell on where current prices are considerably below risk-appropriate levels include Mainz, Gelsenkirchen, Mannheim and Flensburg. Conversely, relatively expensive markets include Munich, Passau, Berlin and Konstanz. average by 8 basis points to 1. However, the spread ranged from an increase of 5 basis points in Friedrichshafen to a price fall of 45 basis points in Coburg. Multiplier levels are also highly diverse and range from an average of 19 in Munich to 8.5 in several German cities including Analysis of the Residential Markets in Germany The attractiveness of a residential market for an investor is essentially determined by the prevailing socio-economic conditions in the location. Gelsenkirchen, Bremerhaven and Dessau. 1

17 Along with the current situation and trends in the occupier market, these Socio-demographics form the structural risk of a market. Markets with high structural risk are Economy principally suited to opportunistic investors while markets with low structural Residential market risk are primarily target markets for core investors. This chapter highlights the structural risk in the largest German residential markets. The risks are The first two areas, both made up of six indicators, are intended to then compared against prevailing price levels in these markets in order to be represent the general socio-demographic conditions and economic activity of able to identify undervalued and overvalued markets. a location and, thus, to evaluate the sustainability of the location. The third tier represents the supply-demand relationship in the relevant residential Structural Risks market as well as its general attractiveness. This part of the scoring The risks associated with investing in residential property are essentially comprises five indicators in total, whereby the market size indicator also influenced by the current situation and prospects in the relevant occupier takes into account the liquidity aspect of a market. market as these can have a direct impact on the investor s. The conditions with regard to sociodemographic agents, the economy and the residential All three tiers principally comprise indicators relating to the status quo but market itself determine the attractiveness of a location from an investor s also feature a projection indicator. In the socio-demographics area, this is perspective or the level of risk associated with an investment in that location. the population projection, in the economy area it is the GDP projection and in the residential market area it is the households projection that acts as In order to make the conditions of a residential market and, thus, the an indicator of future demand for residential property. The model is closely investment risk associated with the quantum of these factors measurable, as based upon the real estate analysis of the Association of German Public well as to be able to compare different locations with each other, it is useful Sector Banks (Bundesverband Öffentlicher Banken Deutschlands, VÖB). Only a to implement a scoring model. To evaluate the structural risk of the German number of adjustments that were deemed sensible were made. residential markets, a scoring model with the following three tiers was developed: 17

18 Since almost all of the measured values used were only available at an. Using the rankings obtained in the first stage, for each of the three tiers, administrative district (Landkreis) level rather than a local authority the average ranking of all indicators belonging to this tier is calculated. For (Gemeinde) level, it was necessary to limit the scoring to an administrative the socio-demographics and economy tiers, therefore, an average value district level and to cities with district status. Theoretically, this meant that across six individual rankings per tier is calculated. For the residential all German urban districts (Stadtkreis) and administrative districts could be market tier, the average value of the individual rankings for five indicators is evaluated in respect of their structural residential market risk. calculated. In all cases, the variables are given the same weighting when calculating the average values. However, for the purposes of this study, only the 17 so-called Riwis cities4 have been evaluated as these are the only cities for which usable real estate 3. Based upon the average ranking calculated in the second stage, a sub- data exists that can be compared against the scoring results. The score for score is calculated for each of the three tiers. These can theoretically have a each of the 17 locations is calculated in four stages. value between 1 and 1, where a value of 1 represents the best achievable result and a value of 1 represents the worst. However, these extreme values 1. The measured values for all 17 indicators are ranked in order of quantum. would only be achieved if a location was ranked in first or last place for all This stage produces 17 rankings, whereby the location with the most indicators in a tier. This is not the case in the present scoring, so the actual favorable measured value is given first place in the relevant ranking. In the scores achieved lie within a somewhat narrower range. case of the population projection indicator, therefore, the location with the largest (expected) population growth is in first place while the city with 4. The three sub-scores for each of the tiers are used to calculate an average the lowest value is ranked 17th. For those indicators where higher measured value, which represents the overall score. At this stage again, all three sub- values are less favorable than lower ones, e.g. the unemployment indicator, scores are given the same weighting when calculating the average value. the cities are ranked in the reverse order. 18

19 As a result of these four stages, each of the 17 cities studied can be assigned a score that provides an indication of the investment risk in each residential market in relation to the overall sample. This takes into account exclusively the risk associated with the relevant macro-location. Investment risks associated with the microlocation of a property or the property itself are not accounted for in the present analysis. The higher the resulting score for a location, the higher the prevailing structural market risk. 19

20 Neckarsulm Market Risk Indication are principally located in southern Germany. The scoring results reiterate Neckarsulm is located within the market circle of Heilbronn which has been measured within the Below-Average Risk area, ranking 9th of the 17 city set. rd that the German residential market is highly heterogeneous and consequently shows a wide range of different risk profiles. While investors focused on the Nearby Stuttgart is ranked 3 and Low Risk, thus both favorable rankings for core segment should primarily find purchase opportunities in those cities the subject project market area concerning risk. with low risk, it is sensible for opportunistically-oriented investors to focus their attention on those locations with above average or high risk. These 17 City Survey Risk Assessment Overview should produce the highest yield prospects, particularly for investors with An overview of the results of the scoring is provided in the graphs on the local market knowledge, provided that the purchase price is in appropriate previous page. The Bavarian state capital of Munich shows the lowest score proportion to the risk. with a value of.1. The risks associated with an investment in this residential market are therefore lower than in all other cities studied according to the model used here. Conversely, the Saxony-Anhalt city of Halberstadt shows the highest score of all cities at 8. and therefore has the highest risk of all locations in the sample studied. The average score across all 17 markets is 5.5. The scoring results can also be transferred into a rating system, which assigns the locations with similar scores to risk groups. In this case, the scoring scale has been divided into four segments of equal size, producing four risk groups: Cities with low, below-average, aboveaverage and high investment risk. Essentially, the picture emerged as expected: the cities with high risk are exclusively situated in eastern Germany, with the exception of Wilhelmshaven, while the cities with low risk Risk Return Ratio In order to evaluate the attractiveness or yield prospects of a residential market for an investor, the market risk must be considered in conjunction with the price levels in that location. Even those markets showing a very low risk are not attractive per se - even when viewed from core-investor s perspective. The reason for this is that the price levels in these markets may be too high in relation to the risk. It is therefore revealing to consider the relationship between price levels and risk in order to identify over-valued and under-valued markets. As a general observation, it can be seen that the players in the market have essentially priced in the risks in the German residential markets appropriately: there is a very strong correlation between the calculated score and the multiplier.

21 Most cities are consequently within a relatively narrow corridor around the Most cities are consequently within a relatively narrow corridor around the plotted trend line, i.e. the price levels are in appropriate relation to the plotted trend line, i.e. the price levels are in appropriate relation to the structural risk of the markets. As a general observation, it can be seen that structural risk of the markets. Essentially, those markets above the line are the players in the market have essentially priced in the risks in the German rather overvalued compared with the other cities while those below the line residential markets appropriately: there is a very strong correlation between are under-valued by trend. The greater the distance of a market from the the calculated score and the multiplier. trend line, the greater the deviation of the risk-return ratio from the average risk-return ratio of the 17 cities. Risk-Reward Ratios of German Residential Markets Regression Analysis Graph By trend, the distances of the markets from the trend line increase as the risk reduces. There is a greater accumulation of outliers above the line. Comparatively safe markets are therefore obviously over-valued by market participants by trend. These markets, including Munich, Konstanz and Passau, show significantly above-average price levels in relation to their score. The reasons for this cannot be clearly determined. However, it can be surmised that investor demand for residential property in markets regarded as relatively safe is very high in relation to supply, which results in upward price movement. On the other hand, Mainz and Mannheim are two examples of comparatively low-risk markets valued at very low levels. Gelsenkirchen, a market with above-average structural risk, is clearly below the trend line. With an only marginally above average score of. and an average multiplier of 8.5 no other city shows lower price levels. It is possible that the city s relatively poor image has contributed to this outcome. 1

22 City 1 3 City 1 3 Neuss M ainz M agdeburg Gelsenkirchen Freiburg (Breisgau) M annheim Rosenheim Flensburg Oldenburg Solingen Darmstadt Kassel Leipzig Hildesheim difference between actual and risk appropriate multiplier). Therefore, based on this Bremerhaven Reutlingen Pforzheim Friedrichshafen Villingen-Sc hw analysis, there Neckarsulm market area appears to be an area of not only, low risk, but Ludwigshafen Gütersloh Eisenach value appreciation for home owners. Developers may benefit by allowing for longer Wolfsburg M ünster Siegen Remscheid absorption at increased sale prices to maximize project Internal Rates of Return. Paderborn Wilhelmshaven Hanau Frankfurt (M ain) Bochum Görlitz Wiesbaden Ravensburg Kiel Düren Coburg Bergisch Gladbach Offenbach (M ain) Lüneburg Bielefeld Bremen Schwerin Braunschweig Plauen Dortmund Ratingen M arket Value/Risk Ratings Table Market Value/Risk Ratings Tables As indicated through the ranking analysis, Heilbronn, for which Neckarsulm can be considered park of as it is within its immediate circle, is in the undervalued market 3 Gießen Dresden Suhl Halberstadt Kaiserslautern Aschaffenburg Neumünster Chemnitz Regensburg Koblenz Cottbus Bayreuth Hanover Rostock Frankfurt (Oder) Karlsruhe City 1 Ulm Appropriately Valued Markets 1 Appropriately Valued Markets City Under Valued Markets areas. Heilbronn indicated 4.98 score (1 score), 1.8 multiplier ( multiplier), -.5 (3 Mülheim (Ruhr) Duisburg Aachen Nuremberg M inden Gera Cologne Krefeld Tübingen Augsburg Essen Stralsund Witten Ingolstadt Göttingen Dessau Salzgitter Fulda Trier Bonn Zwickau Würzburg Fürth Brandenburg (Havel) Bottrop Neubrandenburg Greifswald Heidelberg Osnabrück Saarbrücken Offenburg Recklinghausen Hamm Weimar Leverkusen Hamburg Erlangen Stuttgart Marburg Potsdam Jena Landshut Bamberg Herne Wuppertal Hagen Lüdenscheid Detmold Konstanz Kempten (Allgäu) Erfurt Oberhausen Berlin Düsseldorf Albstadt Heilbronn Passau Halle (Saale) Moers Schweinfurt M unich Mönchengladbach Lübeck Avg. 17 cities Over Valued Markets

23 The tables on the previous page summarize the risk-return ratios of the It can be seen from the tables, for example, that the average multiplier paid German residential markets in table form. As well as the scores and in Mainz for multiple dwellings is 33 basis points lower than the risk- multipliers of the individual markets, the deviation of the individual cities appropriate multiplier. According to this, the residential market in Mainz is from the trend line in the Risk-Reward Ratios of German Residential Markets significantly undervalued. The opposite is the case in Munich, where the Regression Analysis Graph is also expressed as a figure. This figure can be actual price level is 319 basis points above the risk-appropriate price level. interpreted as follows: This allows investors to assess whether values in each market are unusually high or low or appropriate compared with the other markets. The trend line shown in the Risk-Reward Ratios of German Residential Markets Regression Analysis Graph indicates how investors, on average, value However, the classification can be helpful for identifying potential target the structural risks of the residential markets studied. Its slope is -1.1, i.e. markets for investors as it shows which cities are most likely to offer a score which is lower by 1 point is worth an average price increase of 11 relatively favorable investment prospects. However, this does not mean that basis points to the investors. This allows a hypothetical multiplier to be the markets classified as over-valued should be excluded as potential target calculated for each of the 17 markets. If it is assumed that the market markets from the outset. Firstly, the analysis conducted here is an isolated participants have, on average, valued the structural risk of all markets study of the macro-locations, which merely looks at the average price levels. appropriately, then this calculated multiplier indicates the risk-appropriate price level of a market. The value in turn indicates the size of the difference The characteristics of the micro-location as well as the property itself can between multiplier. significantly influence the overall risk of an investment either positively or Consequently, negative figures mean that the actual price level in a city is negatively. Furthermore, the price of an individual property may well lower than appropriate in respect of the structural risk of this market. deviate considerably from the average price levels in the relevant market. In Conversely, positive values mean that the price level in a city is too high in addition, when calculating the risk-appropriate multipliers, a linear risk respect of the structural market risk in that location. evaluation has been assumed, i.e. score shift of 1 to is treated in the same the actual multiplier and the risk-appropriate 3

24 way as a shift from 9 to 1. In contrast, it would be equally plausible to The remaining approx..8 million units (apartments) can, in simple terms, assume that a decreasing score in the low-risk area would justify greater be assumed to represent the relevant housing stock in Germany for price increases than a score decreasing by the same amount in the high-risk institutional investors. area. In such case, for example, the difference between the actual and riskappropriate price levels in Munich would be lower than calculated here. Germany Housing Value/Stock Number of buildings Number of residential units Housing Stock in Germany Living space With a housing stock of some 4. million units, Germany is the largest Value 3.1 million.8 million 1.4 billion square metres > trillion Euros residential market in Europe (excluding Russia). This chapter provides a concise view of the existing housing stock in Germany according to selected The housing stock delineated here, subsequently referred to as the criteria. The emphasis is on the investable housing stock, i.e. that part of the investable housing stock, covers a living space of just under 1.4 billion overall housing stock which is relevant from an institutional investor s square meters divided across some 3.1 million residential buildings. perspective. Having delineated this portion of the housing stock, we look at Mathematically, these properties comprise.8 apartments per building, with its ownership and age structure as well as its dynamics. an average area of 7 square meters per apartment. Both values have remained practically unchanged in recent years. As far back as 1995, a Scope and Value of the Investable Housing Stock residential building mathematically comprised.8 apartments with an The majority of the forty million-plus residential units in Germany are average area of approx. square meters. Although the value of the situated within approximately 18 million residential buildings. With around investable housing stock can only be estimated very crudely, it is possible to 8, units, only a small proportion of the total stock is situated within calculate an approximate figure. Based upon average prices per square meter non-residential buildings. Of the approx million units in residential for freehold apartments, the total housing stock in Germany has an buildings, some 18.5 million are located within single-family or two-family approximate value of some 4.1 trillion Euros according to the 9German houses. Federal Statistical Office. 4

25 Housing Construction and Completions in Germany Adapting 1, housing completions in Germany in 14 plus refurbishment of populations are just a couple of issues to tackle in this context. There are around 9, existing residential units. When this is contrasted with around particular challenges at present for urban residential markets, which are 159, units in 9, the lowest completion volume since German witnessing significant increases in demand for housing. The increase in reunification, it is possible to speak of a recovery in housebuilding. However, completion volumes registered in many cities in recent years is insufficient following housing completions of approx. 15, units in 13, the growth in to keep pace with the high levels of migration. Consequently, the 14 was rather modest. Overall, the comparison illustrates the growing discrepancy between supply and demand has produced housing market discrepancy between supply and demand. shortages in numerous cities and has ultimately resulted in rising rents and the transport and educational infrastructures to enlarged property prices (some of them significant) in many places. However, the situation varies widely at regional level. German cities in particular are faced with major challenges. In addition to significant Legal Frameworks immigration from abroad, they are also exposed to high intra-regional The most recent developments also resulted in effects on the legal migration flows. Until only a few years ago, cities were suffering major framework regulating the housing market in 14/15. In autumn 14, the population losses in favor of their rural hinterlands. Now, the situation has German cabinet passed draft legislation to curtail rental increases. The changed radically. The return to the cities, and particularly city centers, resulting Mietpreisbremse (capping of rents on re-letting) came into effect in has been a pronounced trend for a number of years. In addition to young June 15, empowering federal states to enact appropriate regulations. The educational migrants, increasing numbers of families and single-person new regulations mean that asking rents on re-lettings of existing property households are being attracted by the benefits of city living, such as short must be no higher than 1 per cent above the level of local comparable rents travel times, good local amenities and a broad cultural offerings. In contrast in areas with strained housing markets. However, there are a number of with previous eras, they are also often remaining in the city for the long exemption clauses. Newbuild apartments, for example, are completely term. Besides the consequent positive effects, such as increased exempt from the Mietpreisbremse. tax revenues, this is also creating wide-reaching challenges for cities. 5

26 In addition, for the time being, 559 paras. 1 to 3 of the German Civil Code In view of the socio-political importance of the residential property market, (BGB), which apply to rental increases on modernized property, allow 11 per which has come firmly under the spotlight, the present residential market cent of expenditure on the property to be recovered from the tenant each report seeks to contribute towards achieving greater transparency. The year. The small furnished apartment market segment is also outside of the report illustrates the diversity of prevailing trends in the 9 largest local Mietpreisbremse. In addition to Bremen, Berlin, and Hamburg, a further 5 residential markets in Germany and discusses how cities are responding to local the current multi-faceted issues. authorities (independent cities and municipalities) in Baden- Württemberg, Bavaria, Hesse, North Rhine-Westphalia, Rhineland-Palatinate, and Schleswig-Holstein introduced the Mietpreisbremse by the end of 15. Research Summary Conclusion Investment in residential property is not only worthwhile in prospering cities Refugee Inflow with the best fundamentals. Upon closer examination of trends in indicators The third major issue dominating the residential property market at the end relevant to the housing market, it is evident that cities which have strengths of 15 was the large influx of refugees. The high number of refugees in some areas and more modest results in others can also be impressive. Top arriving in Germany from crisis and war zones also poses extensive challenges markets or traditionally established locations are not exclusively the most for the housing market. Numerous municipalities are desperately seeking promising cities for investment. Leipzig, for instance, has witnessed the accommodation for refugees and, in view of the fact that residential markets strongest growth in terms of demographic trends in recent years. are already strained, the housing shortage is expected to become even more acute. However, the actual housing requirements generated by the influx of According to the latest available data, the population in Leipzig rose by.8 refugees into residential markets is difficult to quantify owing to a lack of per cent within three years (end of 11 to 14), which was the highest reliable figures. The nationwide projections were repeatedly corrected growth among all 9 cities studied. Two of the top markets followed in upwards throughout 15. According to official data, the 1 million mark had second and third place in Frankfurt (+.1 per cent) and Munich (+4.7 per been reached by the end of 15. cent), while Augsburg and Berlin (each +4.3 per cent) occupied fourth and fifth places.

27 Germany Housing Market Outlook 17 In the current property cycle from 9 to 1, prices have risen by 3% in Munich remains the most dynamic German city when it comes to property, the A cities and by more than 4% in the B and C cities. The number of with its fast-rising population and historically low vacancy rate likely to lead completed homes is likely to exceed 3, for the first time in 17. to further price increases for many years to come. Further price rises are However, with an estimated requirement for at least 35, new homes, also expected in Berlin, although the main factors at play here are the very this would cause the gap between supply and demand to widen further still. buoyant labor market and the fact that prices and rents are still relatively This high level of demand will continue to put upward pressure on prices in low for a European capital city. Of the German cities that were analyzed for the German housing market. this report, Frankfurt has shown the lowest increase in prices in the current cycle. However, we are now seeing a Brexit effect, which is driving up prices Between 11 and 1, nearly 45, new homes were completed in for family homes in particular. In Hamburg sluggish rent growth and a high Munich for approximately 9, people. Over the same period, the city s level of construction activity are the most striking trends, which could make population rose by, to reach 1.55 million. It is therefore estimated the city more sensitive to interest rate movements than other urban centers. that an additional 55, or so homes are needed simply to accommodate the new arrivals. What s more, the vacancy rate tends to hover around the The situation is similar in Düsseldorf, where the vacancy rate in the current zero mark and Munich, Germany s most expensive city, has seen property cycle is relatively high for a large German city. For every city analyzed here prices more than double in the current cycle, with further increases and for the overall German housing market we anticipate further price expected in the coming years. increases in the coming years. All the macroeconomic conditions that might signal an end to the cycle such as a turnaround in interest rate policy, a In 1, prices for existing housing stock in Berlin rose by 13% year on year, massive expansion of supply and/or a slowdown in migration to Germany a particularly sharp increase and a stronger rise than all other German are not yet fulfilled and it is likely to be several years before they cities. Property prices in Berlin are now twice as high as they were in 5 materialize. Consequently, we expect rents and property prices in the major and have reached the level of some of the major cities in western Germany. German cities and across the country to continue to rise sharply in 17. 7

28 A shortage of dwellings and a lack of land for development are often cited demand is likely to be narrower than in Berlin and Munich. All this suggests as the main factors driving the price increases. But demand is also adding that low interest rates are the main reason why property prices are to the momentum, with high job growth and ever lower unemployment increasing in Hamburg. Consequently, Hamburg may have a relatively high rates likely to put further upward pressure on prices in 17. sensitivity to any future normalization of interest rates. Any normalization of interest rates is probably still several years away, however, which leads Frankfurt s population stood at 74,5 at the end of 15, an increase of us to expect further price increases in the interim. 1% on 5, and its healthy economy meant that the number of people in employment grew at a similarly strong rate. The resulting high demand for In Düsseldorf, the population has risen by only 5% since 9. Other housing could not be met by the scarce supply, which was also the case in drivers of demand have also been less buoyant than in other major cities. other cities. Consequently, property prices in Frankfurt increased by only Consequently, the price of housing has tended to increase in line with or 4% from 9 to 1. The comparatively high baseline level and subdued below the average. Düsseldorf s property market could be even more job growth in the financial services industry due to the financial crisis and sensitive to interest rates than Hamburg, although price increases are also euro crisis were the probable reasons why price increases in Frankfurt have anticipated here over the coming years. been relatively muted. Because of impetus from the Brexit vote, however, prices surged in 1, particularly for family homes. Price pressure in the German housing market likely to remain high Because of economic migration and the influx of refugees, Germany s In Hamburg, prices for existing housing stock have gone up by around 7% population has now risen to 83 million, which is almost three million more since 9. Price momentum in the city s rental market is sluggish, than at the start of the current property cycle in 9. A large amount of the however. From 1 to 1, rent growth did not even reach half the level influx was distributed across the B and C category of cities (half a million of the other major cities. The relatively high level of construction activity people) and the A cities (also half a million). The resultant demand is coming is probably a key factor in this and means the gap between supply and up against extremely inelastic supply, which has created a nationwide 8

29 shortage of up to 1 million homes. This surplus demand caused prices in the A figure up to almost 45,, which is equivalent to 7,5 homes a year. This cities to surge by 3% between 9 and 1, with prices in B and C cities means that new housing has been provided for around 9, people. Over going up by 45% over the same period. Because of the deficit in supply, which the past six years, however, the city s population has gone up by around could now lead to a relaxation of building regulations and environmental, (based on the 11 census) to reach 1.55 million in 1. It is constraints, the number of new homes completed is set to reach 3, for therefore estimated that at least 55, homes are needed in Munich simply the first time in 17. However, at least 35, new homes are required to accommodate the new arrivals. Munich s extremely buoyant job market is according to estimates by the German government, so this would not prevent also likely to have further boosted demand for housing. a further widening of the gap between supply and demand. A rise in capital market interest rates of around 3 basis points since October 1 means The number of people in employment in the city rose by 3% in 1 and job that demand-related pressure on prices is also likely to remain high. growth for the cycle as a whole was, at nearly 18%, particularly high Consequently, prices look set to rise again in 17. compared with other cities. Equally notable are the low average unemployment rates for 1, with overall unemployment at 4.%, Although some analysts were talking about a property bubble early on in the unemployment among foreign nationals at 8.%, and youth unemployment at current cycle, overvaluations relative to historical price ratios at the 3.1%. In line with the shortages that already existed, the Empirica research national level (income to property prices) will only come about when these consultancy puts the vacancy rate for the end of 15 at.% (11:.%). further price increases take effect. However, because it will take a number The vacancy rate is since likely to have fallen further, adding to the upward of years for the excess demand to be satisfied, we believe that the risk of a pressure on prices. By international comparison, prices in Munich, Germany s bubble forming remains high. most expensive city, are certainly nothing out of the ordinary. According to data portal Numbeo, the price per square meter for property outside the city Munich s vacancy rate at a record low According to the city s own statistics, 3, new homes were completed in center is, at EUR 5,34, the 14th most expensive in Europe (London, Paris, Stockholm, Luxembourg and a number of Swiss cities are more expensive). Munich between 11 and 15. Factoring in estimates for 1 puts the 9

30 In 15, the City of Munich s property market report put the price per square Similar large-scale projects are probably now needed in order to maintain meter for buying property in the city at EUR,3, for rental of existing this quality of life and prevent a continuation of inflated prices. stock at EUR 14.5 and for new build rents at around EUR 1.. Given the current rate of new development, an end to rent and price increases seems Rents and property prices in Berlin on a sharp upward trend unlikely in the short term. The significant upward pressure on prices could In Berlin, according to property data portal RIWIS, prices for existing even persist into the medium and long term. According to the City of townhouse stock went up by 4% year on year in 1, while prices for Munich s latest planning forecast, which was published in May 15, the detached family houses rose by 5.75%. These strong growth rates were population will increase to more than 1.7 million by 3, which would comparable with other cities; however, the overall level of house prices in equate to 15, new residents and demand for 75, new homes. Berlin remains quite low. The difference in prices is particularly pronounced Factoring in today s shortage of at least 55, homes, that would mean that when compared with Munich. You can buy three houses in Berlin for the price 13, homes would have to be completed by 3. of one detached family house in Munich, and the price ratio is the same for townhouses. However, property prices for existing stock have almost doubled The current completion rate is only 7,5 homes per year, however, so there since 5 and are reaching the level of certain major cities in western would continue to be a shortage of homes right through to the end of the Germany. next decade. If the projections pan out as expected, Munich, more than any other city, will be forced to rethink its current urban development policies. According to Numbeo, the price per square meter for property outside the The city can at least point to the fact that it previously succeeded in city center stood at EUR,8 at the end of 1. Property prices increased realigning its urban development strategy in the 19s under Mayor Hans- by 13% year on year in 1, a particularly sharp increase that was higher Jochen Vogel. Back then the building of new urban districts and the suburban than in all other major German cities. In Berlin, too, the rapid acceleration and underground train systems made a big difference to the quality of life in in prices is being caused by an acute shortage of homes, with a lack of Munich and came in spite of the high population growth at the time. development land often cited as one of the main reasons for the deficit. 3

31 According to the latest Berlin property market barometer, there is a Economic growth in Berlin is likely to remain strong in the future and the city particular shortage of affordable housing in the lower price segment. There expects its population to go up by more than 5, by 3. The is no likelihood of a quick remedy, as the number of building permits and continually rising demand for housing that this causes will probably come up housing completions are increasingly diverging. For example, 8,5 permits against further inelastic supply for a number of years to come. For Berlin, in were issued between 9 and 15, but only 44, homes were completed. particular, with its very low home ownership rate (11 census: 15.%; other In no other major German city is there a greater disparity between approved major cities: over %; Germany as a whole: 45.9%), there are therefore property developments and completions, with 1.9 permits issued for every strong incentives for many renters to purchase their own property. The rate completed development in Berlin compared with 1.4 in Hamburg and of rent increases, which has been high in Berlin throughout the current cycle, Düsseldorf and 1.3 in Frankfurt and Munich. At the same time, the city s is making these incentives greater. In 1, rents jumped by 7% compared population has risen by approximately 15, and the number of households with the prior year, which ran counter to the trend in other cities (chart 13). by around 75,. Despite the boom cycle which has persisted since 9, A number of factors are thus at play in Berlin s super cycle and they could demand for housing is still rising at a faster rate than supply. This demand is persist well beyond. The current trend could lead to Berlin becoming in part due to the strong Berlin labor market, with job growth of 4% in 1 one of the most expensive cities in Germany, whereas it is currently ranked and more than % since 9 both impressive statistics. 13th for prices of existing housing stock. Consequently, Berlin s unemployment rate has been on a downward Brexit is driving up prices for family homes in Frankfurt trajectory for a number of years and in 1 fell to below 1% its lowest level for a quarter of a century. The sharp fall in the number of people receiving housing benefit (down by 1% year on year) provides further evidence of the broader health of the labor market. The proportion of all households receiving housing benefit now stands at.9%, which is below the national average of 1.1%. Frankfurt s population was 74,5 at the end of 15, an increase of 7,, or 1%, on a decade earlier. And the number of people living there is likely to rise further over the coming years. At present, the City of Frankfurt s official population projections for the period until expect the number of residents to increase by 4, to 74, with current projections of a long-term increase to as much as 83, by 4. 31

32 Together with the growing number of residents and a dynamic economic Although all of these efforts are keeping the housing shortage in check, they environment, the number of people working in Frankfurt has also risen by will not likely remedy it. Several reasons explain the low price elasticity of almost 1% since 9. Compared with other major German cities, Frankfurt Frankfurt s housing supply, the main one being a shortage of land for has low unemployment rates (total unemployment:.4%; unemployment development. In many districts, the City of Frankfurt is building right up to among foreign nationals: 1.7%; youth unemployment:.1%; respective its municipal boundaries. In addition, large-scale construction projects in averages across major cities: 7.%, 14.4%, 5.%), whereby the employment Frankfurt, as in other places, often involve lengthy and contentious disputes rate among foreign nationals is well below the national average of 15% at the local political level. This restricted building activity has created a (November 1). Frankfurt s migrants possibly have an above-average housing deficit, defined as the ratio of households to the number of homes education, which would also explain the relatively high and increasing available. proportion of people with academic qualifications working in the city. The most recent figures available from the City of Frankfurt show a housing The rapid rate of population and job growth has bolstered demand for housing, demand that was already being fueled by low interest rates, strong growth in incomes and, at least at the start of the current cycle, relatively low property prices per square meter. Consequently, annual building permits have almost doubled in the period since 9 to 5, homes in 13 and to around 4, in 14. However, completions are growing at a much slower pace and in recent years have never amounted to more than 3, homes (substantially less than 1% of the existing housing stock). Furthermore, in recent years, many thousands of homes have been created from the conversion of public sector and commercial properties. New urban shortage of around 3, homes in 14. This figure is likely to have continued to increase in 15 and 1; our rather conservative projections here are a shortage of 33, homes for 15 and 3, for 1. As the shortage of housing has increased steadily since 9, satisfying the excess demand will take a number of years, possibly even significantly beyond the end of this decade. In Frankfurt, the scarcity of housing is the main reason for the approximately 4% increase in house prices from 9 to 1. The financial crisis and euro crisis, because of their negative impact on financial services, slowed price growth more in Frankfurt than in other major cities. districts have also been created. 3

33 However, impetus from the Brexit vote caused prices to surge in 1. The latest property market report reveals that the average price per square Probably in anticipation of wealthy London bankers moving to the city, prices meter for an owner-occupied apartment built in the year in a prime for family homes rose particularly sharply, going up by 11.75% year on year in location is now above EUR 4,. According to Numbeo, the price per square Frankfurt compared with a % increase across the major cities. Prices for meter for properties outside the city center stood at EUR,8 at the end of apartments rose slightly less strongly, at around 1%, and rents increased by 1. only 3.5%. Because of the high level of migration to Frankfurt, rents and prices are expected to continue to rise rapidly over the coming years. And if However, rent increases in Hamburg have been particularly low relative to Brexit has a major impact, Frankfurt s property market could even see the major cities. The average annual increase in rents was under 3% for both substantial price rises. In our Brexit study, however, we present a baseline new and existing homes (major German cities: 4%). It is particularly scenario in which Frankfurt s working population increases by just 5, noteworthy that at the start of the current cycle, rents in Hamburg grew at a people, which would see Brexit have a somewhat smaller effect on the much faster rate than in other cities. Between 9 and 11, rents for housing market. existing housing stock went up by 4% a year, while rents for new builds went up by 7% (major German cities: up by 3.5% and 4.75% respectively). From Price and rent growth in Hamburg: a mixed picture 1 to 1, however, rent growth in Hamburg did not even reach half the Hamburg s property prices, which are the highest in Germany after Munich, level of the other major cities (rents for existing housing stock up by 1.75%; increased by around 1% year on year in 1. Prices for townhouses grew rents for new builds up by 1.5%; both up by 4% in major German cities). just as strongly, with only detached family houses lagging behind with growth of just 3.5%. Relative to the major cities, price growth in Hamburg was in The introduction of a cap on rent increases in 15 is not enough to explain line with the average in 1, as it has been for the cycle as a whole. Prices this trend, as rent growth was already slowing before this. It is rather the for existing housing stock in Hamburg have risen by around 7% since 9, case that Hamburg has the lowest population growth of the major German which is the same as the average for all major cities. cities, and so there is less pressure on demand. 33

34 In addition, the number of building permits issued has increased sharply since All this suggests that low interest rates are the main reason why property 1, and one year later the number of completions doubled, while at the prices are increasing in Hamburg and, as such, that Hamburg could have a same time rent growth has slowed substantially. Because of the lower level relatively high level of sensitivity to any future normalization of interest of excess demand, the vacancy rate fell only marginally, albeit from an rates. However, despite the recent hike in US interest rates, the ongoing already low level, and now stands at.% (1 14:.7%) which expansionary monetary policy of the ECB means that rate rises in the is unusual for a major German city in the current cycle. Eurozone are still probably a long way off. Lastly, there is a general tendency for Hamburg s landlords to be slightly Relatively high vacancy rate in Düsseldorf more reluctant in putting up rents. In the boom cycle of 199 to 1994, rent In Düsseldorf, the population has gone up by only around 5% since 9, with growth in Hamburg was below average at 3.5% per year compared with % the number of households increasing at an even slower rate. Other drivers of across the other major German cities. In 199, average rents in Hamburg, at demand in Düsseldorf have also underperformed the average of the other EUR.5 per square meter, were the second highest among German cities major German cities for example job growth (9 1: 1.5%; major after Munich. Currently, rents in Hamburg are a little over EUR 1 per square German cities: 15%). The unemployment rate, at 8%, is around half a meter, which puts it in 7th place overall. If this long-term underperformance percentage point higher than the average for the other cities. Based on these continues in the coming years, rents in Hamburg could be outstripped by strong but not particularly buoyant conditions, the vacancy rate is probably those in many smaller cities such as Constance, Heidelberg, Ingolstadt, well over 1% at present. (In its most recent property market report the City Tübingen, Darmstadt and Freiburg all in southern Germany. of Düsseldorf put its vacancy rate for 14 at 3.%). The City of Hamburg s population projection, which anticipates only a small Building activity has been modest in recent years, which tallies with the increase of 35, people by 3, also leads us to expect that rent rises will remain low. There is also likely to be less demand-side pressure than in other cities. relatively high vacancy rate. In contrast with the other major cities, the number of homes approved for construction did not exceed 1% of the existing stock in any one year. 34

35 It therefore comes as no surprise that building permits and completions fell under.%, likely to lead to further price increases for many years to come. sharply in 15, each dropping by 5% on the prior year. Because of the Further price hikes are also expected in Berlin, although the main factors at slowdown in construction activity, both price and rent levels and price and play here are the very buoyant labor market and the fact that prices and rent growth tended to be in line with or below the average across the other rents are still relatively low for a European capital city. Of the German cities cities. Property prices in Düsseldorf rose by 5% from 9 to 1 (other that were analyzed for this report, Frankfurt has shown the lowest increase major German cities: 78%), while rents went up by around 33% (other major in prices in the current cycle. However, we are now seeing a Brexit effect, German cities: 33%). which is driving up prices for family homes in particular. Frankfurt, like the other cities, has high excess demand, which suggests that prices will According to a projection by NRW-Bank, the number of households in the city continue to rise in the coming years. will increase from today s level of around 33, to approximately 38, by 4, an increase of 5,. Because of the relatively high vacancy rate, Sluggish rent growth and a high level of construction activity are the most this higher level of demand looks likely, at least in the coming years, to striking trends in Hamburg, which could make the city more sensitive to result in fewer shortages and less price pressure than in other cities. This interest rate movements than other urban centers. The situation is similar in slightly less pronounced growth in demand could make Düsseldorf s housing Düsseldorf, where the vacancy rate in the current cycle is relatively high for market even more sensitive to interest rate movements than Hamburg. a German city, which is why building activity could be particularly muted However, until an interest rate turnaround actually occurs, prices and rents there. For all the cities analyzed here we anticipate further price increases in Düsseldorf too are likely to demonstrate further potential for increase in the coming years that will only come to an end if: over the coming years. 1. supply is massively expanded and vacancies start to emerge. We appear to Summary and outlook for the German housing market Munich remains the most dynamic German city when it comes to property, be a number of years away from this. And so the housing deficit will probably increase further in 17, despite the anticipated increase in building activity. with its fast-rising population and historically low vacancy rate, estimated at 35

36 . there are significant hikes in interest rates. Note that in December 1 the ECB extended its expansionary monetary policy to at least the end of demand for housing falls, for example because economic migration to Germany comes to an end and/or the macroeconomic imbalances in the Eurozone are eradicated. However, the election calendar for 17 points to further political difficulties in Europe. In many southern European countries, hardly any progress has so far been made with urgently needed reforms. 4. prices increase to such an extent that the decision as to whether to renter buy will begin to fall in favor of renting again. In 1, however, rents went up by 4.8%, which was the highest year-on-year increase for years. Because of the housing shortage it is likely regardless of political efforts to regulate rents that rent growth will remain high in 17. In conclusion, all four conditions that would signal an end to the cycle are not yet fulfilled and it is likely to be several years before they materialize. In Average rents on county-level for Germany (15-8 to 1-). (No 17, we therefore expect rents and property prices in the major German differentiation of existing and new properties; Social housing, flat-sharing cities, and across the country as a whole, to rise substantially once again. communities and temporary living excluded.) 3

37 Baden-Württemberg Market Area The state of Baden-Württemberg is comprised of about 35,751 square kilometers of land area and boarders France to its southwest, Switzerland and Austria to its south, situated west of Munich (München) and south of Frankfurt. The population as of December 31, 15 was estimated at about 1,879,18. as indicated in the graph below provided by the Statistisches Neckarsulm Bundesamt Deutschland, the population has experienced steady growth since The capital is Stuttgart. Neckarsulm is located within the circle market area of Heilbronn at its northeasterly area. In the following pages, an overview and competitive analysis of the market areas that influence Neckarslum are presented. As indicated by the previous market analysis of 17 cities, Heilbronn is rated at under-valued concerning residential real estate. 37

38 Baden-Wuettenmeberg State Indicator Map Nearest Large City of Greatest Influence on the Neckarsulm Market Neckarsulm is about 45 minute drive on the A81 north of Stuttgart. Because of the influence of Stuttgart on the economy of Neckarsulm the following overview of the Stuttgart housing market as of 15 based on most recent data available is presented. Neckarsulm Stuttgart Housing Market Overview Stuttgart is the seat of the state government and the parliament, and thus the political center of Baden-Württemberg. With a population of 1,441 (end of 14), Stuttgart is characterized by its topography like almost no other city. Its altitude ranges from 7 meters at the Neckar lock at Hofen to 549 meters at the top of the Bernhartshöhe. To overcome this height difference, there are more than 4 Stäffele, as the sets of steps are affectionately called. The core city itself is located in the Stuttgarter Kessel, the basin of Stuttgart, which limits the availability of building land in terms of area, as well as ventilation. Industry Stuttgart s economic strength is based on its wide variety of sectors, strong exports, an impressive service industry and innovation. The city is best known as a center of excellence for transport. Gottlieb Daimler invented the first motor-driven vehicle here in

39 Today, Daimler employs nearly 18, personnel at its Stuttgart location. Although Stuttgart is the core city of the region, it competes for residents, Major companies in the automotive parts industry, led by Robert Bosch, work businesses and workers at regional level with a total of 14 medium-sized in close cooperation with educational, scientific and research institutions in centers. The polycentricity of the region is not due to the suburban the area. However, the city is also one of the primary locations in the densification processes of recent times but is rooted in historical traditions. European aerospace industry. Around 8 per cent of aerospace engineers in Despite heavy destruction during the Second World War, Stuttgart s city Germany are educated at the University of Stuttgart. The European center of center boasts numerous historic buildings such as the Altes Schloss and Neues excellence for mechanical and electrical engineering manufactures state-of- Schloss, the Königsbau, and the market hall, all of which were faithfully the-art products in the areas of machine tools, industrial lasers, high- reconstructed after the war. The Green U in the city center is a range of performance electronics, medical technology, and environmental technology. parks extending up to the Killesberg. Even though iconic districts and a Stuttgart is also an important German financial center with the second bustling club scene are normally associated with Berlin, these can also be largest stock exchange in the country. The research infrastructure of the found in Swabian Stuttgart, such as the quarter around Hans-im-Glück- state capital enjoys a leading position nationwide, particularly in the areas Brunnen or the western part of Stuttgart. of basic and applied research. Around 45 per cent of the research and development capacity of the State of Baden-Württemberg is clustered here. It is little wonder, then, that population figures have been on the rise for Seven public and a range of private universities are a rich source of highly years, including an impressive 3. per cent increase from the end of 11 to skilled workers. the end of 14. The cyclical high demand for labor in the Stuttgart region and the economic and social situation specifically in southeastern Europe The city is a highly dynamic business location and requires an educated have resulted in continued net migration from abroad. Accordingly, the workforce. Insofar as demand cannot be covered by the domestic workforce, proportion of under-3s in Stuttgart is above-average by nationwide recruitment of foreign workers is set to continue. At the end of 14, the comparison at around one third. Conversely, the proportion of over-s is proportion of foreign residents stood at almost 4 per cent. relatively low at less than a quarter of the population. 39

40 Households Growth Germany, is the Stuttgart 1 program. In addition to the re-organization of Forecasts predict that the Stuttgart population will grow by 4.5 per cent the Stuttgart rail node, the project will create a vast tract of land for the between 1 and 3, while the number of households is set to increase by development of several thousand of new apartments in the Stuttgart basin, a as much as 8. per cent. City authorities are addressing future housing needs place of special significance for the city in terms of urban development. The by targeting 1,8 new residential units per annum, of which units will promotion of social housing will be fostered by way of the city development be subsidized housing. The total of almost 1,7 housing completions in 14 model Stuttgarter Innenentwicklungsmodell (SIM). This provides for (in new residential and non-residential buildings including residential homes) percent of the floor area of newly built residential buildings to be allocated fell just short of this target. The active market vacancy rate in apartment to subsidized housing. In addition, urban sites are to be tendered buildings now stands at 1. percent (14). Due to the constant high demand greater emphasis on the conceptual tender process. This will assign a for housing, the trend towards urban living, and the fact that the per capita weighting of 3 per cent to the purchase price and 7 per cent to the living space consumption has been on the increase for years, there is concept quality. The Mietpreisbremse (capping of rents on re-letting) was currently significant surplus demand in certain sub-segments of the housing also introduced for new lettings of existing apartments in Stuttgart on 1 market. November 15. Affordable housing in central locations is increasingly under pressure. The median exclusive asking rent in the Baden-Württemberg state capital Furthermore, there is a shortage of smaller apartments. Despite the primacy rose from 1.47 per square meter in 14 to 1.91 in 15. The most of internal development, the Wohnen in Stuttgart (Living in Stuttgart) expensive asking rent of per square meter was witnessed in the area concept was formulated to provide a quantitatively and qualitatively comprising Am Bismarckturm, Lenzhalde, An der Burg, and Killesberg. The adequate housing supply, which entails the right to develop waste and area is located halfway up a hillside with views across the city and conversion land as well as increasing density in existing quarters. The most predominantly small-scale development and is regarded as one of the finest extensive development project of the city, which is well-known throughout residential areas of the city. with 4

41 Stuttgart s largest development area, the Killesberghöhe, is also located here Rental Market on the site of a former exhibition center. Indeed, several hundred rental In Germany, many houses are purchased by investors to be held as long-term apartments and condominiums have already been completed here in recent investments and rented. Owners are often interested in earning wealth years. However, the supply of rental apartments in the area in 15 was through appreciation over capitalization of payments value. The appreciation somewhat limited on the whole. of houses and apartments in Germany has been rapid over the most recent 5years due to lack of supply. Land is scarce for development as it is held Stuttgart For Sale Prices M² and Per Square Foot mostly by municipalities which offer land for sale in rare instances. highdensity development is promoted thus the reasoning for multi-story Einfamilienhaus Wohnfläche Single-Family Houses Living Area Location Kaufpreis Zimmers Badzimmer Land Area M² Square Feet (SF) 7599 Stuttgart-Schönberg 53,73 1,98, Asking Price Per M² 719 Stuttgart 1 1, Stuttgart 11 1, Stuttgart 193, Stuttgart 135 1, Stuttgart 13 1, Stuttgart Stuttgart Stuttgart 151 Etagenanzahl Bed Garage No. Buyer Year Energy Eff. Rooms M² Floors Commission Built Class 18 % 195 C PSF M² Rooms 5, ,49, 9, % 195 5, 4, % 1933 F 85, 4, % 1935 N/A 1,741,5 1,9 1, % N/A B 3, Carport 3 % N/A D,14 848, 4, Outdoor 4.7% 198 C 1,58 1,5, 8, Outdoor % 17 B 1,5 9, 4, Outdoor 4.7% 1988 B B 15 1,15 93,, % 199/ ,7 1,8,5, % 194 Maximum 53,73 1,741,5 1,9 1, % 17 Minimum 11 1, % Stuttgart Mean 485, 3,5 331 an analysis of per square meter (m²) analysis is made for average sale price D 485, apartment buildings where land density is increased. In the following data, to average rental rate to estimate capitalization rates. Operating expenses include maintenance, taxes, utilities and management. As indicated in the preceding table the asking price range M² is from about In 17 of the 1 districts in Stuttgart studied, the median exclusive asking rent in 15 was at least 1 per square meter. In 1, this was only true of 1 districts. Affordable apartments were available at the northern city limits. 3,5 to 1,9 whereas the mean is about,35. On a per square foot In the area comprising Zazenhausen, Freiberg, Rot, Mühlhausen, Mönchfeld, basis the range is from about 331 to 1,198. Larger lot sizes and increased Hofen, and Steinhaldenfeld, which are dominated by both multi-story and energy efficiency indicated increased prices per square meter. The newest home was built in 17, no garage, one bedroom. four rooms, no garage, about m² of lot area indicated a rate of 818 m², or about 8.% of the maximum asking price per square meter. fragmented development and less exclusive housing, the median asking rent in 15 stood at 9.5 per square meter. With an average of 9.7 per square meter, asking rents in Weilimdorf, Bergheim, Hausen, and Giebel were also below the citywide average in

42 Key Figures for the Stuttgart Apartment Market Stuttgart Rental Market Map KEY FIGURES FOR THE HOUSING MARKET Stuttgart Baden-WürttemGermany Average asking rent 15 in /m²/month Average size of apartments on offer 15 in m² Vacancy rate in apartment buildings 14 in % Newly finished apartmen 1) per 1, residents 14 Of which are in apartment buildings ) Sources for graphics and tables: CBRE based on data from empirica-systeme, CBRE-empirica vacancy index, State Statistical Offices, Municipal Statistical Offices, Federal Statistical Office, Federal Institute for Research on Building, Urban Affairs, and Spatial Development (BBSR), Michael Bauer Research, Federal Employment Agency ASKING RENTS IN STUTTGART 15 & CAPITALIZATION RATE ANALYSIS City area Number of Apartment size, rental offers average in m² Median rent excl. ties, in /m²/month [1] Am Bismarckturm, Lenzhalde, An der Burg, Killesberg [] Auf der Prag, Weißenhof [3] Berg, Stöckach, Ostheim, Uhlandshöhe, East, Gablenberg [4] Botnang [5] Degerloch, Sonnenberg, Hoffeld, Haigst [] Feuerbach, Hohe Warte [7] Hasenberg, Rotebühl, Heslach [8] Heusteigviertel (North), Oberer Schlossgarten, Dobel, Diemershalde [9] Heusteigviertel (South), Lehen, Weinsteige [1] Mitte, City Hall, Karlshöhe [11] Möhringen, Sternhäule, Fasanenhof East [1] Münster, Hallschlag, Burgholzhof, Birkenäcker, Altenburg [13] Neue Vorstadt, Relenberg, Rosenberg, Feuersee [14] Plieningen, Birkach, Steckfeld, Schönb., Sillenb., Heumaden, [15] Stammheim, Zuffenhausen, Neuwirtshaus 9. [1] Untertürkh., Wangen, Uhlbach, Obertürkh., Hedelfingen, Rohracker [17] Vaihingen, Heerstraße, Höhenrand, Dachswald, Kaltental, [18] Veielbrunnen, Kurpark, Winterhalde, Im Geiger, Espan, Sommerrain [19] Wallgraben, Dürrlewang, Rohr, Fasanenhof [] Weilimdorf, Bergheim, Hausen, Giebel [1] Zazenh., Freiberg, Rot, Mühlh., Mönchfeld, Hofen, , Stuttgart average Riedenb. Büsnau Steinhaldenfeld utili Market Capitalization Rate Analysis 87 Rental Rate Mean 9,88 Annual Expenses %,519,5 481, 7,19 NOI Mean Price M² Capitalization Rate 1.49% 4

43 Heilbronn, Germany Market Overview Heilbronn Area Asking Prices Heilbronn is a city in northern Baden-Württemberg, Germany. It is Research indicated the following current asking prices for single-family surrounded by Heilbronn County and, with approximately 13,4 residents residential houses in the area of Heilbronn. as of December 31, 1 increasing by 1.3% since 14 population of 119,841 according to the German Federal Statistical Office, it is the sixth-largest city Heilbronn Einfamilienhaus Wohnfläche Single-Family Houses in the state. The city on the Neckar is a former Imperial Free City and is the seat of Heilbronn County. Heilbronn is also the economic center of the Heilbronn-Franken region that includes most of northeast Baden- Württemberg. Heilbronn is known for its wine industry and is nicknamed Käthchenstadt, after Heinrich von Kleist's Das Käthchen von Heilbronn. Kaufpreis Zimmers Badzimmer Living Area Land Area Garage No. Buyer Year Energy Eff. M² Floors Commission Built Class 3 N/A % 17 A % 17 A % 17 A+ 4, % 17 A+ 88,1 5, % 17 A+ 75, 4, % 17 A+ 1, , 3, Outdoor % 17 18, 544,, % 17 A ,41 47, 3, % 17 A ,41 441, 3, % 17 A+ M² Square Feet (SF) PSF M² 7478 Heilbronn / Neckargartach 131 1,41 41, 3, Böckingen 4,19 75,3 3, Böckingen 143 1,539 98, 4, Böckingen 173 1,8 74,9 748 Böckingen 133 1, Böckingen 17 1, Heilbronn/Frankenbach Heilbronn / Neckargartach 748 Heilbronn-Neckargartach 748 Heilbronn-Neckargartach Etagenanzahl Bed Rooms Location Asking Price Per M² Rooms ,99,41 3, % 17 Maximum 4,19 75,3 5, % 17 Minimum 131 1,41 41,, % 17 Mean A+ Heilbronn shares a border with the following cities and towns, all part of Heilbronn County and listed here clockwise from the North: Bad Wimpfen, The Heilbronn market area indicated several new homes available that are Neckarsulm, Erlenbach, Weinsberg, Lehrensteinsfeld, Untergruppenbach, under construction to be delivered in 17. New construction energy Flein, Talheim, Lauffen am Neckar, Nordheim, Leingarten, Schwaigern, efficient two-story homes on smaller lots are the best concerning comparable Massenbachhausen and Bad Rappenau. The economy of Heilbronn is based on data. its being the hub of the Heilbronn-Franken region and of services for the them less comparable to the subject project. However, the two comparables region. Heilbronn is the second largest city of the European Metropolitan located in postal code 748 Heilbroon-Neckargartach are on smaller lots of Region Stuttgart. Principal industries: health care services, food and luxury 3M² similar to the subject indicating a per square meter asking price from foods, services to business, financial services, mechanical engineering and about 3, to 3,3. All of the comparables presented are of A+ energy tool manufacturing, automotive industry, electronics, paper and printing, efficientcy. The M² range for this market is from about,95 to 5,174. Several the sales had larger lots as much as 1,4M² which makes and salt mining. 43

44 Neckarsulm, Germany Market Overview Neckarsulm Area Asking Prices Neckarsulm is located about 4 to 45 minute driving time north of Stuttgart Research indicated four current asking prices for single-family residential (7 kilometers/44.7 miles). As indicated in the market overview houses in the area of Neckarsulm. Germany and its primary markets, rural markets are experiencing for economic Neckarsulm Einfamilienhaus opportunities related to pricing and demand because of the lack or housing or affordable housing in densely populated areas. As populations have been increasing, interest rates remaining low and unemployment rates low, Commuting to outlying areas that have highway access has been beneficial to residential real estate owners in rural areas over the past few years. Although threats as identified do exists, the smaller developers suffer less risks due to quick sell out periods. Larger developments are open to greater risks, due to a potential bubble in that has been anticipated by many industry analysts concerning the Germany market area. Kaufpreis Zimmers Badzimmer Living Area Land Area Location M² Square Feet (SF) Asking Price 7417 Neckarsulm 85 3,8 785, 1 1,9 7, 1,798 58,4 3,943 4,5 55, 7417 Neckarsulm, Heilbronn 7417 Neckarsulm/Obereisesheim 7417 Neckarsulm 17 Per M²,754 5,583 PSF M² 5 7 Etagenanzahl Bed Garage No. Buyer Year Energy Eff. Rooms M² Floors Commission Built Class % 1 Rooms B % 1 B % 18 A+, % 191/1994 F 3.5,19 5,85 3, % 1 Maximum 85 3,8 785, 5, % 18 Minimum 1 1,9 55,, % 1 Mean demand for housing has placed pressure on both rents and sale prices. Wohnfläche Single-Family Houses Market Indicated Asking Prices M² New Construction Projects in Neckarsulm Da Capo 85N A limited number of houses for sale were found in the area of Neckarsulm. The best comparable data is postal code 7417, Neckarsulm/Obereisesheim which is an offering of new construction 1M² (1,798 square feet) two story The problem with the bubble theory is that job and population growth energy efficient houses on lots of about 511M² (5,5 square feet). The remain consistent and are expected to remain stable over the next few years. asking price for these houses is 58,4 or about 511M² ( 3 per square The subject project is the planned development and sell-out of six energy foot). These houses are offered as new construction having A+ energy rating efficient prefabricated single-family detached houses ranging in size from (energy efficient house KfW 55, final energy consumption kwh/(m²*a)), 1m² (1,91.7 square feet) to 15m² (1,14. square feet) of two story similar to the subject project houses as proposed in respect to size, location, design including an 18m² (193.7 square foot) an attached two car garage. style and appeal and energy efficiency. 44

45 7417, Neckarsulm/Obereisesheim Elevations & Floor Plans Postal Code 7417, Neckarsulm Market Trends Development of purchase prices for houses in Neckarsulm As indicated in the graph above, the asking price trend for 18M² houses have increased to over 58,4 nearing the 73, level, whereas 14M² to 18M² houses have also increase since September of 1 reaching the 55, range whereas small houses from 1M² to 14M² have experienced stable prices. The mean sale price in the Neckarsulm market area is about,94. The asking prices are based on an evaluation on the real estate portal offered and sought after houses. However, this analysis only presents the houses being offered, yet does indicate overall pricing trends which are stable to increasing. 45

46 Neckarsulm Area Asking Price Range estimated at about 513M² (5,5 square feet) based on three-1m² houses As indicated, newer more energy efficient houses in both nearby Stuttgart and three-15m² houses, including garage of 18M² (193.7 square feet), thus and Neckarsulm indicate greater asking prices than their older less energy the total house foot print area for all six houses is about 8.5% of the total efficient houses offered in the area. Four houses that bracket the size of the land area to be purchased. Including the aggregate patio/garden subject project s planned houses from 17M² to 85M² indicated asking about 5M² (538 square feet) total lot coverage is about 45.1%. Driveway prices from a Mean of about 5,85 whereas the Maximum was about areas are estimated to cover about 3M² per house, or about 33 square feet 785, and the Minimum at about 55,. The asking price range per M² was indicated as a mean of about 3,38, a Maximum of about 5,583 and a Minimum of about,73. The offerings for new construction indicated a M² price 3,943. area of per house, for a total of about 18M² or about 1,938 square feet making total lot area usage of about 993M² or about 55.1% of the total lot area. These dimensions are typical for small subdivisions like the subject project in Germany and in the Neckarsulm area, thus the total land contribution per house is estimated at about 3M² (3,9 square feet) of land usage making the house plans smaller as compared to comparable recent sales and asking Estimated Asking Prices for the Subject Project Houses price comparable data. The Company is to offer six prefabricated energy efficient houses for sale, comparable with 7417 Neckarsulm/Obereisesheim 17M² houses that are also new construction. The Company s houses are to 1 to 15M². There are six houses planned for the subject project. The subject project houses Neckarsulm Market Unmet Demand Analysis As presented on the following page, based on a population growth rate of 1.% per year, it is estimated that in 18, if no building takes place that the estimated market vacancy will fall to about.3%, from the estimated 3.3% are energy efficient (A+ rating) semi-detached two-story single-family residential units. The land area to be purchased is about 1,8M² (19,374.5 square feet/.447 Acres) whereas the foot prints of the six houses is for 17 and by 1, there will be a housing deficit in the Neckarsulm market area if population levels continue to increase and no construction takes place. 4

47 Postal Code 7417, Neckarsulm Housing Demand Analysis Neckarsulm Housing Historical and Forecasted Housing Demand Analysis Year Community Area Total Population Hectares Count Population Density EW/km Change Housing Units Change in Housing Number of Vacant Demanded Demand Housing Units Vacancy Land Value 5,494 7,41 N/A , %,494 7,4 -.% ,385 (7) 1.8% 7,494 7,17 -.3% ,351 (34) 54.1% 8,494,88-1.3% ,195 (15) % 9,494,41 -.7% ,11 (85) % 1,494, % ,5 (59) % 11,494 5, % , (445) % 1,494 5,754.9% , % 13,494 5,7.% , % 14,494 5,798.1% , % 15,494,34.% , % Forecasted "e" estimated "f" forecasted Vacancy 1e,494,57 1.% , % 17e,494,833 1.% , % 18f,494 7,11 1.% , % 19f,494 7,37 1.% , % f,494 7,4 1.% , % 1f,494 7,9 1.% ,9 1 (87) -.7% f,494 8,1 1.% , (14) -1.7% 3f,494 8,483 1.% , (343) -.% 4f,494 8,78 1.% ,7 19 (47) -3.% 5f,494 9,5 1.% ,7 131 (3) -4.% Population Growth % Estimate 1.% 47

48 Floor Plans for Subject Project Houses Upper Floor Plan (3+4 plan with garage) Ground Floor Plan (3+4 plan with garage) 48

49 Elevation Renderings for Subject Project Houses Ground Floor Plan (3+4 plan with garage) The patio/garden area per house is estimated at about 5M² (538 square feet). 49