Zeitschrift für Immobilienökonomie Journal of Interdisciplinary Property Research Sonderausgabe 2009 Wirtschaftsfaktor Immobilien Die Immobilienmärkte aus gesamtwirtschaftlicher Perspektive Wissenschaftliche Bearbeitung Im Auftrag von GESELLSCHAFT FÜR IMMOBILIENWIRTSCHAFTLICHE FORSCHUNG E.V. Society of Property Researchers, Germany Unter Mitwirkung von
>> Geleitwort Preface Kristin Wellner Preface by the Editor The present study, published as a special issue of ZIÖ under the title Real Estate as an Economic Factor the Real Estate Markets Viewed as Part of the Overall Economy, means that ZIÖ is once again fulfilling its aim of making academically-relevant real estate economics topics accessible to practitioners. In the current financial crisis, the importance of the real estate sector to the overall economy is more apparent than ever. This importance is rationally analysed and clearly quantified in this special issue. The study deals with the companies, staff and turnover of the real estate sector as well as the contribution to gross added value made by the real estate industry. The reader will be provided with a suitable method for the (politico-)economic delimitation of real estate submarkets and the extent of the real estate stock and, derived from the national accounts (VGR), the assets tied up in real estate in Germany. The informative content is rounded-off by a presentation of the progression of real estate rents and purchase prices, together with a discussion of the associated problem of data collection. In an international comparison, the special features of the German market are highlighted, together with, inter alia, an explanation of why there can be no subprime market in Germany. The importance of the real estate industry is made particularly clear by the realisation that more than half of all German loans are secured on real estate. This allows a direct association between the financial and real estate industries to be derived. Although this cannot present a solution to the challenges of the present financial crisis, the overall economic links are clearly pointed out and quantified. This issue once again makes a major contribution to basic research into real estate economics and to the understanding and economic classification of the real estate industry. The present study was sponsored by the Society of Property Researchers, Germany (gif), the DV Deutscher Verband für Wohnungswesen, Städtebau und Raumordnung, the BSI Bundesvereinigung der Spitzenverbände der Immobilienwirtschaft (with BFW, GdW, Haus & Grund, IVD, BFW, DDIV, vdp and VGF), the ZIA Zentraler Immobilien Ausschuss and the BMVBS Federal Ministry of Transport, Building and Urban Affairs. Immoebs, the Forschungsverband für Immobilien-, Hypotheken- und Baurecht, and the DVP Deutscher Verband der Projektsteuerer also contributed to the financing. The study was carried out by the IW Cologne Insitute for Economic Reserach e. V. (Dr. Michael Voigtländer) and the ZEW Centre for European Economic Research GmbH (Dr. Peter Westerheide), in cooperation with the Chair of Economic Geography of the University of Mannheim (Prof. Dr. Paul Gans). The editor s thanks go to all those involved: the editors, the sponsors of the study and in particular to Hartmut Bulwien FRICS, as instigator and coordinator of this study. I hope that this special issue will once again find a wide and interested readership and consideration in the economy and by politicians. Prof. Dr. Kristin Wellner - Editor -
Abridged version I. The Real Estate Industry The real estate industry is one of the largest sectors of the German economy. In 2006, the real estate industry included 707,000 firms with 3.8 million employees. The turnover of the sector was 384 billion. This means that the real estate industry accounts for 22% of all companies, 10% of all employees and 8% of total turnover in the German federal economy. Included under the heading of the real estate industry are all firms involved in the planning, construction, funding and management of real estate. There are also other companies, from real estate advisors to cleaners, providing important services for the real estate industry. Those involved in management, administration and brokerage form the core of the real estate industry in a narrower sense. The construction industry, with 336,000 firms and 2.2 million workers, is the largest sector of the real estate industry. The real estate industry in the narrower sense includes about 250,000 firms with almost 380,000 employees. Its turnover was around 127 billion. Employment growth is particularly evident. Whereas the numbers of employees in industry and in the construction sector have been declining since the 1990s, employment in the real estate industry in the narrow sense grew by 81.5% between 1991 and 2006. This can largely be explained by the increasing outsourcing of real estate services. The major importance of the real estate industry is also clear in that, in Germany, around 55% of all loans are secured against real estate The total volume of lending for private real estate finance and for firms from the real estate industry in the narrow sense is almost 1.3 trillion. Real estate markets can be classified from different points of view, based on either property stock or activities. The first applies to the assets that the real estate markets create and manage, the second to the process of property construction, management and disposal, together with the associated activities. This paper covers both approaches, with particular attention paid to the major economic sectors with a high proportion of value added. II. The Stock of Real Estate The stock of buildings and sites is one of the decisive quantities in the determination of the importance of the real estate industry to the overall economy. The summary of the real estate markets and of the assets tied up in buildings and sites has been carried out using two different methods: Firstly, the figures for existing stock have been differentiated. Secondly, the amount of real estate or construction assets has been assessed on the basis of macroeconomic accounting (Figure 1). Both land and buildings come under the heading of real estate (Figure 2). Land can be classified as Rohbauland (unserviced land zoned for development), Bauerwartungsland (land with hope value for development), baureifes Land (land ripe for development) and developed sites. Buildings are subdivided into Hochbauten and Tiefbauten. Hochbauten (lit. buildings mainly above ground level) include both residential and non-residential buildings; the latter are generally referred to as commercial buildings in the industry. Residential buildings include all buildings in which at least half the total lettable area is used for residential purposes. The most important types of non-residential building include offices and administration buildings; warehouses; industrial and commercial buildings; as well as amenity buildings, including in particular buildings of direct public interest. These include buildings in the education and cultural sector; buildings used for health, social and transport purposes; those used for supply and waste 11
Figure 1: Summary of the methodology for determining real estate assets Assets: Buildings (from the national accounts) Real estate assets Real estate stock: buildings (from various statistics and own calculations) Real estate stock: sites (from estimates based on land use statistics and sale prices for land from the federal statistics office) Source: author s personal research, University of Mannheim Figure 2: Overview of Real Estate, Sites and Buildings Real estate Sites Buildings Rohbauland (unserviced land zoned for development) Bauerwartungsland (land with hope value) Land ripe for development Developed sites Residential Commercial Amenities Residential buildings Individual and duplex houses Apartment buildings Residential homes Hochbauten i.e. buildings above ground level Non-residential buildings Offices Logistics and warehouses Industrial and commercial buildings Tiefbauten i.e. buildings mainly below ground level Communications Utilities Transport infrastructure Sport complexes Amenity buildings Source: modified, based on Russig et al. 2005, University of Mannheim 12
disposal; and buildings used for leisure activities Tiefbauten (lit. buildings mainly below ground level, civil engineering works) include public and private infrastructure, e.g. for the provision of utility services including waste disposal, transport and telecommunications as well as sports complexes. Official statistics only partially document the stock of real estate. Comprehensive and geographically structured data is only available for apartments and residential buildings. For other types of buildings only building permits and completions are registered, not the current stock. No comprehensive data for industrial and commercial real estate, or the majority of special and amenity real estate, is available in the official statistics. The validity of the data is limited but not just in relation to these types of real estate. There are also considerable deficits concerning the supposedly well-documented residential stock, resulting for example from updating errors and distortionary methods of classification. This paper makes use of private databases, surveys, market reports, association statistics etc. in order, at least in part, to close the largest gaps in the data, where official sources are unable to deliver adequate or indeed any data, Sites According to the basic definition, real estate stock includes the sites on which structures or buildings have been erected. Between 1996 and 2006, the amount of Siedlungs- und Verkehrsfläche (lit. developed land and land for roads and services) that is relevant from the point of view of the real estate industry increased by 14%, largely at the expense of agricultural land. The increase in Siedlungs- und Verkehrsfläche can largely be attributed to land required for development purposes. There is a comparatively low rate of growth in the amount of commercial land, particularly for producing industry. As a result, the proportion of non-residential land is declining. In 2006, Siedlungs- und Verkehrsfläche of 4.64 million hectares accounted for about 13 % of the total land area in Germany. Housing and Residential Buildings Housing and residential buildings are a significant and relatively well-documented section of the real estate stock. At the end of 2007, around 82.21 million people were living in 39.9 million residential units, 52% of which were in apartment buildings and 46% in individual or duplex (horizontally-divided twofamily) houses. The remainder are residential units in non-residential buildings and residential homes. In the past, the housing stock has steadily increased (Figure 3). The number of residential units has increased by around 5.5 million since 1991. However, since 1997 development activity has declined considerably, particularly in eastern Germany. The focus of development activity has changed from multistorey apartment construction to individual and duplex (horizontally divided two-family) houses. The total area of residential accommodation has grown faster than the number of residential units. The average floor area per residential unit increased from 83 sq m in the mid-1990s to more than 86 sq m in 2007. Although the rate of annual increase in the east German federal states is greater than in the west, residential units in western Germany are still larger than those in the new federal states. The reduction of the size of households means that the amount of residential accommodation per person has considerably increased, rising to 42 sq m during the same period. Depending on the method of assessment use, the vacancy rate in Germany ranges between 4 and 8%. The highest figures are in the new federal states, the lowest in Hamburg. Vacancy rates in the east German federal states have fallen in the last few years, as a result of Rückbau (demolition) measures, whereas in the west they have remained almost constant. As no uniform definitions or methods are used in the collection of vacancy data, the vacancy rates reported by the different institutes and organisations vary appreciably from each other. 13
Figure 3: Changes in Population, Households, Residential Units and Residential Accommodation 1991-2007 (1991 = 100) Source: federal statistics office; University of Mannheim In 2008, 45.7% of private households in west Germany owned their own homes: in east Germany the figure was 32.5%. The proportion of private ownership has grown in both parts of the country over the years, although the growth rate in the new federal states is considerably greater than in the former federal area. Professional/commercial providers own almost a quarter (23.3 %) of the housing stock: 36.6 % of all residential units are owned by small, private landlords. Non-Residential Buildings and Amenities German official statistics provide only inadequate data on the stock, development and structure of space in non-residential buildings. Some of the missing data can be obtained from private sources. An estimation of office stock on the basis of space utilisation per employee determined a stock of more than 311 million sq m of office space (in terms of lettable area, using the MF-G standard) as at the end of 2007. This is equivalent to a gross external area of around 380 million sq m. Almost 24 million sq m of this is vacant. The average effective amount of space per office worker is 22.2 sq m (lettable area) or around 27 sq m GEA. Unfortunately, it is not possible to derive a time series. There has also been a steady increase in the amount of retail space during the last few decades. Between 2000 and 2008, the amount of sales space rose by about 1.5 million sq m per year, increasing from 109 to 120 million sq m. By European comparison, Germany has an above-average amount of retail space: more than 1.4 sq m per head of population. Real Estate Assets The presentation of real estate assets is based on the national accounts (VGR). At the beginning of 2008, the value of residential and non-residential buildings was stated to be 6.6 trillion. 59% of this was attributed to residential buildings and 41% to commercial and amenity buildings. Developed land is left out of account as non-productive assets in the national accounts. This value can be derived from official statistics, using sale prices for development land, at just under 2.4 trillion. Of 14
this total real estate value, 2.1 trillion Euro is attributed to buildings and open space, of which 74.5% is the land element of residential developments and 25.5% the developed land for non-residential developments. The total value of real estate assets, including both land and buildings, was almost 9 trillion at the beginning of 2008. III. The Contribution of the Real Estate Industry to Value Creation and Employment In the assessment of overall economic significance, the value added by a sector is important. In 2006, the real estate industry contributed 389 billion or 18.6% to the value creation in the whole economy 150 billion of this was attributable to the real estate industry in the narrow sense, with value creation being divided roughly equally between residential and commercial property. The construction industry contributed 80 billion and the real estate financiers 38 billion to the value created by the real estate industry. It is interesting to make a comparison with other sectors. Mechanical engineering and the motor industry, which are often the focus of political discussions, each created a considerably lower amount of value (74 billion and 81 billion respectively) than the real estate industry. Only the entire producing industry made a larger contribution (485 billion ) to gross value added than the real estate industry (Figure 4). Figure 4: Gross Value Added in 2006: Comparison of Sectors Source: Federal statistics office 2008o, IW Cologne 15
The number of people employed in the real estate industry is also considerably greater than in mechanical engineering and the motor industry. The fragmentation of the real estate industry is noteworthy: many firms turn over less than 250,000 p.a. Service Providers for Households and Firms A special feature of the German real estate market is its strong residential rental sector. More than 39 million people and around 57% of private households in Germany live in rented accommodation; more than in almost any other European country. About 30% of households with net monthly incomes exceeding 3,200 live in rented apartments, underlining the high level of acceptance of this market even by high-income social groups. Other major clients of the real estate industry are producing industry and wholesaling and retailing. Wholesale and retail alone contributed 28 billion to the real estate industry in the narrow sense in 2005. Overall, firms purchased services worth more than 100 billion from the real estate industry. Changes in the real estate market therefore do not just affect freeholders, but also a large proportion of households and firms. IV. Property Prices and Rents Information concerning the trend of property prices in Germany is provided both from the official side and by private suppliers. In comparison with other markets, non-official sources play a relatively large part, in the face of the limited availability of official statistics. Advances in the Measurement of Real Estate Prices Official statistics mainly serve to measure consumer prices. They still do not provide any property price indicators that could be used as benchmarks for the trend of prices in the German real estate market. Considerable advances in the measurement of real estate prices have been made by the new official indices for property prices and existing property, oriented towards general market indicators. This trend should continue, supported by corresponding EU requirements. The inadequate utilisation of the real estate price information provided by the Gutachterausschüsse für Grundstückswerte (local valuation panels), particularly in Bavaria and Baden Württemberg, has so far been an obstacle to the improved derivation of real estate price statistics. There is considerable potential for the standardisation of this information and its full inclusion in official statistics at federal level. Recently - and also due to corresponding requirements in the inheritance tax reform law - increased efforts had been made towards national cooperation between local valuation panels and the unification of survey and processing standards. This process, which is welcomed, should be intensified. The provision of both official and non-official statistics is currently being expanded. In particular, hedonic price indices, which allow a higher level of quality than the traditional indices, are being developed. Movements of Real Estate Prices and Rents The long-established BulwienGesa-Index für Wohnimmobilien (residential property index), which is calculated as the arithmetic mean of individual price and rental indices, shows that prices are cyclical. The data, which are also used by the Deutsche Bundesbank, show that there was a cycle that continued to the middle of the 1980s and a second cycle up to the late 1990s. Since then, although the cyclicality of prices has been much more subdued, an additional, less distinct cycle up to about 2003 can be recognised (Figure 5). 16
Figure 5: BulwienGesa Residential Property Index and Consumer Prices 1975 to 2008 (rate of change and index 1975 = 100) Source: BulwienGesa AG, Datastream/Deutsche Bundesbank, ZEW calculations. To 1989 West Germany, afterwards all Germany In the shorter period from 1991 to 2008, assessed on a wider basis of 125 towns and cities for all Germany, real estate prices have increased only slightly. Condominium apartments have increased in value by 8.8% (new build) to 11.3% (resales), while terraced houses have increased by between 10.1% (new build) and 17.9% (resales). Rents for new apartments have increased only moderately in this period. The increase, 12.7%, is considerably less than the general inflation rate. Rents for apartments being relet have increased by almost 44%, roughly in line with the consumer price index. At the moment, private households are paying about a quarter of their disposable income for rent and ancillary charges (excluding heating). If heating costs are included it is as much as 30%. However, there is considerable variation, both between different towns and cities and between different districts of individual towns. Total rental costs have been driven by ancillary charges (see Figure 6): Both non-heatingrelated ancillary costs and expenditure on heating and hot water have increased considerably faster than either base rents or consumer prices. Since 1991, household energy prices have almost doubled (up 94%). On the German office market, the average market rental value, based on 125 towns and cities, actually fell by 23% between 1991 and 2008. The trend of rental values was distinctly cyclical. In the period between 2005 and 2008, a gradual increase was identifiable in the central locations, although there were considerable regional variations. At the moment rents are stagnating or even slightly declining. In the retail sector, the trend of rental values is different depending on the category of location and situation. In prime (1a) locations, shop rents rose moderately (up 12%) between 1991 and 2008. The differences in individual towns are considerable. They have the widest ranges of any real estate prices. In most categories of location, rents in secondary locations have declined by more than 20%. Even in the major centres, the growth that resumed after 2004 has not been able to compensate for the previous declines. 17
Figure 6: Base Rents and Ancillary Costs: Comparison with the CPI 1995 to 2008 (1995 = 100) Source: Federal statistics office (Genesis database), ZEW calculations. VPI = consumer price index for Germany VPI = consumer price index V. The German Real Estate Market in International Comparison No German Sub-Prime Market Germany not only has a very large residential letting market but also, in particular, a well-functioning private housing market. Whereas, in e.g. the Netherlands or the UK the majority of rented apartments are publicly owned and are let as social housing, in Germany most are privately-rented apartments that are also attractive for middle-class households. This makes a considerable contribution to the stability of the real estate market. Unlike the UK or the USA, therefore, there is no sub-prime market in Germany. This is due much more to lack of demand than to shortage of supply. After all, households with credit problems do not need to get involved in expensive loans if the residential letting market offers attractive alternatives to home purchase. High Level of Stability of the German Market Price cycles are typical of real estate markets. As a result, phases with high growth are often followed by phases of declining prices. Compared with international price cycles, the German property cycle is rather flat. This is demonstrated in particular by the low volatility of residential property prices. Prices in Germany fluctuate only half as much as those in the Netherlands, the UK or Spain. The German commercial property markets are also considerably more stable than those in other European countries. It is noteworthy that real estate prices in Germany have sometimes moved in the opposite direction to the international trend. 18
...due to the German Property Finance System The German real estate Finance System is fundamental as an explanation of the high stability of the German market. The predominance of fixed interest rates ensures that real estate prices react less to short-term interest rate changes. In the UK, house prices fall by 6.4% within two years of interest rates rising by one percentage point. In contrast, in Germany they fall by only 0.2%. Also, it is typical both for firms and for households to contribute adequate equity capital. On average, residential property in Germany is financed with 27% equity. In addition, in Germany financing is based on the Beleihungswert (mortgage lending value), which is pitched so that the market value does not fall below it, even in downturn phases. Excessive debts are therefore less likely. The German real estate finance system is also characterised by the Pfandbrief (mortgage bond), by which almost a fifth of all mortgage loans are refinanced. The Pfandbrief is regarded as an extremely safe security, allowing advantageous refinancing terms. This is reflected in the conditions for property financing. Funds Dominate the Indirect Investment Market The market for indirect real estate investments in Germany is dictated by the open- and closed-end real estate funds The assets of the open-ended public real estate funds and the special funds are almost 110 billion, those of the post-end funds are estimated to be more than 200 billion. As different as the two forms of investment may be, their common factor is that they are only of limited interest to foreign investors. This contrasts with real estate shares and in particular REITs, which are of interest to international institutional investors due to their transparency and the liquidity of the market. This market is still underdeveloped in Germany: an improvement in the market circumstances may present opportunities to bring further foreign investment to the domestic market. VI. Real Estate and Provision for Old Age Private, capital-based pensions and the associated wealth formation with real estate have considerably increased importance in the recent past, in the face of the deteriorating standard of the state pension schemes. Property ownership is very popular as a form of private investment. Based on the Deutsche Bundesbank comprehensive definition, about half of private assets comprise real estate. For today s generation of pensioners, property ownership is playing a much larger part than in the past. Almost a third (32.4 %) of property owners in west Germany are now more than 65 years old. In the new federal states, the proportion is somewhat lower: 26%. A comparison of the proportion of property ownership in different age brackets over time i.e. today s 65 to 80-year-olds with the same age group in 1991 - shows that property ownership has increased the most with older households, while it has actually declined somewhat with younger people (see Figure 7). Property ownership is not necessarily better than other forms of investment for pension provision. However, it eases the smoothing of housing consumption over the age cycle and shifts financial burdens to earlier phases of the cycle of working life. Property owners are distinguished by higher saving rates, so that, on average, they build up more financial assets than tenant households with similar incomes. The importance of private residential letting as a means of pension provision should also not be ignored. About a fifth of residential owner-occupiers also have incomes from property letting. However, more than 700,000 tenant households, the majority of them at or near to pension age, also receive income from rents. The Riester subsidy for owner-occupied residential property and the purchase of shares in housing co-operatives, which came into force retrospectively from the beginning of 2008 in replacement of the previous Eigenheimzulage (owner-occupier subsidy) can be taken up either in the savings phase before 19
acquiring owner occupied property or in the post-savings phase (repayment phase) The Bausparkassen (building societies) are also offering Riester-qualifying savings agreements, which include both the savings and repayment phases. By the end of 2008 around 40,000 contracts had been taken out. First indications are that this figure increased by a further 60,000 contracts in the first quarter of 2009. This is an indication of the wide acceptance of this complex instrument. So-called reverse mortgages offer an innovative possibility for raising an income from private real estate assets in old age. This model allows residential property owners to raise a mortgage on their property in old age and to draw a pension from it. Annuitising owner-occupied housing through reverse mortgages will also be possible in Germany in the future. The first offers are currently coming on to the market. Figure 7: Change in the Proportion of Owner Occupiers in west Germany* by Age Group 1991 2007 (percentage points) Source: SOEP, ZEW-calculations. Status owner v. tenant refers to the main residence, Age stated is for the head of the household, *incl. West Berlin. 20