Real estates, the euro and the question if
things will never be the same again


Actually there has been a plan to issue another information letter on real estates in mid September – but that came to nothing. The topicality of the events has made us wait and see in order to register what would come after the great catastrophe. For after all the equity markets have reacted so badly that it has turned into an actual economic crisis – but mind you, this crisis had already been smouldering before September 11th and has come to light fully only by these incidents.

By now people are talking of a recession which this country is sliding into in the next year, we hear of mass dismissals and recent vacancies on the office markets, which could result in a downtrend of the demand for rental flats.

Additionally, the euro is coming. A currency which we all have gotten used to by now, which doesn’t mean however that we are not sceptic of how stable the new currency will be compared to the dollar and yen, to Swiss francs and rouble.

Aside from the fact that the euro remains the biggest monetary experiment in history, one can definitely bear some positive expectations. The area of the euro is the second largest and economically the second biggest homogeneous consumption market in the world. The “euro countries” are all relatively stable democracies, despite different political characteristics and emphases. The currency authority of the countries is now administered by one central place – the European Central Bank, whereby the various euro countries may get into the act of this bank thoroughly. The time of the monetary loners is over. Together we are stronger, at least we hope so.

Let us also hope that the ones stable and autonomously acting German federal bank will bring its experience and be able to influence the monetary course of the European Central Bank accordingly. At least there are no indicators of turbulences when it comes to the euro – it did not come out unscathed, there are hardly any bigger fluctuations upwards or downwards to be expected, and the inflation rate in the euro area also keeps the set borderlines more or less (except for last year when the inflation got pushed up by the strongly increasing oil prices; the consumption prices are fairly stable in general).

But it hasn’t only been that way since September 11th. Yet a lot more expedient optimism used to be the order of the day before the fateful occurrence. Nobody seemed to really worry the warning bells of economy already ringing since long; at the most one got to hear the wedding bells ring from time to time, when there were rumours about two enterprises giving each other the word of consent to a fusion, or when one gulped the other without further ado.

In reality we probably stand in the middle of a more or less normal economy cycle. Time and time again the steep up is followed by the steep down; once the demand is serviced the consumption drops, the production numbers drop and thus dismissals and wage cutting become necessary. Today, in the era of global interdependence, this has a bigger effect than in past. Since it plays a much bigger role how the quarterly reports of the businesses founded on shares look like, on the side of the managers one has been trying to blandish the obvious slump.

Not anymore since September 11th. So at least that is not the way it used to be. All the same this historically fateful and tragic date has been a good reason for many to explain negative economic trends just now, which have already existed before. Nobody dares to dissent to this and nobody is really responsible for the tremendousness, the fateful occurrence.

What does all this have to do with real estate? Let us now come to the actual topic of our real estate letter and to the question: will the negative skeleton data of economy also have a negative effect upon the real estate market? Will also here be nothing the same again?

Let us, in order to answer this question, first of all take into consideration some utterly different data: first, the building industry. It moans loudest, for it is most affected by the economic developments. But it has already been this way since several years. Much less investors, less house constructors – which has mainly got to with the drastically decreasing tax advantages for real estate investments, the tightened tenant’s rights and several negative experiences, especially in the new federal states. Quite a few have made some thoroughly bad experiences, which scares others off to invest into real estate.

The private house constructor who, unlike the capital investor, does not want to save taxes but have his own house is also affected by this; after all the income limits for the house building subsidy have been cut ones again and also on the side of the credit service sector, giving out building credits is bound to more and more strict terms.

So we still have the situation that notably less new residential space has been created in the past years, than what our market actually needs. Just this week the Federal Statistical Office has pointed out that the population in our country has reached the highest ever of 82,2 million people. Also the number of households has increased, which is (based on Frankfurt’s newspaper of 23. November n2001) the decisive rate for the demand for private residential space. The average yearly need of newly built apartments per year sums up to 400.000 up to 420.000, while the number of completed apartments will only be around 340.000.

The quote of freehold flats increased by 3,2 per cent from 1993 to 2000 and lies at about 42 per cent in our country now; tendency increasing. Also the size of living space per capita is increasing up to more than 40m².

From all these skeleton data one can conclude offhand that there is still a shortage of residential space. Of course one needs to differentiate in which locations this is mostly the case: for instance, in congested areas and large cities, such as Berlin, Hamburg, Duesseldorf, Frankfurt and Munich, the demand for residential space is unbrokenly good because there are simply too little flats in relation to jobs. In Frankfurt for instance there are 560.000 jobs and a population figure of about 670.000.

As to Rhine-Main region, we can only confirm the non-stop demand from our own experience. Whereby we need to differentiate once more: no decline of ability to lease unfurnished apartments has been noted; yet the market of furnished apartments, which are mainly used by short-term tenants and weekend commuters, is affected.

Many banks and computer companies have been hiring thousands of staff, which mainly absorb the market of furnished apartments. That has decreased notably, whereby we presume that this trend is going to turn around again in February or March next year.

Even cities such as Offenbach or the surrounding communities are not affected by the downtrend of the economic situation as to the demand of rental space. In top locations of Frankfurt or Vordertaunus there are still top rents of 15,- euro per m² of living space (net rent, unfurnished, high quality equipment) being paid. Anyone knowing Frankfurt also knows that the market of rental apartments has hardly ever been affected by the ups and downs of the economic situation. The rents went up and up again; if they have paused going up now then that is just and equitable; for also rents cannot extend boundlessly. But they also don’t drop again! Perhaps there aren’t 50 or 100 potential buyers responding to an offered flat, perhaps there are just 20 or 25 – but even from this landlords can still choose a tenant with quite an ease.

So what is our conclusion?

Very simple: if someone wants to do something for his own asset value capacity he should invest in a residential property in one of the large cities or the surrounding communities. It doesn’t have to be the top location for the top price, but it must be a fairly good location if one wants to secure an enduring property value retention and appreciation. Otherwise one perils to fall victim to the economic downturns.

The fundamental advisement to this is very simple for the capital investor:

In which locations does one achieve high but long-lasting secured rents? This is neither the case in the upper price segment – i.e. in times of crisis the absolutely expensive apartments have to rather be vacant or need to be offered at a lower price; nor in the lower price level: for at this range everybody will end up who has lost his job and is now looking for an extremely inexpensive property.

What remains is the relatively secure scope of apartments in good locations for fair prices. This should be taken into consideration when purchasing. In order to fulfil the increasing demand for more square meter of living space per capita of population one should not choose the apartments that are too small for these demands. The recommended household space for one person is a 1-bedroom-kitchen-bath-balcony apartment with 45.60 m² of living space. For a two-people-household it is a 2-bedroom apartment with 65,95 m² of living space. However a 3-bedroom apartment with more than 100 m² of living space is a purchase of the upper price segment, and the whole purpose of which needs to be well thought out and calculated against acquiring a one- to two-bedroom apartment. Just in terms of the risk spreading, one often is on the safe side if one decides to take two apartments in two different locations.

One also needs to keep in mind that one must not let oneself be lured by alleged tax advantages. The danger for this to happen might be less today than it has ever been. But if someone, for instance, considers to buy a landmarked refurbishment property in cities in the new federal states in order to save taxes and wants to do so before the end of the year, he should have a precise look around and inspect both the macro and the micro location of his property. Furthermore he needs to bear in mind that today every property needs to be kept in existence if he wants to convert into cash a potential value appreciation, free of tax, by selling the property later (after 10 years).

This brings us to the next important subject: the property value retention as compared to the euro.

Whatever will happen to the euro: the property is definitely on the safe side. No matter what development the national currency has shown in past – the one who had freehold property was always on the winner’s side. The reason for this is a well known fact: property cannot be multiplied randomly. Building land is getting more and more expensive. Building is getting more and more expensive. No matter from which viewpoint one looks at it: having freehold property, one has asset value. And asset values are safe values to a large extent. Of course, also a real property has its risks. Just as a share, a property is not a savings account. And tenants are living and sometimes very peculiar beings. Allowedly, some of them make troubles sometimes. They don’t pay their rent or do so belated. For they all are people. And the lawmaker today, there is no doubt to this, is on the side of the tenant more than ever. This, by the way, is a reason why institutional investors – meaning the big investors on the real estate market such as insurances, funds and private large-scale investors – are more and more falling back on the commercial property. Yet again, the commercial property is more subject to the ups and downs of the economic situation.

The single investor who wants to obtain a property for additional income when he retires, as an investment with a secure value or as a capital investment obtained by outside finances is often better off with a residential property than with a commercial property, for latter one usually requires some more know how in regards to leasing and administration and so it often remains reserved to professional funds.

So one simply needs to be attentive when choosing one’s tenants and when creating the tenancy contract and needs to ask oneself the one important question already when purchasing the property: what tenants clientele do I want and in which city, region or city district do I find it? That is where one should then be looking for a suitable investment possibility.

If you would like to get competent advice from experts of Frankfurt and its vicinity you may contact us; we are virtually “home” here. In other regions of Germany we also have competent partners.

Regardless of September 11th, one thing remains the same: the real property. For man wants to have a space to live, a home – whether rented or freehold property – is always wanted, and most important: in our country there is still less residential space on the market than there is demand for it.


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