Global Market Spotlight

MARKET SPOTLIGHT: BERLIN

Berlin is still the cheapest EU capital to live in, and it’s the number one investment destination for residential property in the EU. Yet the dynamics of German rental housing can make it uneconomical to build large rental properties, leading to a paradoxical situation where diversified economic growth, population increases, and rising household formation are not overheating the multifamily market. At the micro level, Berlin consists of 12 districts encompassing the city’s 190 postal codes. Each code is a town unto itself, with about 18,000 inhabitants. In the 1950s and 1960s, Germany’s federal states and large companies built volumes of basic, affordable housing owned by municipal associations and industrial groups. In keeping with German cultural and engineering practices, this housing was built to last; owner investments maintain a stock of high-quality affordable housing. In some areas, as much as 35 percent of multifamily housing units are in such buildings, says Michael Schlatterer, director and residential-valuation team leader at CBRE Berlin, providing a buffer that allows consistent but modest rent increases. “It’s a unique situation,” he says, “and the overall market is really functional.” Functional and dynamic; the purchasing power of residents in each district differs, resulting in micro-rental markets with varied pricing and standard dwelling sizes. Germany suffered recession and weak employment in the early 2000s, before labor reforms fired up the German export engine. Between 2002 and 2007, state-owned housing associations sold off older properties, often to Nordic, American, and British private investors. Following the crisis, rents began rising; as Germany’s role in the world and the EU grew, Berlin became a hot spot, and its residential real estate sector has developed into a scale industry where large government owners are now moving to create more lower-rent units through acquisitions and new building. At the same time, several large, private, integrated property ownership and management companies, such as LEG Immobilien AG, GAGFAH SA, and Deutsche Annington Immobilien SE, have emerged and listed on stock exchanges; those public shares are now the way that institutional investors are gaining indirect access to the German and Berlin residential sectors, says Schlatterer. Some of the government’s multifamily companies have also listed; GSW Immobilien AG, for example, was formerly a limited liability company owned by the municipality of Berlin. As large players rose, Real Capital Analytics data shows, private equity firms, family offices, and specialty developers sold a number of smaller projects in Berlin. Those developers include U.K.-based Benson Elliot; American firms Lincoln Equities Group and Strategic Value Partners; Swedish NCC AB, a Swedish construction company; and Sanus AG, a Berlin firm specialized in refurbishing pre–World War II buildings. Large, listed German residential real estate companies such as Deutsche Wohnen AG illustrate that the future for multifamily rental housing in Berlin will belong to a few players with large operating platforms. Deutsche Wohnen is virtually a pure play on Berlin’s residential market; following its merger last November with another public real estate company, GSW, Deutsche Wohnen owns nearly 150,000 units, with 72 percent of those in Berlin. Deutsche Wohnen says Berlin is one of the most attractive markets in Germany and projects rental growth of more than 5 percent over the next several years. But that won’t come easily. The six municipal housing associations in Berlin agreed with the Senate of Berlin in 2012 to limits rents—and thus rent increases—to 30 percent of net household income. That’s made the government the most important player in the Berlin residential market; the associations are buying and upgrading existing housing stock but also starting to build new units with the aim of increasing the supply of housing with “socially acceptable rents”—below 8 euros per square meter—about the average of what CBRE reports for Berlin in 2013. The “Big Six” own 15 percent of Berlin’s 1.9 million housing units, and because 86 percent of Berlin’s housing is rental units, their impact is significant. GESOBAU AG, for example, plans to build more than 1,000 new units in current designs by 2018 and as many as 2,000 more units in sustainable designs favored by Berlin’s housing policy. GEWOBAG—an association owned by the City of Berlin itself—brought 6,800 existing Berlin units under the rent-control umbrella since 2012 and plans to build another 2,300 units to raise its total inventory to 65,000. The upshot is that the cost of land and construction in Berlin is higher than the average rental rate for new lettings, so Berlin’s multifamily opportunity for private capital lies mainly in higher-end condominiums in the central city; about 80 percent of new construction in Berlin for several years has been condos, says Schlatterer. Berlin supply-demand data tells the story. Household formation in Berlin is expected to top 20,000 per year for several years. Builders can’t keep up. Only 4,180 of 7,600 planned rental units were delivered in 2012, and only 2,194 of those were in multifloor residential properties. Most of the 18,000 units on the drawing board for 2014 won’t be completed by 2018, says CBRE, and only 14 percent—2,520 units—are in multifamily format. While Germany’s historical market structure imposes clear constraints, large private equity players have found ways to participate. In early 2013, Deutsche Wohnen bought a 6,900-unit Berlin rental property from Blackstone Real Estate Partners Europe III in a cash-and-shares transaction that made Blackstone Funds a 5 percent owner of Deutsche Wohnen. Deutsche Wohnen’s CEO says in a press release that the deal was central to its plan to scale its Berlin platform—a strategy boosted by the GSW merger.

MARKET SPOTLIGHT: LONDON

Private investors in London face a very specific problem: building an operating platform. “London faces a chronic housing shortage,” says Graham Parry, Grosvenor’s head of research for Britain & Ireland. Rapid household formation in London has pushed up prices, leaving many first-time buyers unable to afford home ownership. Banks have tightened lending criteria and required larger down payments, blunting the impact of the “Help-to-Buy” program the U.K. government launched in 2013 to help boost the housing market. With those factors fueling a “sustained shift in preferences toward renting over buying by London’s relatively young professional population,” Parry says, “the opportunity exists for investors to partner with existing residential developers to deliver a new large-scale private rental development.” Enter the Dutch. Dutch pension fund manager APG Asset Management last December formed a 50-50 equity joint venture with U.K. property developer and management firm Delancey to acquire the Elephant & Castle Shopping Centre in South London. “Affordability of housing in London is an increasing concern,” says Delancey CEO Jamie Ritblat; the firm plans to build 600 rental units on the site. The project follows Delancey’s conversion of the London Olympics Athletes’ Village to more than 1,400 residential rental units, says Chris Lacey, executive director of Central London residential investment at CBRE, which introduced APG to Delancey. That project gave Delancey expertise in large-scale development and in on-site management and leasing, a rare skill set in London real estate. London’s multifamily market is 20 years behind the U.S. and Canada in terms of such integrated development experience, says Lacey. “The joint-venture platform between Delancey and APG is the first of its type to bring an experienced development firm together with a long-term pension fund in London,” he says. German banks participated in debt financing with equity from several U.S. and U.K. family offices, says Lacey. Data from Real Capital Analytics shows that most private capital deals in London’s apartment sector in the past two years have been small, with most involving no more than 200 units and many fewer than 100. American private equity firms Apollo Global Management and AREA Property Partners have been buyers in London, while Blackstone sold three properties. But the Elephant & Castle project opens a new chapter for London’s multifamily sector. Says Lacey: “The sites and opportunities exist, and there are potentially great returns to be had.”