Current Issues Berlin property market: Heavily mortgaging the future
Transcription
Current Issues Berlin property market: Heavily mortgaging the future
Economics International topics March 16, 2005 Current Issues Berlin property market: Heavily mortgaging the future Editor Hans-Joachim Frank +49 69 910-31879 hans-joachim.frank@db.com Technical Assistant Martina Ebling +49 69 910-31710 martina.ebling@db.com Deutsche Bank Research Frankfurt am Main Germany Internet: www.dbresearch.com E-mail: marketing.dbr@db.com Fax: +49 69 910-31877 Managing Director Norbert Walter • Since Germany’s reunification the economy in Berlin has underperformed. Indeed, in seven out of ten years economic output shrank. As a result, Berlin’s gross domestic product per head in 2004 fell short of the 1991 level. This year, too, real GDP growth is forecast at barely 0.5%. • This negative development is due largely to ongoing structural change. With important service clusters having established themselves elsewhere, employment growth can be generated (almost) only in new sectors (ICT technologies, media and biotechnology). • The medium to long-range prospects are brighter, bolstered by the extremely good education and research infrastructure and the city’s open society. This attracts young, creative people, facilitating the settlement of new branches of industry. • The office markets have disappointed many investors in recent years. Although the supply of space has not been boosted so strongly in the new millennium as in the 1990s, sluggish demand has made even this moderate increase too steep. As a result, one in every ten offices is currently unlet. We expect vacancy rates to ease only moderately up to 2009 and rents to tick up only slowly as from 2006. At the end of this decade prime rents will be about 10% above their present level. • Retail turnover in Berlin dropped in 2004 for the fourth consecutive year. As purchasing power sagged, retail space was expanded, driving down productivity per unit area appreciably and putting severe pressure on retail rents. Meanwhile rents are falling not only in peripheral areas; prices are also being marked down significantly in 1a locations. However, the most swingeing adjustments are presumably over. • Rents and prices for residential property have been declining for years, due in the main to a massive increase in the supply of multifamily dwellings. Although rents are currently below levels in other west German cities, basically this is in line with the differences in disposable incomes. Consequently, the coming years are not likely to bring marked changes in prices, neither upwards nor downwards. • Berlin is turning into a major tourist attraction: In 2004 alone the number of roomnights soared by around 16%. However, given the strong expansion in capacities at the top hotels in particular, this segment could be up for consolidation. Authors: Tobias Just, DB Research, +49 69 910-31876 (tobias.just@db.com) Guido Spars, Technische Universität Berlin, +49 30 3142-8087 (spars@gp.tu-berlin.de) Current Issues 2 Economics March 16, 2005 March 16, 2005 Current Issues 1. Macroeconomic environment The global economy expanded by around 4% in 2004 after adjustment for inflation, its strongest performance since 2000. This positive trend was down to the Asian economies and the United States. The US economy turned in growth of about 4.5% in 2004, with a stimulating policy mix bringing recession to a swift end and ushering in a speedy return to high rates of expansion. Massive tax refunds and favourable refinancing possibilities on the housing market stemming from extremely low interest rates encouraged private consumption. Strong domestic demand, coupled with corporate cost cutting, boosted profits, generating increased investment as a result. Fixed capital expenditure in 2004 jumped by double digit figures in the US. The labour market also picked up in the course of last year, with over 1.7% more people in work in January 2005 than in the same month of the previous year. For 2005, though, the outlook for the US economy is not quite so rosy. Business expectations in industry sagged appreciably over the past year, although they continue to hold a high level. US GDP growth is expected to slow towards its potential rate (3.5% in real terms) as fiscal stimuli gradually peter out. Added to which, from the second half of 2005 interest rates should at least no longer exert an expansive effect (in spite of the rate hikes in 2004 by 125 bp, real short term rates are still negative at present). The benign development in the US, Asia and eastern Europe also spurred the German economy. After three years of sluggish performance, real GDP growth in 2004 matched its potential rate of around 1.6% again. This put the rate of expansion in Germany only marginally below the comparable euro area statistic. But unlike the US and Euroland, economic development in Germany has so far rested mainly on good export business. Private consumer spending is still not contributing to growth in the economy. However, a slight uptick in private consumption is to be expected for 2005. For one, the final stage of income tax reform will push up disposable incomes a little. For another, a huge backlog of demand has built up over the past three years as people have held back on purchases of consumer durables and motor cars. Given the still unsatisfactory situation on the jobs market, this will not be worked off speedily, but replacements for electrical household appliances and automobiles in particular cannot be postponed indefinitely. With a slight deterioration in export business this year, real GDP growth in Germany is forecast at only 1.3%. The German labour market continues to languish, a situation the reforms introduced so far have done little to remedy. In January 2005 5 million people were registered out of work, 3.3 million in the former West Germany and 1.7 million in the former East. This puts the unemployment rate in west Germany at 9.9% and in east Germany at 20.5%. Since the number of vacancies in both halves of the country also continued to fall, rapid improvement in the jobs market is not in sight. The mediocre growth outlook for 2005 will presumably not suffice to make any significant inroads into unemployment. The major risk factors in the coming months are depreciation of the USD versus the EUR and persistently high oil prices. Both factors are very probably here to stay: The US currency threatens to weaken further owing to the high US current account deficit, and the global terrorist threat will put a risk premium on oil prices in future, too. Business expectations in industry 120 70 2000=100 110 % 60 100 50 90 40 80 30 70 99 00 01 02 03 Germany (left) 04 05 USA (right) Sources: ifo, ISM Development in real GDP % yoy 6 5 US 4 Euroland 3 2 1 Germany 0 -1 96 97 98 99 00 01 02 03 04 05 06 Sources: National statistical offices, Deutsche Bank Main refinancing rates in the USA and Euroland Fed Funds Rate % 8 6 Refi rate 4 2 0 2000 2001 2002 2003 2004 2005 2006 Sources: Federeal Reserve, ECB, Deutsche Bank 2. Economic development in Berlin Fully fifteen years after reunification, the bonus to the city from its status as the German capital is still meagre in the extreme. Certainly, the removal of the government and many agencies from Bonn to Berlin has attracted many associations and interest groups in its wake. So far, Economics 3 Current Issues March 16, 2005 however, the pull has not been strong enough to place Berlin’s 1 economy on a sustainable footing. The decades in which the city was divided not only robbed its people of the freedom to choose where to live, they also caused entire industries to leave the city and form new business clusters in other West German cities (e.g. Frankfurt/Main as a banking centre, Munich as an insurance location and Hamburg as a media city). At the same time the city’s economic structure was artificially preserved during its “insular period” by regulatory measures, making severe economic adjustment processes inevitable in the aftermath of reunification. These processes are still ongoing. Population development Berlin is currently home to not quite 3.4 million people, almost as many as in Hamburg, Munich and Frankfurt/Main together. Berlin is therefore by far the biggest German city. The size of its resident population has been practically constant since the late 1990s. But this is still almost 100,000 people less than the 1993 peak. Almost one-third of the inhabitants are under 30, not quite half are between 30 and 60, and a good fifth are older than 60. The population structure is thus roughly on a par with the average for Germany as a whole. Given that the natural population balance, i.e. the difference between deaths and live births, has shown a clearly negative and comparatively stable tendency for years, the development in the city’s population is determined primarily by migration trends. In the early 1990s net immigration into the city was still markedly higher than the birth deficit. In the subsequent five years there were more departures, and the past few years have seen marginal net immigration of just enough to even out the birth deficit. But it is worth taking a closer look at the migration flows. On the one hand Berlin has been haemorrhaging residents to surrounding areas for years; but on the other the city benefits from net immigration from abroad and from the rest of the country. All in all, in the last 12 years Berlin has lost about 190,000 people net to its environs. At the same time a good 65,000 people have moved there from other parts of Germany and upwards of 155,000 from abroad. Although the number of residents in the city has been flat since 1998, the metropolitan region including the surrounding districts in Brandenburg is growing constantly. Within the city, too, considerable shifts have taken place since reunification. The outer parts of the city, mainly in the east where extensive urban development programmes have been carried out (e.g. Karow-Nord, Französisch-Buchholz and Altglienicke), are registering growth. The outer districts in the west have held their populations steady, while the downtown districts, most notably the densely populated settlements Hohenschönhausen, Marzahn and Hellersdorf in the east of Berlin, have suffered a very severe population drain. Exchange rate development 120 Jan 1999=100 110 Effective exchange rate of the EUR 100 90 80 USD/EUR 70 1999 2000 2001 2002 2003 2004 2005 NB: The effective exchange rate describes the development of the EUR against 42 trading currencies. Source: EZB Oil price per barrel 60 50 Oil price in EUR, real 40 30 20 Oil price in USD, nominal 10 0 00 01 02 03 04 05 NB: Real oil price deflated by EMU-CPI Sources: OECD, DB Research Population figure in Berlin flat m 3.6 3.5 3.4 3.3 Economic contraction in seven out of ten years 3.2 After adjustment for inflation Berlin generated GDP of less than EUR 21,000 per inhabitant in 2004. Both the level and dynamic of economic output are surprisingly low. Per capita GDP in the city is some 20% below the west German level. Indeed, in Hamburg the domestic product is almost twice as high as in the capital. Even graver is the lack 3.1 3.0 2.9 2.8 1980 1 4 Prognos AG estimates the economic impact of removal of the capital from Bonn to Berlin at almost EUR 11 bn in total over a period of ten years. Given GDP of around EUR 70 bn at present, Berlin’s heightened status as the German capital is thus by no means marginal; but it is not great enough to make up for the burdens of adjustment (see Prognos AG (2003), Bedeutung der Hauptstadtfunktion für die regionale Wirtschaftsentwicklung in Berlin, Project Number 09/02, Berlin). Economics 1985 1990 1995 Source: Federal Statistical Office 2000 2005 March 16, 2005 Current Issues of momentum: Whereas the level of prosperity in western Germany jumped between 1991 and 2004 by roughly 8.5%, soaring by no less than 70% in eastern Germany, the figure in Berlin fell below the 1991 level again for the first time in 2003. Up to 1994 Berlin’s economy felt the direct benefits of the reunification boom and the attendant removals and construction work. Subsequently, however, GDP shrank in seven out of ten years, chiefly as a reflection of the adjustment process in the east of the city. The construction industry has acted as a further drag in recent years, having expanded very strongly in the aftermath of reunification. Development of the government precinct and major traditional metropolitan centres that had been neglected while Berlin was a divided city (e.g. Potsdamer Platz, Friedrichstrasse) is almost complete. Consequently, the building industry is shrinking to a level sustainable in the long term, as in the east German territorial states. Berlin notched up marginal economic expansion again in 2004, albeit at less than half the rate of GDP growth for Germany as a whole. Nor is the outlook for 2005 any more propitious given the somewhat bleaker overall economic situation: The capital is unlikely to turn in real economic growth of much more than 0.5% this year. In line with the city’s poor economic showing, its purchasing power has also been eroded. Having bettered the German average by 2.5 percentage points in the mid-90s, in 2003 Berlin’s purchasing power slipped slightly below the statistic for the country as a whole for the first time and stands now at only 96% of the German mean. This can be explained partly by the removal of families with high spending power to the surrounding areas. Indeed, in most of the neighbouring counties purchasing power has risen since 1996. In comparison with other cities Berlin has thus fallen even farther behind: In Hamburg purchasing power per head is roughly 9% higher. In Frankfurt/Main it is more than 10% up on the Berlin level and in Munich about one-third. Population development and its components '000 yoy 40 30 20 10 0 -10 -20 -30 -40 92 94 96 98 00 02 04 Natural population balance Migration balance Population development Source: State Statistical Office Berlin Migration balances for Berlin '000 yoy 40 30 20 10 0 -10 -20 -30 -40 92 93 94 95 96 97 98 99 00 01 02 03 Labour market still under severe pressure Former West Germany The city’s structural problems have also left skid marks on the labour market, with almost 20% of the workforce registered unemployed in January 2005. Ten years ago unemployment in Berlin was still seven percentage points lower. The situation is unlikely to ease quickly given that the structural problems can, at best, be solved in the medium term. For the short term, the still falling number of vacancies is an eloquent indicator. At present the more than 325,000 job-seekers in Berlin have just 6,600 registered positions to choose from. At the federal level, Saxony-Anhalt is the only state with an even more adverse ratio between the demand for and supply of work. Former East Germany (excl. surrounding areas) Surrounding areas Statistics on the economically active population are a similarly drastic reflection of the problems on the labour market. The number of people in work in Berlin has contracted by around 10% since 1991. Even during the upswing years between 1997 and 2000, which did at least provide for moderate employment growth in west Germany, on balance no new jobs were created in Berlin. The ratio of economically active persons to the total population graphically indicates that the German capital has not yet matured into the nucleus of a functioning business cluster. Although this “labour market participation rate” is only marginally lower, at 44%, than the level in western Germany, for Berlin it has receded slightly since 1991. It therefore follows that the number of people in work has dipped more sharply than the resident population. In west Germany, on the other hand, the rate has held steady over the entire review period. Population growth of slightly more than 3.5 million inhabitants in the former West Germany has thus contrasted with a proportionate increase in the number of people with jobs. The huge gap between the labour market Economics Abroad Source: State Statistical Office Berlin Berlin GDP starting to grow again in real terms 4 % yoy Germany 3 2 1 0 -1 Berlin -2 -3 92 93 94 95 96 97 98 99 00 01 02 03 04 Source: VGR der Länder, 2004, estimate 5 Current Issues participation rate in Hamburg (2003: 60%) and Berlin (2003: 44%) is also extremely revealing. Even if the unemployment rate in Berlin could be reduced to zero, the difference between the labour market participation rates would merely have halved. Hamburg evidently plays a far more important part for the labour markets in its surrounding region than Berlin. March 16, 2005 Industrial concentration in Berlin and its surroundings Hospitality trade Transport and telecoms Banking and insurance Real estate, corp. services Public services Education and teaching Healthcare Other services Domestic services TOTAL 50 Teltow-Fläming 40 Berlin Changing employment structure Agriculture Producing sector Manufacturing industry Construction Services sectors Distribution and repairs 60 30 Berlin Share in total employment 2003 Berlin Employment growth 2003 vs 1996 Germany Employment growth 2003 vs 1996 0.4 15.6 9.3 5.3 - in % -25.8 -32.6 -24.4 -41.6 -7.9 -12.2 -5.8 -26.3 84.0 11.4 3.8 -13.4 10.3 1.4 5.6 5.8 2.9 18.3 10.5 6.4 12.2 32.8 -20.8 -13.3 26.3 -7.2 -4.3 6.9 24.8 -2.2 3.1 40.9 -9.1 3.3 15.6 8.7 2.1 17.5 42.1 15.4 10.4 100.0 -4.3 2.6 Dahme-Spreewald 20 10 Potsdam 0 96 97 98 99 00 01 02 03 04 NB: Industrial concentration is defined as the number of employees in mining and manufacturing per 1,000 inhabitants. Industrial concentration Germany 2003: 74 Source: GfK Sources: State Stat.Office Berlin, Fed. Stat. Office, DB Research Structural change slow to take place However, this analysis of the overall figures does conceal some interesting special developments in individual sectors. The division of Berlin, and the Nazi regime that preceded, disturbed the natural process of structural change in the city for more than 50 years. Some sectors were kept there artificially with high subsidies (e.g. tobacco processing), others were forced elsewhere by the city’s insular situation. In fact, it took just a few decades to strip Berlin of its eminent position as a German business centre. In pre-war Germany one in every ten economically active persons was employed in the capital, compared with just 4% today. This loss of standing is even more serious for the services industries and manufacturing and cannot be made good in a few years. Indeed, for many sectors the departure from the city is presumably irreversible, since regional clusters cannot simply be shifted about. The biggest job losses in recent years have been at manufacturing companies, which shed about one-third of their workforce between 1996 and 2003. Today only about 15% of Berliners work in industry or construction. Despite the long years of recession in Berlin’s building industry, too, the proportion of the labour force employed in that sector is not significantly less than in Germany as a whole. Once the reunification boom had come to an end, construction therefore simply contracted to its normal size. The proportion of the workforce employed in manufacturing is now way below the comparable figure for the whole of Germany. This, too, is part of the return to normality, the very low proportion of industrial companies being a feature of modern west European cities. 6 Economics Employed persons in Berlin as percentage of employed persons in Germany - in % Producing sector Distribution & transport 1939 1961 1989 2003 8.7 4.7 3.8 2.3 10.6 5.5 5.3 3.6 Services 15.9 8.3 5.0 4.7 Govt. sector 16.5 7.7 7.1 6.0 Total 10.3 5.6 5.0 4.0 Sources: Gornig/Häussermann (2002), Experian, DB Research March 16, 2005 Current Issues Berlin and its surroundings - Population and economic development since 1996 - Havelland 1) -9.1% 2) 3.5 pp 3) 16.7% Potsdam 1) –52.6% 2) –1.9 pp 3) –5.6% PotsdamMittelmark 1) –34.5% 2) 5.0 pp 3) 22.6% Oberhavel 1) -21.6% 2) 6.1 pp 3) 18.8% Barnim 1) -31% 2) 4.9 pp 3) 16.9% MärkischOderland 1) 0.0% 2) 4.1 pp 3) 12.1% Berlin 1) -15% 2) -6.3 pp. 3) -2% TeltowFläming 1) 42.5% 2) 4.9 pp 3) 11.1% DahmeSpreewald 1) 11.5% 2) 5.1 pp 3) 12.8% Oder-Spree 1) -5.0% 2) 1.7 pp 3) 2.0% Legend 1) Ind. concentration 2004 vs 1996 in % 2) Purchasing power 2004 vs 1996 in % points 3) Number of inhabitants 2003 vs 1996 in % Sources: GfK, state statistical offices, DB Research These massive employment losses have not been compensated so far by corresponding jobs growth in the services sectors. Between 1996 and 2003 the number of service jobs climbed by around 50,000. The strongest growth was in the hospitality trade (+33%), corporate services (+18%) and the health service (+7%). Below-average development in important supraregional services sectors such as financial services and business and technical consultancy is admittedly a problem. Berlin has not yet succeeded in positioning itself as a new cluster for these areawide services. The only new service clusters of supraregional importance to have been created in Berlin are in the small sub-sectors data processing, advertising and the film industry. Data processors expanded by 86% from 1998 to 2002 alone, the advertising industry by 2 94% and the film industry by 41%. Of course these sectors are still too small to revitalise Berlin’s economy of their own accord. In the medium term other more powerful drawing cards are needed. To turn Berlin into a hub for eastern Europe, the transport infrastructure should be geared to this end. That should boost the city’s position as a logistics centre. Finally, the concentration of federal agencies in the capital is likely to generate further growth in jobs. 2 Job losses have not been compensated so far by employment growth in new sectors Geppert, K., Gornig, M. (2003), Die Renaissance der großen Stadt – und die Chance Berlins, in: DIW-Wochenbericht 26/03, pp. 411-418. Economics 7 Current Issues March 16, 2005 Sectoral focus on media and ICT technologies The media, information and communications sector (ICT technologies) has experienced some of the most dynamic development in the city. Between 1998 and 2002 alone the number of businesses and the 3 headcount rose by upwards of one-quarter. This gratifying development has been the driving force in recent years behind a number of property development projects in Berlin. For this the city has the advantage of being able to cater well to the industry’s specific location needs with its ample stock of space, added to which the major locational factors have been stable for years. The hard factors include rather good transport connections (which, however, still have room for improvement), the supply of skilled specialists and sufficient large, premium quality offices and land. ICT technologies with some of the most dynamic development in town 4 The Senate’s report on Berlin as an office location cites Spandauer Vorstadt, the Scheunenviertel and various technology locations such as Adlershof and the FOCUS Teleport in Moabit as settlement regions of choice for New Economy companies. In addition, larger companies in particular are looking for low-priced office space, for example in Kreuzberg (ID Media) or the Oberbaum City (Pixelpark, Gameplay). Given the high proportion of start-ups in this sector, average space requirements are still very low. But on the assumption of successful cluster formation this should increase rapidly. Then ICT companies will seek similar areas to established office space takers in other sectors. That could spur demand for new, efficient and combined office space of more than 1,000 m². Moving forward, the share of space will be well above the present 3% share of employment; based on experience in the US and UK, the figure is put at 10-15%. This would be to the detriment of small-scale office stock in mixed-use metro districts. The eastern area along the River Spree (media-spree) in particular holds out plenty of potential for new media companies, as underscored by the successful settlement of Universal Music and MTV. Start-ups require little space Sectoral focus biotechnology The Berlin-Brandenburg region is home to some 160 biotech companies, no fewer than 98 of which are headquartered directly in Berlin. Around 1,900 workers are employed there. The number of companies doubled from 1997 to 2001 alone, during which time the number of employees soared by 140%. But a process of consolidation set in from late 2001, bringing a drop of around 12% in the number of jobs. Some company failures were made up for by start-ups, holding the number of businesses more or less stable. The Senate Department 5 reports employment growth again since autumn 2003. There are four biotechnology parks and start-up centres in Berlin with disposable space of altogether roughly 70,000 m²: • Campus Berlin Buch with a total of 27,000 m², • berlinbiotechpark with disposable space of 11,500 m², • Focus Mediport with disposable space of 19,500 m², • WISTA / UTZ Zentrum für Umwelt-, Bio und Energietechnologie with 10,525 m² space. 3 Senatsverwaltung für Wirtschaft, Arbeit und Frauen [editor] (2004), Wirtschafts- und Arbeitsmarktbericht Berlin 2004, Berlin, p. 68. Senatsverwaltung, IHK Berlin [editor] (2001), Bürostandort Berlin: Strukturen und Perspektiven bis 2010, Berlin, p. 33. Senatsverwaltung für Wirtschaft, Arbeit und Frauen [editor] (2004), Wirtschafts- und Arbeitsmarktbericht Berlin 2004, Berlin, p. 66. 4 5 8 Economics 100 biotech companies in the city March 16, 2005 Current Issues In addition, several biotech projects have arisen in the surrounding regions, among them the Biotech-Bogen Hennigsdorf, where space of more than 7,000 m² is available. In Luckenwalde in the borough of Teltow-Fläming the biotech centre features total space of about 13,000 m². For all the efforts to create particularly attractive conditions in these centres, almost half of all biotech firms still opt to locate outside the 6 parks. Biotech companies change their head offices comparatively often, a common practice in fledgling industries. Research shows that between 1997 and 2001 almost 17% of all firms moved their headquarters. However, moves of this kind seldom go beyond the city boundaries, indeed companies often relocate within the same district. Planned expansion was quoted as the main reason for moving. For the coming years, too, the Senate Department expects further demand for space. Fledgling biotech sector in BerlinBrandenburg at the crossroads With support from the business and science communities and the administrative authorities, the “BioTOP Action Centre” has drafted a programme of action translating the vision of Berlin-Brandenburg as the leading European biocapital into specific recommendations. One of the central conditions for the concept is the existence of suitable areas for 7 research, development and production. The biotech industry is unquestionably set to be one of the most dynamic sectors in the coming years. Up to 2010 sales at German biotech companies of relevance to the health sector alone (red biotechnology) are predicted to more than double. But this growth should not cloud the view for the market risks: Many companies have not yet broken even, and the road from initial idea to marketable product has proved extremely long in the past. Both aspects will arguably heighten the pressure to consolidate as the industry moves forward. Nor must we forget that the location is still in the throes of a tough beauty contest with other biotech centres in Germany. A leader has not yet emerged. What is more, the US, Switzerland and the UK are considerably more advanced than the German biotech market. In the United Sates red biotechnology already notches up sales of EUR 30 bn; turnover in Europe aggregates roughly EUR 10.5 bn, but only EUR 915 m of this is generated by German companies, and many have yet to be weaned from state subsidies. Were consolidation to take place on a global scale, German centres could suffer. That is at least a risk 8 scenario. Risks for biotech firms still high Budget 2004 - Adjusted expenditure in EUR m Administrative expenditure: 9,424 Other exp.: 356 Investment: 1,987 Personnel expenditure: 6,838 Interestexp.: 2,387 Source: Senate Department of Finance Berlin Public budgets in “dire straits” Following reunification the rapid reduction in federal aid, the high cost of merging an outsized administrative apparatus and, not least, excessively expansive planning based on overly upbeat forecasts of the capital’s economic and financial future quickly threw Berlin’s state budget out of kilter. The level of debt in Berlin relative to nominal GDP % The level of debt in the Land (state) Berlin has risen fivefold since 1991 from EUR 10.8 bn to almost EUR 56 bn in 2004. The attendant 400% leap in interest expenditure weighs heavily on the state purse year for year. 11.4% of the 2004 budget – just under EUR 2.4 bn – is earmarked for interest payments alone. 91 6 7 8 Stegh, T. (2002), Standortverteilung und Standortanforderungen kleiner und mittlerer Biotechnologieunternehmen in der Region Berlin-Brandenburg, Berlin. BioTOP [editor] (2003), Biotech Report 2002/2003 Berlin-Brandenburg, in: Biotopics, Magazin der Biotechnologie in Berlin Brandenburg, Issue 20, Berlin. Perlitz, U. (2004), Rote Biotechnologie in Deutschland: den Kinderschuhen noch nicht entwachsen, in: Aktuelle Themen 305, Deutsche Bank Research, October 18, 2004. Economics 93 95 97 99 01 80 70 60 50 40 30 20 10 0 03 Sources: Senate Department of Finance Berlin, VGR der Länder 9 March 16, 2005 Current Issues By 1995 the annual deficit on the state budget had already reached EUR 5.5 bn. Thereafter the authorities were supposed to implement a stringent austerity programme. However, sluggish economic development and the first stages of the federal government’s tax reform soon led to shortfalls in tax revenues, putting an end to nascent progress on consolidation. At the same time unforeseen expenditure became necessary – the debacle with Bankgesellschaft Berlin, for example, cost EUR 1.8 bn – driving the 2001 deficit above the EUR 5 bn mark again. In the following three years the annual deficit was scaled back to just under EUR 4 bn. In the 2005 budget the Senate has pencilled in a negative fiscal balance of slightly less than EUR 4 bn and net borrowing of EUR 5.4 bn. Conventional budget ratios underscore the inevitability of further consolidation: Berlin’s borrowing ratio in 2003 worked out at 19.6% and the ratio of interest payments to the tax take at 21.3%. The Senate Department says both these levels are twice those in other German states (including their local authorities). Back in November 2002 Berlin Senate already established that the city-state’s budget was “extremely distressed”, i.e. that Berlin was in a financial situation from which it could extricate itself in the medium term only with the aid of extra federal transfers. To pave the way for these federal transfers, in spring 2005 the Federal Constitutional Court must follow the Senate’s reasoning and confirm the “extreme budgetary distress”. There is talk at the moment of need for altogether roughly EUR 34 bn. This federal aid would be tied to strict covenants and a binding financial reorganisation programme. With the two-year 2006/2007 budget the Senate intends to continue its rigorous cost-cutting and follow through beyond 2008 on the reorganisation programme already in force. The aim of further federal subsidies should be to relieve Berlin of its interest and capital commitments to the extent that the city-state is able to service the remaining interest burdens under its own steam. However, Germany’s panel of economic advisors, for one, cautions against recognising extreme budgetary distress for Berlin, fearing the creeping erosion of fiscal discipline at individual state level (moral hazard problem). A major consequence of the spending cuts so far is the extremely low level of investment in the state budget – lower even than the federal investment aid granted to the city. Higher education, urban renewal, the cultural and social infrastructure, and now also housing construction grants are just some of the sectors hit by the investment cutbacks. Interest expenditure EUR m State benchmark Berlin 3,500 3,000 2,500 2,000 1,500 1,000 500 0 91 93 95 97 99 01 03 05 07 NB: For the state benchmark, average interest expenditure by the state and local authorities was calculated per head of the population. This was then multiplied by the number of inhabitants in Berlin. Source: Senate Department of Finance Berlin Net new borrowing EUR m Berlin State benchmark 6,000 5,000 4,000 3,000 2,000 Long-range outlook 1,000 Berlin’s short-term development will bear the stamp of ongoing structural adjustment. But the medium to long-range outlook is brighter, provided the focus is right. Of course active economic promotion is difficult when budgets are tight; but particularly in respect of the major projects – airport development, the merger with Brandenburg and strengthening Berlin’s position as a scientific location – the proper agenda should be set right now. This is particularly important in that demographic trends will check potential growth in the long range. Business promotion with tied hands Business promotion in Berlin has to contend with difficult overall conditions: In the east of the city the transformation process is not yet complete, in the west structural change is causing massive adjustment. Only 2% of the 2004 budget, or slightly over EUR 400 m, was available for business promotion in Berlin, compared with around 4% in Hamburg. 10 7,000 Economics 0 91 93 95 97 99 01 03 05 07 NB: For the state benchmark, average net new borrowing by the state and local authorities was calculated per head of the population. This was then multiplied by the number of inhabitants in Berlin. Source: Senate Department of Finance Berlin March 16, 2005 Current Issues Berlin’s locational advantages include modern technical and logistical infrastructure, highly skilled workers and not least attractive, centrally 9 located properties on favourable terms. Recently, media companies in particular have been attracted by these assets. Besides the two big players in the music industry, Universal Music and MTV Central Europe, there are a host of smaller firms and start-ups in this and neighbouring branches such as advertising or fashion. Opinions vary on the extent to which these successes can be attributed to good locational policy. In an Allensbach poll conducted in autumn 2003 the businesspeople surveyed gave Berlin the worst marks of 25 cities for “service to businesspeople”. Yet a year previously the Berlin Business Location Center (BLC) won the European E-City Award and was voted the city with the best information for companies in Europe from among 130 European rivals. The BLC replies online to all questions regarding investment in the city. Economic policy in Berlin focuses on the development of a cluster strategy and successful innovation policy. The central development bank in the city-state, Investitionsbank Berlin (IBB), bundles the main development programmes and also provides free innovation counseling. The central contact and coordination agency, Zentrale Anlauf- und Koordinierungsstelle (ZAK), and district coordination agencies for companies to speed up the complex licensing procedures operate within the relevant Senate Department in an attempt to accommodate the difficult decision-making processes in the two-tier administrative structure (districts and the Senate). Additionally, Berlin GmbH seeks to market Berlin successfully as a business location, and the Liegenschaftsfonds Berlin is the contact for people interested in state-owned real estate. Economic promotion targeting development of a cluster strategy and innovation policy Finally, initiatives by industry and its associations, the chamber of industry and commerce and the chamber of crafts also discharge important information assignments. They help build up industry networks such as the Medienboard Berlin-Brandenburg, the action centre BioTOP (biotechnology), the TimeKontor (IT) and the FAV Forschungs- und Anwendungsverbund Verkehrssystemtechnik (transport systems engineering research and application association). It is precisely in this raft of different business development channels that critics identify a major disadvantage of business promotion in Berlin, since there is no guarantee of a consistent promotion strategy. Given that the city’s precarious budget situation leaves no scope for further financial assistance, improvements can be achieved only through coordinated cooperation among the existing institutions. The “One Stop Agency” set up recently as a contact for companies at the BLC could mark the first step in the right direction. Berlin airports (2004) Tegel Airport development could bring a lift With a passenger volume of almost 15 million in 2004, Berlin is the fourth largest airport location in Germany. With facilities in Tempelhof, Tegel and Schönefeld, the capital possesses three international commercial airports, of which Tegel and Tempelhof lie within the Berlin city area. This airport system is to be replaced in a few years by the new airport Berlin Brandenburg International (BBI) in Schönefeld. Planners believe that the number of passengers carried can be boosted from initially 20 million in 2010 to around 30 million in the following years. This would make BBI the third largest airport in Germany after 9 Diversity of promotion could be a disadvantage Length of runways Tempelhof Schönefeld 3,023 m / 2,116 m / 2,700 m / 2,424 1,700 3,000 137,931 36,422 48,571 Passengers 11.0 m 0.4 m 3.3 m Air cargo 21,735 t 585 t 15,042 t Takeoffs and landings Sources: Zukunftsagentur Brandenburg (ZAB), Brandenburg Economics Ministry, ADV But precisely in terms of interregional and international accessibility Berlin still lags way behind other European centres (see Wirtschaftsinitiative Metropolitana FrankurtRheinMain e.V. (2004), Eine Region auf dem Weg zur Spitze, FrankfurtRheinMain im internationalen Standortwettbewerb, Basel). Economics 11 March 16, 2005 Current Issues Frankfurt/Main and Munich. Towards this end the company Flughafen Berlin Schönefeld GmbH (FBS) has been set up with three partners: the federal government, Berlin state and Brandenburg state. A price tag of roughly EUR 2 bn has been put on the construction project, with EUR 430 m coming from the public exchequer and part from the FBS’s own funds. The rest could be externally financed with public-sector guarantees. The public authorities will therefore be bearing the brunt of financing the new airport project. However, the airport development in Schönefeld is proving complicated: Although official planning approval has been granted, opponents are now trying to bring the expansion to a halt. For one, 3,800 plaintiffs are bringing a class action against the planning permission before the Federal Administrative Court in Leipzig. For another the Higher Administrative Court (OVG) Frankfurt/Oder has ruled in February 2005 against the validity of the state development plan for the airport location. A lengthy regional impact assessment procedure is therefore set in train, in which the suitability of the location will have to be demonstrated. Both procedures therefore represent legal obstacles on the way to implementation. Nonetheless, the politicians and FBS are determined that building work shall begin in early 2006 and the facility become operational after a construction period of four or five years. For Berlin’s economy, development of the airport is welcome in that it concentrates flight movements and exploits scale economies. Concentration on one airport is also expected to bring better integration into international air traffic, with more connecting flights and more intercontinental services. The spillover effect is hoped to extend far into Poland and the Czech Republic, guaranteeing improved connections with eastern Europe and Asia and exploiting the competitive advantage of roughly an hour off flying times from the air hubs in the west. Benefits of a major international airport for the economy Fast and efficient international connections are an important requirement for the further specialisation of Berlin’s economy on knowledge-based services. So the new airport must be very well connected to the city centres. This leaves the question of the use to which Tegel and Tempelhof airports can later be put. The huge inner-city sites pose an enormous challenge to the real estate industry, too. The Tempelhof complex alone is 1.2 kilometres long and comprises in the region of 10,000 rooms. Full reuse of a specialised property on this scale will hardly be possible without huge alterations. The proposal by planners Brunnert in Stuttgart to use Tempelhof airport as a terminal for BBI thus appear interesting. Both facilities could be linked by a non-stop railway, for which the infrastructure is already partly in place. Check-in and baggage handling would be at Tempelhof, in the centre of town. Departure would be from BBI. Besides which, attractive inner-city shopping malls could be created in Tempelhof. Subsequent use of Tempelhof and Tegel needs clarifying Berlin-Brandenburg still a desirable match In 1996 plans to merge the states Berlin and Brandenburg were thwarted in the necessary referendum. Whereas a majority of 53.4% of Berliners voted in favour, more than 60% of the people in Brandenburg rejected the union, prompted mainly by fear of Berlin’s political dominance and the capital’s financial problems. Although these reservations are still present in the population, in later polls by Berlin’s Freie Universität and the Forsa research institute clear majorities came down in favour of a merger. Cooperation between the two states has been intensified in recent years, and many institutions have been amalgamated. Also, a common “road map” was drawn up in 2001 so that a merger in 2009 can be put to the vote again in 2006. The new coalition government in Brandenburg, although basically in 12 Economics Merger plans shelved March 16, 2005 Current Issues favour of a union, makes this conditional on both states solving their financial problems. That could prove an insurmountable obstacle. Berlin’s Social Democratic Party has already withdrawn from near-term merger plans. In principle experts agree on the benefits of a merger between the two 10 states. Added to the lower administrative costs are the advantages of better coordination in regional development (planning, infrastructure, real estate markets), particularly of the interlinked municipal and surrounding areas in the Berlin conurbation. By this reckoning it would be quite wrong to try to solve the financial problems before joining the two states, because a merger would help cut costs and hence ease the fiscal constraints. A marriage is basically desirable Population forecast for Berlin Berlin would, however, have to have guarantees that the merger would not worsen its position in the federal fiscal equalization system. That could happen if the capital were to lose its city-state privilege in the 11 course of the marriage. Desirable as this may be in the medium term, in the early years it will be impossible radically to downsize the administration. Transition periods should therefore be agreed for the privilege. The road map is to be put to the vote again in spring 2005, but even in the event of a positive decision speedy implementation is not likely. 3.5 m 3.4 3.3 3.2 3.1 3.0 2.9 Ageing and population decline on the cards In the coming years the birth deficit in Berlin will rise steadily. According to the “median variant” of the Federal Statistical Office’s population projection, the deficit will climb from around 5,000 persons p.a. at present to roughly 10,000 p.a. in 2020. In the median projection variant the statistical office assumes annual net immigration of about 10,000 persons throughout the forecast period. Up to 2015 the population 12 figure would still edge up by some 50,000 people. After that the trend will be dominated by the steady advance in the birth deficit. Up to 2050 it will swell to almost 30,000 people a year, steadily lowering the number of inhabitants as from 2015 to just under 3.1 m people in 2050. However, should the migration trends of the past three years firm up, the median variant could turn out to be too optimistic. Net immigration in 2002 worked out at only a little over 8,500 people, tumbling in 2003 to less than 500. For 2004 the ultimate balance could even be negative. The Senate department’s “shrinkage scenario”, which sees population figures dipping below 3.3 million in 2020 already, would therefore be quite realistic. Arguably more serious than the drop in population numbers will be the changes in the age structure, with the share of over-60s leaping from roughly one-fifth to within a whisker of 40% in 2050 and the proportion of aged (over 80s) soaring from 3% at present to 11% in 2050. By this reckoning the age structure in the capital will differ only marginally in the middle of this century from that in Germany as a whole. 10 11 12 2.8 00 10 20 30 40 50 Source: Federal Statistical Agency, median variant Population structure Berlin - 2050 61-80 27% 80+ 11% 0-18 13% 31-60 37% 19-30 12% Source: Federal Statistical Office See Deutsches Institut für Urbanistik (2004), Berlin und Brandenburg: Kooperation oder Fusion? Difu-Kolloquium war gut besucht, in: difu Berichte 2/2004, pp. 18-19. Vesper, D. (2004), Stellungnahme zur Länderfusion Berlin-Brandenburg im Rahmen des difu-Kolloquiums am 4.6.2004. This trend corresponds approximately to the Berlin Senate department’s “basic” forecast variant (see www.stadtentwicklung.berlin.de/planen/bevoelkerungsprognose). In this, Berlin’s population grows up to 2010 by almost 40,000, after which it begins to drop at a quickening rate. In its INKAR forecast the Federal Office for Building and Regional Planning predicts that with net immigration of not quite 10,000 people a year the population in Berlin will grow to about 3.5 million by 2020. This tallies roughly with the Senate department’s “boom” scenario. Economics 13 March 16, 2005 Current Issues Moderate increase in the number of households up to 2025 There were slightly over 1.8 million households in Berlin in 2003, i.e. on average each household consisted of 1.8 people. The number of oneand two-person households in particular has risen perceptibly in recent years. Meanwhile, not more than two people live in more than 80% of Berlin households. In an ageing society the trend to smaller household sizes will persist, given that older households generally consist of no more than two people. On the basis of the Federal Statistical Office’s median projection variant the number of households in Berlin will increase to around 1.95 million up to 2025 even as population decline sets in. Only after 2025 will the number of households begin to fall, returning to approximately the 1999 level of 1.8 million in 2050. In comparison to the advance in household numbers Germany-wide, only moderate growth in households is expected for Berlin. This is due mainly to the high number of small households that already exist. In the Senate department’s by all means realistic “shrinkage scenario”, positing a sharp drop in the number of inhabitants from 2005 already, the number of households would remain roughly at the present level until 2010 and then decline faster to below 1.7 million in 2050. Number of households in Berlin 2.0 m 50 Share of households over 65 (right) % 45 40 35 1.9 30 25 20 1.8 15 Number of households (left) 1.7 10 5 0 95 03 15 25 35 45 Sources: State Statistical Office Berlin, DB Research Demographic development depressing potential growth Economic growth is generated, first, if the size of the workforce increases, second, if the capital stock expands or, third, if technological 13 progress brings about productivity gains. On the assumption that future productivity gains will, at least, come no more easily than at present and that the capital stock does not grow faster than today, demographic developments will therefore directly dampen an economy’s growth prospects. For this, of course, the number of economically active people and not the number of inhabitants is decisive. If all fundamentals of relevance to the labour market stay constant at the present level, the number of gainfully employed persons will drop in parallel to the potential size of the working age population, i.e. the number of people between 15 and 65. But the number of people in that age group is shrinking far more strongly than the population as a whole. That would depress the potential growth rate of Berlin’s gross domestic product from around 14 1.2% p.a. at the moment to 0.7% in 2050. Of course, this is not an inescapable fate. A limited number of possibilities exists to augment the labour force. This calls for success on reining in unemployment, lengthening working life or raising the proportion of women in work. More immigration and higher birth rates could likewise swell the number of people able to work. But under plausible assumptions all these measures are at best suited to holding potential growth stable at the present-day level. Potential rate of GDP growth in Germany West Germany Berlin East Germany Source: DB Research Important scientific institutions in Berlin 3 universities 6 colleges Berlin is one of the most important scientific locations in Germany, with three universities, six colleges and seven universities of applied sciences. Added to this is a host of scientific research institutes. Even now, the quality of research at Berlin’s higher education facilities is among the best in the country, reflected i.a. in the high number of academic publications. Expenditure on research and development 7 universities of applied sciences 14 14 The capital stock comprises both real capital and human capital. See Gräf, B., German growth potential: facing the demographic challenge, in: Current Issues, December 11, 2003, Deutsche Bank Research, and Gräf, B. and Schneider S. (2004), Das Wachstumspotenzial – kaum Chancen auf Verringerung des Ost-WestAbstands, in: Aktuelle Themen 306, Deutsche Bank Research, pp. 36-45. Economics 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 05 10 15 20 25 30 35 40 45 50 Growth opportunities through science and openness 13 % yoy 5 research institutes of the Fraunhofer Society 2 Helmholtz major research facilities 5 research institutes of the Max Planck Society 12 research institutes of the Leibniz Society Source: IW Halle, Datenbank innovative Kompetenzfelder March 16, 2005 Current Issues 15 relative to GDP is also exceptionally high. So far, however, the capital has not managed to translate this locational advantage into economic strength. For the future, business and science should ideally be closely interlocked. The more successfully the attractive education and research infrastructure can be brought together with business through networks and start-up initiatives, the more likely Berlin is to attract cutting-edge industries not yet established as clusters in other cities. Then self-reinforcing growth processes could kick in as more young, creative people move to the city, also from abroad. This could enhance its growth potential, because the capital stock and productivity gains would not then be invariable. Indeed, Berlin could capitalize more than others on future processes of structural change. A large number of studies show that economic growth in a region rides in considerable measure on the existence and networking of talented people. But the educational facilities on offer in Berlin do not necessarily guarantee that it will attract and retain the leading talents. Empirical studies corroborate that regions featuring a high degree of diversity (both ethnic and cultural) and the attendant tolerance grow at an above-average rate, because they are attractive to 16 creative and active people. As the “cultural capital of the Republic”, Berlin has more variety to offer than any other region in Germany, and this lends it special appeal. This may be a trump card for the city in the formation of new industry clusters, albeit a long-term one. What is more, the high proportion of foreign residents could prove an important locational asset when the German cities are obliged to vie more intensively for immigration, given that immigration follows trodden 17 paths: Future immigrants will tend to go where native cultural networks have already been built up. In this respect Berlin has a huge start on most German cities. Attractive to young, creative people These growth processes could be accentuated further if more federal agencies are concentrated in Berlin. This is conceivable particularly for the ministries in Bonn, at least in the long term. And should the new airport really turn into a hub for eastern Europe, Berlin could also develop into a centre for east European policy issues within the EU. 3. Berlin real estate market Plans and concepts for the city Berlin has lots of metro and neighbourhood centres, as well as prospering surrounding areas. Because of the favourable land prices, the fringes of the city and the surrounding areas have gained most from “pent-up” demand for space and property. In a parallel development a second centre has arisen in the heart of Berlin. Within City-Ost the bulk of investment has flowed into the government district, Potsdamer Platz, Leipziger Platz, Friedrichstrasse and the Scheunenviertel district. Second centre in City-Ost Based on overly optimistic population and economic forecasts and spurred by generous subsidies, in the 1990s the quantity of residential and office space on offer was ratcheted up sharply. The amount of property now standing vacant as a result is obliging municipal planners 15 16 17 Wirtschaftsinitiative Metropolitana FrankfurtRheinMain e.V. (2004), Eine Region auf dem Weg zur Spitze, FrankfurtRheinMain im internationalen Standortwettbewerb, Basel. See Florida, R. und Gates, G. (2001), Technology and Tolerance: The importance of diversity to high-technology growth, in: The Brookings Institution Survey Series, June 2001, p. 12 and on the connection between ethnic diversity and economic growth: Alesina, A. and La Ferrara, E. (2004), Ethnic Diversity and Economic Performance, http://post.economics.harvard.edu/faculty/alesina/papers/ jelrevsionsnov21.pdf Just, Tobias and Korb, M. (2003), International migration: who, where and why? In: Current Issues, Deutsche Bank Research, August 1, 2003. Economics 15 March 16, 2005 Current Issues to take greater account of inventories. Consequently, recent planning is focusing more on inner-city revitalisation than on development of the 18 outer areas. The planning basis for subsequent spatial compaction in City-West and City-Ost is the “Planwerk Innenstadt” (Inner-city Blueprint) approved in 1999. This targets the selective deconstruction of outsized road areas and greater use of derelict downtown sites. Similar game plans exist for the northeast, southeast and west of Berlin. Additionally, in 2004 the following targets were formulated for the city in the new Berlin 2020 urban development blueprint: • boosting economic prowess and competitiveness, • preservation of a socially and functionally mixed city, • Berlin as a green and ecological city, • consideration of the metropolitan region as a whole. There is evidently a conflict of interests between plans to “green” the city on the one hand while boosting its economic capacity and making it more compact on the other. Ultimately, the plight of the public budgets is likely to force prioritisation of the economic objectives, since the returns yielded by green areas are at best indirect. Although Berlin’s inner-city local recreation areas are among its most important soft locational assets, in comparison to other economic centres the capital is already amply provided with these. Urban planning objectives in partial conflict Growth in office space in German cities 140 1994=100 Berlin 130 Frankfurt The Berlin office market 120 Munich 110 Office market situation Berlin today possesses a total of 17.8 million m² office space, making it the biggest office location in Germany. Ten years ago there was just 13.5 million m² of office premises in the city, meaning that an average of 430,000 m² new space a year has been put onto the market. Primarily, though, it is the city’s size that makes it Germany’s biggest office market. Taking the stock of office space in proportion to the resident population as an indicator of the importance of the office market for the city, the absolute size of the market is put into perspective. At 5.3 m² per inhabitant, the ratio is clearly below the comparable values in other west German cities. Indeed, the typical office locations Munich and Frankfurt/Main feature more than three times as much office space per 19 inhabitant. Take-up is stagnating at a low level. Roughly 360,000 m² office space was let in 2004, about as much as in the previous year but some 30% down on the peak year 2000 and less than on average for the past ten years. It is striking that in 2004 there were practically no big lets: more than 80% of the leases agreed were for space of less than 500 m². This holds up a mirror to the activities of the most dynamic sectors in the cities, the media and IT. Since many of the companies in these industries are still in their comparative infancy, their need for space is as yet compact. And until further federal agencies are moved to Berlin, the public sector will be absent as an important taker of large floorplates. Certainly, government facilities such as the federal family affairs ministry, the state department of education or the Federal Labour 18 19 16 See Heine, M., Fürst, F., Spars, G. (2003), Märkte ohne Perspektive?, Herausforderungen für den Immobilienmarkt Berlin, Berlin. Since both Frankfurt and Munich are places of work for a big catchment area, this measure again underscores that Berlin has not yet succeeded in becoming the pulsating hub of the region. The differing vacancy levels in the cities go only a little way to explaining the discrepancy. Even dividing only the office space absorbed by the number of inhabitants, Frankfurt can boast three times more space per resident than Berlin. Economics 100 94 95 96 97 98 99 00 01 02 03 04 Sources: DB Real Estate, DB Office space relative to the number of inhabitants - 2004 Frankfurt Munich Düsseldorf Hamburg Cologne Berlin m²/inhabitant 0 5 10 15 Sources: DB Real Estate, Federal Statistical Office 20 March 16, 2005 Current Issues Agency did rent space on a large scale, but at least part of this was for removals within the city. Consequently, little extra space was absorbed. One in every ten offices in Berlin empty Up to the end of 1993 there were virtually no vacant office premises in Berlin, and office rents soared to almost EUR 50 per m². Expectations of market developments were extremely high, with the result that a raft of office properties were projected. These came onstream in large numbers just as structural change took hold of Berlin and employment figures began to fall. Whereas the number of office workers subject to social insurance contributions shrank between 1994 and 1998 by altogether around 8%, the supply of office space grew by 4.4% p.a., driving the vacancy rate in Berlin to over 9% by 1998. This was followed by a three-year recovery, with office jobs also being created again in Berlin in the wake of overall economic upswing. Also, the supply side responded; as a result the stock of office space rose by only another 1.5% p.a. in subsequent years. During this period office properties were shooting up in Frankfurt and Munich: In Frankfurt the supply of office space was ratcheted up between 2000 and 2004 by 4.7% a year, while Munich slated growth of around 4% p.a. In Berlin, however, the amount of property standing empty contracted only moderately at first in comparison to the other west German office centres. Whereas Frankfurt posted a vacancy rate in 2001 of around 2.5% and Munich less than 1%, in Berlin it eased to only about 7%. As from 2001, even the moderate new construction activity in Berlin still proved too strong, as the economy slipped into recession and employment in Berlin went into reverse. Even though non-office jobs were harder hit by the cyclical downswing than office work because the former were affected by structural adjustment as well as the economic situation, nonetheless office employment in Berlin has also edged down by a total of 2% in the past three years. This has caused the amount of office space standing empty in the city to build up again gradually. Including sub-let space, at present some 1,7 million m² office space in Berlin is not under lease, bringing the vacancy rate within a whisker of 10%. This represents a jump of almost three percentage points on 20 2001. Rising vacancy levels are the obvious indication that extra supply is greater than extra demand. On smoothly functioning markets 21 supply overhangs lead to falling prices. Consequently, prime rents in Berlin have sagged. At present a square metre of office space in a prime Berlin location can command little more than EUR 20. That is about EUR 10 less than three years ago. 1a locations of this kind are to be found in City-Ost, City-West and in the area Potsdamer Platz/Leipziger Platz. Employees liable to social insurance contributions 1300 in '000 1250 39 % 38 Office employment rate (right) 1200 37 1150 36 1100 35 1050 34 Total employees liable to soc.ins. contr. (left) 1000 33 950 32 900 31 95 97 99 01 03 Sources: Federal Employment Agency, DB Research Prime rents and vacancy rates on the Berlin office market 60 50 EUR/m² % Vacancy rate (right) 12 10 40 8 30 6 20 4 10 2 Prime rent (left) 0 0 91 93 95 97 99 01 03 05 Source: DB Real Estate Planning status for future growth in office space The report by the Senate Department of Urban Development and the chamber of industry and commerce on Berlin as an office location, “Strukturen und Perspektiven bis 2010”, reflects the projected focus on the inner city. Although the overall concept for the city does also incorporate new office locations on the metropolitan railway ring (S-Bahn-Ring) and in the outer city, in the absence of sufficient demand these are to be pursued “on a significantly smaller scale” than before. Generally speaking the development in office space will continue to concentrate on the two centres City-West and City-Ost, with the rest of the city centre providing additional space for special categories of 20 21 In Frankfurt/Main one in every six offices is empty at present, in Düsseldorf one in seven. In our assessment model the vacancy level alone explains almost 50% of the variance in the prime rent. Economics 17 March 16, 2005 Current Issues demand. It is also planned to create complex service centres only selectively in the S-Bahn-Ring zone. Finally, in the outer parts of town the emphasis will be on the major radial traffic arteries. According to the urban zoning plan, around 18 million m² office space (gross floor area) can be built within the metropolitan area. That would be equivalent to double the present stock. One-quarter of this potential lies in the city centre, and a good fifth in the Ring zone and on the radial arteries. By far the greater part (53%), though, is to be found in the 22 outer city. 1.7 million m² alone are accounted for by the seven major developments Alexanderplatz, the railway centre Lehrter Bahnhof, the area around Leipziger Platz (excluding government precinct), the street blocks Spittelmarkt / Grunderstrasse, Alexanderstrasse / Jannowitzbrücke, Nördliche Friedrichstrasse / Tacheles and the addition of buildings in City-West. Doubling of office space possible Additional office space in relation to stock 7 % Further drop in the number of completions Berlin has a large supply of centrally located space that has hitherto been used inefficiently. Some of these building gaps will be closed by big projects in the coming years. In the Tiergarten district, for instance the Köbis-Dreieck (Köbis Triangle) will create more than 40,000 m² office space. Also in Tiergarten, the new Lehrter quarter featuring almost 150,000 m² in all will be built by 2008 together with the new central station. And Berlin’s aspiration to become a new media centre is underscored by the Spreestadt, being constructed directly by the river and scheduled for completion in 2008. However, given the large amount of property standing vacant and sluggish demand, overall new construction looks set to remain well below the latter year average. We expect a total of around 630,000 m² extra office space to be put on the market by 2009. The stock of space will thus grow by an average of 0.4% or about 130,000 m² p.a. Less possible retirements, total office supply would reach approx. 18.3 million m² by the close of 2009. 6 5 4 Assumptions 3 2 1 1995 1998 2001 2004 2007 0 2010 Sources: DB Research, DB Real Estate Forecast of vacancy rate and development in rents With relatively few new office projects in the coming years, the office property forecast focuses on the assessment of demand. There are two reasons why this is more difficult in the case of Berlin than with established west German office locations. First, economic trends in Berlin have detached themselves from business activity in Germany as a whole. This is because structural adjustment in the city is not yet complete. Until the capital can field a strong business cluster, the situation remains extremely uncertain, since the settlement of a new sector is not automatically a success. Second, the public sector plays an extremely important part in the capital. The office markets there are thus confronted with two opposed processes. On the one hand additional federal agencies may be relocated to Berlin as a means of better networking government players. It was decided in 2004, for example, that the Federal Intelligence agency would move to Chausseestrasse by the end of 2008. On the other hand, the necessity to consolidate state finances is making cuts in the public sector headcount imperative. In view of these uncertainties we present three 23 development scenarios for the next five years. 22 23 18 Senate Department, IHK [editor] (2001), Bürostandort Berlin, Strukturen und Perspektiven bis 2010, Berlin. The probabilities of occurrence specified indicate the relative importance of the three scenarios. The addition to 100% does not mean that all possibilities have been modelled. The risk scenario is not therefore a crisis scenario, and the positive scenario is not the best of all possible worlds. Economics Development in office workers % yoy 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 04 05 06 07 Positive scenario Main scenario Risk scenario Source: DB Research 08 09 March 16, 2005 Current Issues 1. Main scenario – moderate upswing: In this scenario Berlin gradually resolves its structural problem and increasingly develops in sync with the overall German trend. As from 2006 Berlin’s GDP grows at an average rate of 1.5% after adjustment for inflation, so that employment figures bottom out in 2006 and the office headcount even starts nudging up in the course of 2005. The number of office employees liable to social insurance contributions ticks up through 2009 to top the 2004 statistic by altogether 3%. Total completions through 2009 amount to 630,000 m². Probability of occurrence: 60% 2. Risk scenario – persistent structural problems: Forecast of vacancy rates in Berlin 14 13 12 11 10 9 8 7 6 5 4 Main scenario Risk scenario Positive scenario % 00 01 02 03 04 05 06 07 08 09 In this scenario a sustained pick-up does not occur because Berlin fails to emerge as a new cluster for media, IT or biotechnology. GDP stagnates throughout the entire forecast period, with the loss of altogether 40,000 jobs, of which 5,000 net are office employment. Growth in office work sets in considerably later and turns out to be extremely low. It is based entirely on the settlement of individual companies and new federal agencies and cannot make up for the initial losses. As in the main scenario, the volume of completions through 2009 aggregates 630,000 m². Probability of occurrence: 25% Source: DB Research Forecast of prime rents in Berlin EUR/m² 30 Positive scenario Amid extremely low employment growth in the main scenario the vacancy rate will initially tick up a little in 2005. Not until 2006 will it begin to ease slowly, reaching around 9% in 2009. Consequently prime rents will advance by only about 3% p.a. in the main scenario. In 2009 they will be just 10% above their present level. In the risk scenario the vacancy rate at the end of the forecast period will hit the 13% mark and headline rents will continue to sag perceptibly. By 2009 prime rents of barely EUR 17 will be obtained; however, this is still slightly more than Stuttgart, for one, can command at present. In the positive scenario the labour market will show the first signs of revival towards the end of 2005, gaining steadily in strength. Since supply will adjust upward towards the end of the forecast period, the vacancy rate will not fall faster, easing relatively constantly to around 7%. As supply grows tighter, it will push up rents significantly. In the positive scenario headline rents will top EUR 28 in 2009, bringing them level with 2000. Retail property 25 Main scenario 20 3. Positive scenario – Berlin becomes a new media and IT cluster: In this scenario Berlin becomes the new media and IT location in Germany and further federal agencies are moved there. In a second wave further corporate services (software specialists, legal consultants, tax advisors accountancy firms) set up in the city. Economic developments start to pick up in 2005, and as from 2007 Berlin’s GDP expands by almost 2% a year. This gives rise to significantly more office jobs as from 2006. In 2009 there are almost 7% more office jobs in Berlin than in 2004. The improved situation on the labour market in the city increases the chances of extra construction work. By 2009 830,000 m² of additional space is created in all, mainly between 2007 and 2009. Probability of occurrence: 15% 35 Risk scenario 15 10 00 01 02 03 04 05 06 07 08 09 Source: DB Research GfK consumer confidence - seasonally adjusted - 20 % 15 10 5 0 -5 2001 2002 2003 2004 2005 Source: GFK Retail sales per inhabitant Munich Düsseldorf Hamburg General sectoral trend Even though the German economy expanded by 1.6% in 2004, the situation for German retailers remains precarious, with an estimated price-adjusted drop in turnover of 1.5%. That was the fourth consecutive year in which retail sales fell year on year. The outlook for 2005 is not much better. The GfK index of consumer confidence has Economics Frankfurt Berlin EU 0 2000 4000 6000 8000 Source: GfK 19 March 16, 2005 Current Issues hardly moved since mid-2003. But at least the level has been creeping up steadily since September 2004. It is not just lacklustre economic activity that has buffeted the retail trade; structural factors are giving the sector its roughest ride. For one, many classic retail articles such as food, textiles, household goods and furniture are struggling with clear symptoms of saturation. These traditional retail product lines enjoy a less-than-average lift from income growth in times of economic upswing, while purchases of consumer durables such as furniture are the first to be shelved during recession years. Meanwhile only 31% of consumer spending in Germany goes on retail goods, compared with more than 40% in 1991. So far there is nothing to signal a gradual end to the trend. Second, a new distribution channel has come about with the internet. Last year the Germans spent around EUR 13 bn on online merchandise, ten times more than five years ago. In Berlin retail sales plummeted even more sharply than in Germany as a whole. They were down 6.6% in 2002, 1.3% in 2003 and are estimated to have suffered a further drop of around 1.5% up to the end of 2004. But at least the tailspin has lost much of its momentum. Even so, more than stagnation is not realistic for 2005. The weakness of the retail trade in the capital is also highlighted by the fact that more than 22% of the retail space in prime city-centre locations is occupied by food services and food retailers – considerably more than in Frankfurt/Main (15%) or Munich (8%). Retail sales in Berlin - inflation-adjusted 2000 = 100 non-seasonally adjusted seasonally adjusted 120 110 100 90 2001 2002 2003 2004 80 2005 Sources: State Statistical Office Berlin, DB Research The retail property market Berlin currently possesses some 4.1 million m² retail space, about twothirds in the west of the city. That is over 50% more than in 1991. The backlog of demand, which was very substantial immediately after German reunification, particularly in east Berlin, has now been worked off. The supply of space in east and west Berlin has been brought more or less into balance and, at 1.2 m² per head of the population, is on a par with the level of the retail markets in Hamburg and Munich. However, surface area productivity in Berlin is appreciably lower than in the two other million-strong German cities, because sales per inhabitant in Berlin work out about 30% lower than in Munich or Hamburg. Further surface area growth with tumbling sales therefore exacerbates retailers’ earnings situation. In recent years this has considerably pushed up the proportion of multiples in the city centre, with international chains seeking a presence in the capital and independent retailers lacking the liquidity to sustain a protracted price war. Meanwhile, the proportion of multiples in downtown Berlin is comparable to that in other big west German cities (higher than in Munich, slightly lower than in Frankfurt/Main); in Tauentzienstrasse multiples already make up 90% of the retail trade and on the Kurfürstendamm almost 70%. Berlin’s retail market is polycentric, with City-West (Kurfürstendamm, Tauentzienstrasse) and City-Ost (Friedrichstrasse) considered the prime locations. Prominent neighbourhood locations also exist, such as the Hackescher Markt, which has become a big tourist attraction. Schlossstrasse and Wilmersdorfer Strasse are further important regional retail centres in Berlin with high traffic counts. Also, the Arkaden on Potsdamer Platz is one of the best-frequented shopping centres in Germany: Each year the roughly 40,000 m² attract more than 25 million visitors. Purchasing power in Berlin and its surroundings Germany = 100 20 Economics 100 Berlin 95 Potsdam-Mittelmark 90 Dahme-Spreewald Teltow-Fläming 85 80 75 96 97 98 99 00 01 02 03 04 Source: GfK Prime retail rents EUR/month Frankfurt Munich Rents clearly under pressure At the end of 2004 roughly EUR 170 per month was agreed for a square metre of retail space in a prime Berlin location. This brings headline rents roughly back to their 1998 level. Whereas the development in rents was in sync with other German retail centres up to 2001, in the past three years the Berlin market has detached itself from 105 Hamburg Berlin 94 95 96 97 98 99 00 01 02 03 04 Sources: Kemper's, DB Real Estate 260 250 240 230 220 210 200 190 180 170 160 150 March 16, 2005 Current Issues the trend: In Frankfurt/Main, Munich or Hamburg prime rents held broadly stable, while in Berlin discounts of around 15% have been granted since 2001. Consequently, it is no longer just the secondary locations that are having to adjust to the pressure of rising supply and falling demand. In the prime segment (1a locations), too, international retail chains are scrutinising costs more closely and reviewing the need for unprofitable branches. But whereas peripheral retail locations have seen rents collapse steadily since the mid-1990s and retail rents in outlying areas are now only two-thirds of their 1995 levels, the reaction in the top bracket is presumably cyclical in nature. The prime locations are not expected to lose permanently in value. Although rents are still set to soften in 2005, the most swingeing adjustments are presumably over. Shopping centres in Berlin In Berlin there is currently around 1.1 million m² for rent in altogether 45 shopping centres featuring retail areas of at least 5,000 m². In comparison to the early 1990s the supply of space in shopping centres is now 350% higher. However, the biggest shopping precinct in town is still the Gropius Passagen with more than 80,000 m², opened back in 1969. There was little movement on the market until the mid-1990s, when a regular boom occurred. Up to the turn of the century the surface area in Berlin’s shopping centres was ratcheted up far more strongly than on average for all the German cities. But the market has calmed down a little in the past three years, as the concentration in the supply of shopping centres is now among the highest in the country. This means a new shopping centre is no longer automatically a success. As a result of the project boom in the 1990s the centres in the capital are also extremely modern in comparison to other cities. More than threequarters of the facilities in Berlin are less than 15 years old. In Hamburg, Munich or Frankfurt/Main the share of such areas is well below 30% in some cases. Modern shopping centres Around 90,000 m² of additional areas in shopping centres is currently under construction and scheduled for completion in 2005/2006. Another 100,000 m² is projected or being debated. The supply of space could therefore increase by 20% in the next three years. Given the tense market situation this fresh supply can only lead to crowding out. Unquestionably one of the most important projects is the Sonae shopping centre on Alexanderplatz with approximately 36,000 m² retail area and the Eastgate shopping precinct with more than 30,000 m² sales area in Marzahn. But comparatively the biggest changes are planned for Schlossstrasse in Steglitz. Schlossstrasse is one of the highest-volume shopping streets in Berlin. Unlike the Kurfürstendamm or Friedrichstrasse, Schlossstrasse is a regional centre. It comprises more than 100 retail outlets with a total of about 100,000 m² floor space. In the next two years retail space could be boosted by around 50% if the Schlossgalerie, the Forum Steglitz and conversion of the Hertie branch into the Schlossstrassen-Center are realised. These projects will inevitably crowd out resident retailers. Unclear at present is whether this predatory competition will affect only the retailers in the neighbourhood of Schlossstrasse or those outside the traditional catchment area as well. Only if the planned enhancement turns Schlossstrasse into a supraregional shopping location will the incumbent retailers there also be able to benefit from the new projects. But then purchasing power will be sucked out of the other supraregional centres, because total sales in Berlin and the surroundings are likely to remain flat in the near future. Economics Major changes ahead for Schlossstrasse 21 March 16, 2005 Current Issues Residential property The housing market in the capital has passed through various stages since the fall of the Berlin wall. Directly after reunification acute housing constraints caused rents to soar. The subsequent construction boom put an end to this scarcity, indeed in many segments oversupply was created, as a result of which rents and prices tumbled. Observers by no means agree in their current market assessments. On the one hand the nosedive in completion figures indicates that many investors are avoiding the market. Yet at the same time foreign opportunity funds are 24 very actively in search of housing portfolios. Current assessments of Berlin housing market differ vastly Features of Berlin housing market Housing stock Completions Dwellings per 100 households Living space per unit Living space per inhabitant 1991 1997 2002 2003 in m HU 1.716 1.825 1.874 1.876 in HU 10,717 32,965 5,182 3,418 Index 97.8 101.1 100.8 99.5 m² appr. 67 69 70 70 m² 33 37 39 39 HU = housing unit Source: State Statistical Office Berlin Size and structure of the housing market There are almost 1.9 million housing units at present in Berlin. More than 40% are over 55 years old and a good quarter over 85 years. This share of apartments in old buildings is roughly on a par with comparable figures in the east German states. But it is well above the values for the states of the former West Germany, where only one in every four dwellings is more than 55 years old. 300,000 housing units are in prefabricated “Plattenbau” apartments in the east of the city and only one in every four dwellings is in a privately financed new building. Most units in Berlin are in apartment houses and only about 10% in one- or two-family houses. Extensive financial promotion for rented apartments in the past made the owner-occupied segment unattractive. As a result the home ownership rate of around 12% is well below that in west German cities. In Hanover, Hamburg, Munich or Stuttgart more than 20% of households live in their own homes. The proportion of one- and two-family houses and the low home ownership rate in the city also explain the comparatively small amount of living space per household. Whereas households in Berlin possess an average of roughly 70 m² living space, the figure for Germany as a whole is almost 90 m². However, it would be wrong to expect rapid adjustment processes in future from this difference: In Frankfurt/Main, where both the home ownership rate and the share of one- and twofamily houses is comparable to that in Berlin, households do not have more than 70 m² of living space at their disposal either. But notwithstanding large-scale refurbishment programmes, Berlin still has ground to make up in the quality of its housing. In some 150,000 units 24 22 The Empirica Institute voiced these very different assessments in the provocative title of its study (see Empirica (2002), Wohnungsmarkt Berlin – Hoffnungsloser Fall oder Markt voller Chancen?, study commissioned by LBS Norddeutsche Landesbausparkasse, Hanover). Economics Housing in Berlin by building age - 2002 - "Plattenbau" prefabs 300,000 Subsidised housing construction (all types) 311,000 Privately financed newbuilds 67,000 Old buildings up to 1918 510,000 Old building 1919-1948 286,000 Source: Senate Department March 16, 2005 Current Issues there is still either no communal heating system, bathroom or indoor 25 lavatory – or indeed all three. Of the 1.6 million rented apartments just over 20% belonged to the municipal housing companies at the end of 2002 and 11% were organised along cooperative lines. This means that the bulk is in the hands of other housing companies and private owners. Development in construction Among the most prominent new-build projects were the so-called “new suburbs”, for example the new districts Karow Nord and Rummelsburg Bay. Five major urban developments in all, originally planned with some 30,000 housing units, were launched. Also projected were more than 20 urban development contract areas with another almost 22,000 units. However, these blueprints quickly emerged as outsized, calling for 26 counteraction. About 169,000 housing units were completed in Berlin between 1991 and 2003. But construction output was not spread evenly over the entire period. More than 50% of the new units were built in the four years from 1995 to 1998; in the two years 1996 und 1997 alone more than 55,000 apartments were put up, mainly in apartment buildings. Yet people still quit the city, partly to buy good-value homes of their own in the surrounding areas. In the more closely networked region around Berlin over 70,000 one- and two-family houses have been built since 1991 – 140% more than in the city itself during the same period. Meanwhile Berlin’s housing market has responded to people’s “vote with their feet”, and the construction of apartment houses has virtually dried up. Barely 1,200 units in multi-family buildings were completed in 2003, against almost 2,000 in one- and two-family houses. At least the painful process of adjustment for the construction industry seems to have come to an end for now in the residential sector. Building permits for apartment houses have stabilised at around 900 apartments a year, and in 2003 and 2004 a slight uptick in permit numbers was registered in the owner-occupied segment. By October 2004 almost 6% more building permits for one- and two-family houses were issued than in the comparable year-earlier period. However, at least part of this is presumably due to the plans announced by the federal government to cut subsidies for new owner-occupied homes. Price and rent trends in the city The extensive construction of new apartment houses has stepped up supply enormously. In conjunction with falling population figures, this has significantly eased Berlin’s housing situation in the past 15 years. City-wide, the number of unoccupied units averages 5%, or roughly 27 90,000. The share of vacant accommodation is particularly high in the districts Marzahn-Hellersdorf, Friedrichshain and Berlin-Mitte. There, up to 8% of the units are unoccupied, and in some quarters the vacancy rate is as much as 15%. In the districts Steglitz-Zehlendorf and Reinickendorf the vacancy level is comparatively low, at around 3%. Housing completions in Berlin 30 '000 25 20 15 10 5 0 91 93 95 97 99 01 03 05 One- and two family Multi-family NB: 2004 estimate, 2005 forecast Sources: State Statistical Office Berlin, DB Research Process of adjustment in residential construction almost at an end Rents and property prices in Berlin 3,500 3,000 12 EUR EUR 10 8 2,500 6 2,000 4 1,500 2 1,000 0 1994 1996 1998 2000 2002 2004 Price of newbuild (left) Price of completed building (left) 25 26 27 Investitionsbank Berlin (2004), Der Berliner Wohnungsmarkt, 2003 report for the Senate Department of Urban Development. Counteraction means winding up the developments by 2006. Of the 30,000 units planned only about 8,000 have been built so far. Up to end-2002 costs of EUR 1.5 bn were incurred on all the development work, 60% of the total expenditure budgeted. Revenues from non-public exchequers totalled only EUR 383 m – roughly one-third of the receipts “pencilled in”. This gave rise to a deficit of EUR 1.1 bn that was included in the state budget. These are the figures from the Senate Department – the micro-census shows twice as many unoccupied dwellings. Economics Rent for newbuild (right) Rent for completed building (right) Source: BulwienGesa 23 March 16, 2005 Current Issues So while the vacancy rate has not yet assumed such a dramatic scale as in east German cities, it is enough to depress rents and purchase prices. All segments are not equally affected, though. Rents for properties from existing inventories have stayed largely flat since the mid-1990s. In the past, generous state subsidies for rented property held rents artificially below the scarcity price. Where the public sector is gradually withdrawing from its active role of supplier, prices are tending upwards, but this is evening out the price effects from easing of the market, and rents for existing properties are holding relatively stable. The picture in the new-build segment is different. There, additional supply has driven down average rents in the past ten years by almost 30%. This can be explained as a normal market reaction to the initial imbalance between rents for new-builds and existing properties. Rents for new-builds in the mid-1990s were about 70% higher than for properties from existing inventories. Today the difference is only just over 20%; but it is still higher than in comparable west German cities (Frankfurt/Main and Hamburg 17% each; Düsseldorf 16%, Munich 15%). Developments on the market for condominiums were exactly the reverse. Prices for existing properties have sagged appreciably, whereas the prices for new owner-occupied apartments have been comparatively stable for years. The price trend for existing properties is partly influenced by the fact that the proportion of converted apartments in the east of the city has climbed significantly since 1994. Since apartments in east Berlin are on average cheaper, this shift weighs on the average price of a completed apartment. This is a purely statistical and not a market effect. All told, however, it can be said that rents and prices have stabilized in the past three years. Admittedly, though, price levels are not at all metropolitan: At around EUR 2,500 per m², a new condominium in Berlin costs about 13% less than in Frankfurt/Main and almost 30% less than in Munich. The differences in rents and prices for one-family houses are even more striking. They can be explained, however, by the cities’ respective economic output. Taking the price of a condominium relative to gross domestic product per head of the population, comparatively an apartment in Munich is considerably cheaper than in Berlin. Admittedly, per capita GDP in Germany is an inadequate indicator of households’ income situation given the extremely strong secondary distribution processes. But even taking apartment prices relative to disposable household incomes, prices in Berlin are comparatively higher than in Frankfurt or Munich. That said, the gap has narrowed appreciably. Outlook for Berlin’s residential market Until the economy in Berlin gets back firmly on its feet, a strong increase in rents and prices is unlikely. But at least the markets have moved towards equilibrium following the upheaval of the postreunification years. Drastic price slides on the market as a whole are consequently no longer to be expected. Of course, the city’s budgetary plight will force it further to examine its commitment on the housing market. We expect the public authorities gradually to retire from their active role as landlords and sell off more of their housing stock – either directly to the tenants or through intermediaries. Portfolio disposals of this kind could trigger significant price markdowns. In the round of privatisation, sales prices in this (lower) price segment are then likely to give way. 24 Economics Different development in newbuild and existing property Price of a new condominium in relation to disposable income 21 20 Berlin 19 18 17 Frankfurt a.M. 16 15 Munich 14 1994 1996 1998 2000 2002 2004 NB: The ratio is depicted as the price of a 100 m² apartment, divided by the disposable income. Both figures are in EUR, therefore the indicator has no unit. Sources: State Statistical Office, Business Strategists, G March 16, 2005 Current Issues Population 2003 Mitte FriedrichshainKreuzberg Pankow CharlottenburgWilmersdorf Spandau SteglitzZehlendorf TempelhofSchöneberg Neukölln TreptowKöpenick MarzahnHellersdorf Lichtenberg Reinickendorf The housing sub-markets in Berlin 1 2 3 4 5 6 7 8 9 10 11 12 '000 320.7 256.0 347.7 315.3 226.1 288.4 335.8 306.8 233.8 252.9 258.9 246.1 - aged 65+ % 13.2 9.8 14.3 18.0 17.7 19.6 16.6 15.2 21.0 11.9 15.7 19.0 - foreigners % 27.1 22.4 6.0 16.7 12.3 9.2 14.9 21.6 3.3 3.5 7.8 8.9 Arrivals less departures (2003) '000 2.5 13.4 3.6 3.7 8.1 -2.2 3.2 -0.7 -3.3 -9.5 -5.4 -5.6 Median monthly net income (2002) EUR 1,300 1,225 1,400 1,625 1,525 1,900 1,500 1,300 1,625 1,600 1,475 1,625 Number of dwellings (2002) '000 190 145 200 190 117 155 185 165 126 130 141 132 1.7 1.8 1.7 1.7 1.9 1.9 1.8 1.9 1.9 1.9 1.8 1.9 Persons per unit (2002) Living space per inhabitant (2002) m² 38.2 37.7 38.7 44.8 36.4 42.9 39.4 36.4 36.1 34.3 33.9 39.3 Completed dwellings (91-02) '000 13.8 5.9 19.9 4.8 7.4 7.2 6.8 6.9 11.5 11.4 6.5 5.7 Housing vacancy rate (2003) % 7.4 6.5 5.5 3.7 3.7 3.0 3.4 4.7 5.3 8.2 5.5 2.6 7.5 6.1-6.6 5.9-6.5 5.8-6.1 8.2 Average newbuild rents (2004) EUR 6.1-9.5 5.6-8.0 6.3-7.1 7.7-8.3 6.7 7.3-8.5 6.3-7.3 Sources: State Statistical Office Berlin, IBB, BulwienGesa, BEWAG Accommodation available in Berlin Hotel properties in Berlin Berlin is always worth a visit – a saying that more and more people are evidently taking to heart, because the number of roomnights in the capital has been skyrocketing for years, jumping from 7.5 million in 1995 to 11.4 million in 2003. Indeed, the number of overnight stays by foreign tourists over the same period almost doubled to around 3.4 million. But with a share just topping 30% of all roomnights, visitors to Berlin from abroad still play a fairly small role. In Munich foreign guests generate more than 40% of all roomnights and in Frankfurt/Main even more than 50%. Tourism continued to develop well in 2004. In the first eleven months around 16% more roomnights were registered in Berlin than in the yearearlier period, and the share of foreign guests continues to head north. An important contributory factor in last year’s exceptionally buoyant increase will have been the Museum of Modern Art (MoMA) exhibition, a major cultural event. Of the 1.2 million visitors roughly three-quarters 28 came from out of town. Considerably more hotels in the city The supply of hotel beds in the city has been ratcheted up in recent years on roughly the same scale as demand. In 2003 there were almost 69,000 hotel beds in Berlin, about 24,000 more than eight years previously. The trend to larger operations is unbroken, with the average 28 Lodgings Beds 1995 1999 2003 421 504 560 44,351 55,873 68,779 Beds/lodging 105 111 122 Source: State Statistical Office Berlin Roomnights in Berlin - seasonally adjusted fiuges 1400 '000 Share of foreign 1200 guests (right) 1000 % 800 32 30 28 600 26 400 200 34 Number of roomnights (left) 24 22 0 94 95 96 97 98 99 00 01 02 03 04 05 Sources: State Statistical Office Berlin, DB Research See http://www.berlin.de/tourismus-unterkunft/special/fakten.html Economics 25 Current Issues number of beds per hostelry growing by upwards of 16% from 1995 to the present. The relatively evenly balanced development in supply and demand has caused the occupancy rate in the premium segment to fluctuate cyclically around the mean of about 62%. However, stable occupancy has been “bought” in recent years with price discounts. At EUR 130, the average room rate in 2003 was about 12% down on its 2001 peak. This rather sharp markdown in the quality segment can, of course, be explained partly by flagging domestic economic activity. This hit Berlin especially hard because the hotels there rely comparatively heavily on meetings and seminar offers and many companies scaled back their training and education budgets in particular in the past three years. Another factor is the strong expansion in supply in the quality segment. In 2003 some 4,100 guestrooms, i.e. upwards of 18% of all classified hotel rooms, were in the five-star bracket. These were joined in 2004 by another almost 730 rooms (Ritz-Carlton and Radisson SAS Dom Aquaree), and in 2005 extension of the Adlon and the Concorde Hotel in Augsburger Strasse will come onstream with 380 rooms in all. With another 700 rooms in the pipeline, in a few years growth in the premium segment could top the 40% mark. Berlin would then feature an exceptionally high density of top properties for a German city. That could weigh on room rates and sales in this bracket in the coming years, especially since there has also been a sharp latter-year rise in the number of four-star hotels. 2005 looks set to be a particularly difficult year, because without an eminent cultural or sporting event the number of roomnights is at best likely to increase in line with trend growth of a good 5%. Still chances on Berlin’s hotel market But the hotel market in Berlin also offers plenty of opportunities. If 70% of the new rooms are created in the upper segment (4- and 5-star hotels) in the next few years and the city can reckon on further growth in visitor numbers, there are chances for the lower price bracket. In 2003 already, the occupancy rate of 60% across all hotel beds – and not just in the quality segment – was higher than in, say, Hamburg 29 (roughly 45%). 2006 looks particularly promising, with six FIFA World Cup matches (including the final) expected to draw many football fans into the capital. In the medium term, too, the outlook is good for Berlin’s hotel market. Should the number of roomnights tick up in the coming five years at its trend growth rate of around 5%, on the assumption of constant occupancy the market would have room for another 17,000 beds across the entire lodgings spectrum. It is not implausible that the trend growth rate will be upheld in the coming years. Although Berlin already boasts the most roomnights of all German cities, this leading position is easily put into perspective by the capital’s size. Relative to the number of inhabitants, roomnight statistics are no more than middling. The implicit growth prospects are all the better, the more successfully Berlin matures into a services centre and Berlin-Brandenburg advances to a biotech location in Germany. Once corporate education budgets permit higher attendance at meetings and conferences again, this should still work to Berlin’s advantage, securing its position as the top conference destination in Germany. 29 26 Admittedly, the entire lodgings industry notches up occupancy of around 45% for all its beds, putting it roughly on a level with the rate for Hamburg. Economics March 16, 2005 Percentage of 5-star hotels in all classified hotels - 2003 Frankfurt Berlin Hamburg Munich Cologne % 0 10 20 30 Source: Jones Lang LaSalle Occupancy rate and average price in Berlin - quality segment 160 140 EUR % 66 Occupancy rate (right) 120 68 64 100 62 80 60 60 58 40 56 Average price (left) 20 54 0 94 95 96 97 98 99 00 01 02 03 Sources: Jones Lang LaSalle, Deloitte & Touche Roomnights in relation to population - 2003 Frankfurt Munich Dresden Cologne Berlin Hamburg 0 2 Source: Federal Statistical Office 4 6 8 March 16, 2005 Current Issues 4. Concluding remarks Shortly after Germany’s reunification many investors and politicians had high hopes of the city’s economic development. After all, Berlin did become the capital of the biggest economy in Europe. And particularly in east Berlin, the pent-up demand was immense. The conclusion that the city was in need of major construction work in all segments of the property market seemed logical. Nor was it actually wrong. Even so, many expectations turned out to be inflated, mainly because the way in which the introduction of a market economy would shatter artificially preserved economic structures had been widely underestimated. This eroded the industrial base, and the new federal agencies and corporate services were unable to fill the gap. Large service clusters in such established locations as Frankfurt/Main, Munich, Düsseldorf or Hamburg were not shaken up by the new capital – by and large the economic geography remained as it was. Further major fallout from this painful structural change came in the form of dramatically distressed public budgets, dragged down by the huge strains on the labour market. Even before reunification, the public administrations were oversized, and collapsing revenues brought this into particularly sharp focus during the 1990s. High hopes after reunification disappointed … This has left skid marks on (practically) all real estate markets. On the office markets, premises conceived in the heady days of reunification euphoria are still standing empty. Crowding out has intensified on the retail market as waning purchasing power meets expanding retail areas. Consequently retail rents are sagging across the board. Finally, housing policies reacted too late as residents began “expressing their will with packing cases”. The search for affordable one- and two-family houses was met for far too long with the construction of new apartment houses. This not only dashed many investors’ expectations, it also confronted them with financial losses. The widespread reluctance to invest in Berlin is therefore understandable. But this reticence should not lead to complete abstinence, because the best chances on property markets come precisely at the end of a difficult process of adjustment. … also on the property markets Certainly, the long-range restrictions imposed by demographic change and the attendant limits to growth also apply to Berlin. Yet in national competition for new leading-edge industries Berlin could make a better showing than peripheral locations. Arguments in favour of this are the city’s extremely good education and research infrastructure and its open-minded and tolerant society, attracting young, creative people. Besides which, local-authority holders of housing portfolios are increasingly being forced to divest them. This opens up the prospect of worthwhile price markdowns for portfolio transactions, which will be all the bigger the more potential investors shy away from Berlin as a place in which to invest. To be sure, a gold-rush mentality is still inappropriate; but the overstated optimism of the 1990s has been followed by exaggerated pessimism in the new millennium. Moderate confidence and selective commitments are justified. For investors in search of security, long-range strategies make good sense, given the risks that remain in the short term. Modest optimism justified in the long term, … … but not gold-rush mentality Authors: Tobias Just, DB Research, +49 69 910-31876 (tobias.just@db.com) Guido Spars, TU Berlin, FG Stadt- und Regionalökonomie, +49 30 3142-8087 (spars@gp.tu-berlin.de) Economics 27 Current Issues ISSN 1612-314X Topics WTO textile agreement now expired: China maturing into the world’s tailor Availab le faste r by e-m ail!!! published on February 14, 2005 Stronger productivity growth in the US: largely a statistical artefact January 18, 2005 Turkey 2020: on course for convergence January 12, 2005 America after the elections: An overview of the political and economic situation Energy prospects after the petroleum age UK house prices: end of the rally in sight The U.S. balance of payments: widespread misconceptions and exaggerated worries December 14, 2004 December 2, 2004 October 15, 2004 October 1, 2004 Japanese cars: sustainable upswing expected September 27, 2004 Asia outlook: cruising at a good speed September 14, 2004 Foreign direct investment in China good prospects for German companies? August 24, 2004 Germany on the way to longer working hours August 10, 2004 All our publications can be accessed, free of charge, on our website www.dbresearch.com. You can also register there to receive our publications regularly by e-mail. Ordering address for the print version: Deutsche Bank Research Marketing 60262 Frankfurt am Main Fax: +49 69 910-31877 E-mail: marketing.dbr@db.com © 2005. Publisher: Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Federal Republic of Germany, editor and publisher, all rights reserved. When quoting please cite “Deutsche Bank Research“. The information contained in this publication is derived from carefully selected public sources we believe are reasonable. We do not guarantee its accuracy or completeness, and nothing in this report shall be construed to be a representation of such a guarantee. 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