Current Issues Berlin property market: Heavily mortgaging the future

Transcription

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
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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
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
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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.
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.
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%
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.
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.
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
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
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
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
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
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
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
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Current Issues Berlin property market: Heavily mortgaging the future

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