A Lot More Money for Nothing

Die Baustelle des künftigen Dorotheen Quartiers in Stuttgart (Baden-Württemberg), ein Bauprojekt für Geschäfte, Wohnungen und Restaurants, aufgenommen am 04.08.2016. Foto: Silas Stein/dpa (zu dpa: "Breuninger profitiert von Nachfrage nach Luxus" vom 04.08.2016) +++(c) dpa - Bildfunk+++
Competition over construction-ready land has been heating up over recent years.
  • Why it matters

    Why it matters

    Germany’s property boom may be intensified by speculation in urban land. Politicians are beginning to address the issue, with possible tax increases on the horizon.

  • Facts


    • German real estate prices continue to soar, with annual property inflation currently running at about 6.3 percent.
    • The cost of prime land in Berlin is thought to have gone up 50 percent in the last year.
    • Some voices are demanding land tax increases or zoning reform to combat land speculation.
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It looks like the only way is up for Germany’s real estate market. Almost every week, market research companies horrify some Germans — and delight others — with news of record property price increases. The latest report, from the research agency F + B, says house prices went up 3 percent in the second quarter of 2016 alone, and 6.3 percent year on year.

Observers often link this real estate price inflation to poor returns on capital elsewhere. With interest rates apparently stuck close to zero — or below — and with paltry returns on fixed-income bonds, investors are looking elsewhere for both yield and capital gain.

The other reason commonly given is the reluctance of German local authorities to approve rezoning applications. There are signs this may be changing. The first half of 2016 saw 213,600 construction permits granted across Germany, a 26 percent increase. But that’s still not enough to meet surging demand.

There is a third factor driving real estate prices in large cities, one which is increasingly coming in for criticism. In many German cities, speculators are hoarding prime sites in urban centers, neither building on them nor reselling them. Political opposition is growing to the practice, which has even drawn condemnation from within the real estate industry.

“The true winners of the property boom are the land dealers.”

Gordon Gorski, managing director, Hochtief Projektentwicklung

“We know that building land is being hoarded. That contributes to delays in construction,” said Axel Gedaschko, president of the GdW, the Federation of Housing and Real Estate Associations. Andreas Ibel, president of the Association of Independent Real Estate Companies, or BFW, agreed: “The land market is now among the major drivers of real estate prices,” he said.

This means an increasing amount of construction-ready land lies dormant, as landowners speculate on even bigger price rises.

For some time now, developers have groaned at the extraordinary increase in land prices. “The true winners of the property boom are the land dealers,” said Gordon Gorski, managing director of Hochtief Projektentwicklung, the development arm of the major German construction company Hochtief.

Developers in cities like Berlin, Düsseldorf or Hamburg used to reckon with land prices taking up about 20 percent of their budget. The figure is now closer to 40 percent.

In the last few years, land speculation in Berlin has become a very lucrative business. This year, an official city report on the real estate market claimed inflation on central sites approved for large residential buildings was running at 50 percent.

Prices for suburban sites increased 30 percent. Land prices in Munich may not be rising so quickly — at “just” 10-15 percent a year — but only because they are already so high, with suburban sites trading at €1,400 per square meter, about $1,565.

Unsurprisingly, large cities have seen the most substantial increases in land prices for residential and commercial real estate construction. But even a state like Saxony, which has no real shortage of land, saw a 12 percent increase in prices in 2015.

Nikolaus Ziegert, one of Berlin’s most important real estate and land brokers, gave Handelsblatt an example of the profits that can be made in a city growing by 60,000 inhabitants a year. He reported the recent case of a plot of land bought less than three years ago for €20 million selling on for €90 million.

Anyone who knows Berlin will be aware of many empty sites still dotting the German capital. But Mr. Ziegert says this does not mean the Berlin market is less heated than elsewhere. “There are fewer and fewer empty sites available, partly thanks to speculators,” he said. But things may not last: “I think we are coming to the end of the era of speculators.”

Mr. Gorski, the developer, agreed, saying developers are “hitting the sound barrier” in terms of the prices they can charge, and not only in Berlin. Mr. Ibel, who heads the real estate federation, also says the heat may be going out of the market. “But I have to confess, I thought the same thing two years ago,” he admits.

One plot of land in Berlin was bought for €20 million, then sold less than three years later for €90 million.

The question of how to stop speculation on building land is a live political issue. One suggestion is taxing unused land more highly than built-on land. “It is such an obvious suggestion that I wonder why politicians haven’t really taken it up yet,” Mr. Ziegert said.

But if they are thinking of taking the step, Mr. Gedaschko, from the GdW, wants to see plenty of exceptions. “I would welcome higher taxes on unused plots but only if the law contained the necessary exceptions. For example, tax rebates on sites unsold because of lack of demand,” he explained.

Some in the industry simply reject the suggestion. Mr. Ibel said: “Tax is not a solution. We should support the industry, rather than tax it.”

Mr. Gorski, the developer, suggests a different approach. Construction permits should have a time-limit of just one year. That would force owners to build themselves or sell the land on to someone who would. Currently, building permits are valid for two years, and can be easily extended for a further year.

Mr. Ziegert, the property dealer, has a surprisingly radical take in view of the fact that he makes his living buying and selling building land. “You shouldn’t be able to sell land at all,” he said, suggesting instead that ground leases should be used, to put a time limit on the use of sites.


Reiner Reichel has been working for Handelsblatt since 1995 and specializes in real estate, closed-end fund and system models. To contact the author:

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