Frankfurt | Residential investment | 2014/2015 MARKET REPORT

Attractive conditions for residential investment JAN LUDWIG Investment Consultant | Frankfurt

> Continued population growth in Frankfurt increases pressure on housing market > Supply of residential properties cannot keep up with this development > Demand for housing expected to considerably exceed supply in coming years

Frankfurt am Main Statistics (2013/2014) Population

700,815

Households

393,744

Unemployment rate Employees paying social security contributions Purchasing power index Disposable income per capita in € Prime yield residential

Population Frankfurt am Main (in 1,000)

> No negative effects from planned new legal regulations seen so far > Sales prices continue to rise while yields continue to drop > Revitalization, tear-downs and new-builds of existing properties offer attractive yields and value add potential for risk-inclined investors > Focus: the sub-markets Westend and Sachsenhausen

514,794

Sources: Colliers International, Statistisches Landesamt Hessen, Bundesagentur für Arbeit, Statistisches Amt Frankfurt

> Rents continue to increase, but more slowly than in past years > Favorable socio-economic conditions create attractive market for residential investors

7.3 %

Source: Statistisches Amt Stadt Frankfurt

115.5 24,142 4.12 %

Projektentwicklung MainTor Quartier (Bild: DIC Deutsche Immobilien Chancen AG & Co. KGaA)

Frankfurt will continue to be one of the most attractive major German cities in 2015. Excellent economic prospects and a favorable job market in combination with attractive quality of life continue to motivate people to move to the city, putting ongoing pressure on the housing market. The housing market in Frankfurt offers investors secure investment options as well as significant value add potentials thanks to conversions and new-builds.

KONTAKT

Population growth in Frankfurt continues

Jan Ludwig Investment Consultant [email protected]

The upward population growth trend continued in Frankfurt in 2014. As of June 31, 2014, 700,815 people were living in Frankfurt, 7,000 more than 6 months prior. That means the city is growing by 290 people each week, a development that is leaving its mark on the housing market. The population in Frankfurt has grown by almost 7% since 2010, and there are no signs of this changing in coming years. The 2010 population estimate for Frankfurt predicts an increase in population to around 725,000 residents by 2020, a further increase of more than 3%. Kalbach-Riedberg and the Gallusviertel, which includes the Europaviertel are experiencing the largest influx, two areas in which a large amount of new residential space was created in the past several years. These two areas have grown by almost 2,000 new residents and account for more than one-quarter of total population influx. The number of private households has been experiencing considerable growth for several years now, surpassing the 390,000 mark for the first time in 2013. We can expect to see an ongoing increase in the number of households in line with population growth, with household numbers potentially increasing to more than 400,000 in the next few years.

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Frankfurt

Frankfurt Dr. Tobias Dichtl Research Analyst [email protected]

Market report | 2014/2015 | Residential investment | Colliers International Frankfurt GmbH

Households in Frankfurt (in 1,000)

Source: Statistisches Amt Frankfurt am Main

New residential areas planned Increasing demand for housing in Frankfurt is facing a limited increase in supply. Between the years 2003 and 2013, an average of 2,400 apartments were completed per year and permits were issued for almost 3,000 apartments. 2013 was clearly an above-average year with 2,930 completions and more than 5,300 permits, highlighting the fact that developers are responding to the lack of housing. This development corresponds with the estimated demand for new-builds issued by the Bundesinstituts für Bau-, Stadt- und Raumforschung (BBSR). Looking at current population prognoses, however, there is a likelihood that demand has been slightly underestimated. That means that completion volumes will just barely be enough to cover demand, if at all. New housing in a volume worth mentioning is only being built in a few districts of Frankfurt as the availability of developable land, particularly in downtown areas, is limited. The City of Frankfurt, however, sees potential for around 24,000 apartments and plans to address the problem by drawing up new development plans. At the beginning of the year, the city approved development plans that could enable construction of 6,000 apartments. Some of these plans, however, have been facing headwinds in their early planning phases, and it is still up in the air whether construction will actually begin. The general interest in building new, affordable living space is often in conflict with the individual interests of various groups of residents who do not want to see the population density in their area grow or open space being used for housing. Current building activity is concentrated in Europaviertel and Riedberg, the sites of almost half of new-build apartments.

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Rents continue to increase, but more slowly than in past years Ongoing pressure on the housing market is leaving its mark on rent prices. The online portal Immowelt.de recorded significant increases in offered rents in 2011 and 2012, while rents stabilized in 2013 at an average €12.80 per sqm, almost 85% higher than the German average. A look at the different districts paints a varied picture with rents going up in top central locations where high-end new space is being offered within the scope of revitalization projects. Rents in the outer districts remain stable or have fallen slightly. Affluent individuals continue to be drawn to the city center and neighboring areas, while residential space in the lower price segment can be found in the city outskirts. High-end project developments are focusing almost exclusively on condominiums where upvalue potential can be effectively exploited. High-earners are in the market for attractive housing in top locations such as MainTor Quartier. Despite prices exceeding €12,000 per sqm, the most exclusive penthouses are currently being sold in this area while still in the planning phase.

Investors continue to be on the lookout for residential investments The favorable socio-demographic conditions in Frankfurt combined with a favorable financing environment and a lack of alternative, profitable investment options have spurred a considerable inflow of capital on the housing market. Private and small-scale investors are particularly interested in residential properties and condominiums, small to mid-sized investment opportunities that are typically less attractive to institutional investors. Investors currently active on the residential investment market differ considerably in terms of

Market report | 2014/2015 | Residential investment | Colliers International Frankfurt GmbH

their investment strategies. Project developers are taking advantage of upvalue potential from revitalization and partitioning existing buildings into condominiums. Private investors are investing in single apartments or entire residential properties for their own use or to rent out, while institutional investors are focusing on residential portfolios or larger project developments.

Project developments popular with institutional investors Project developments featuring a large amount of residential space are currently popular with many major institutional investors. These are often the only opportunity to pour larger amounts of capital into one investment, making involvement also interesting to investors who only focus on investments as of a specific size. Three large-scale projects have already changed hands this year: Rebstockhöfe, the Harry’s Lofts and Houses project and the new development, Little East. All three projects were already sold during an early planning or construction phase, clear evidence of high investor interest in the few available project developments.

Project developers focus on outdated office properties Because of the limited number of available building sites, project developers have been looking to different strategies including properties with upvalue potential through conversion. Almost 400,000 sqm of office space has been taken off the office market and converted into housing since 2012. This development is particularly apparent in Niederrad, where the conversion of a site strictly zoned for office use is being transformed into a mixed-use space with office, residential and retail. More than 100,000 sqm of space is being converted in this area alone with more conversions to follow. Other parts of the city where conversions are actively underway are in close proximity to the city center, particular in the Westend and City submarkets. Due to the high costs involved in transforming offices into residential space and the strategies being pursued by project developers, very few of these conversion projects are targeted at developing rental properties. In most cases, the buildings are being partitioned into condominiums that are then being sold to private individuals, giving project developers a concrete short-term exit strategy. Ongoing high demand for condominiums feeds this development, which, in turn, further limits the supply of rental properties.

Buidling permits and completions in Frankfurt am Main

Source: Statistisches Amt Frankfurt am Main

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Market report | 2014/2015 | Residential investment | Colliers International Frankfurt GmbH

Summary and outlook Investors are pleased with the favorable, secure conditions for residential investment but have to dig deeper in their pockets than they did a few years ago because of the high demand. Project developers and opportunistic investors who invested early on are now harvesting the fruits of their labor and selling their projects to long-term oriented investors. At the same time, they are again on the lookout for new investment properties in which they can reinvest their capital. These factors will continue to keep demand high for residential and office properties in need of revitalization and renovation and offering upvalue potential. High rents are a burden to lower to mid-income residents and strongly limit their access to some residential areas. Residents with high purchasing power can choose from a wide selection of high-end apartments, ranging from new-builds like DIC’s MainTor Quartier to mansions and luxury turn-of-the-century buildings in Westend, Nordend, Sachsenhausen and Bockenheim. We do not expect to see a shift in this polarization in the near future, as the planned new-build volume cannot keep up with population growth.

Residential market Frankfurt 2014

old building Average price for one-family houses in € new building

old building Average price for condominiums in € per sqm new building

old building rent for appartments in € per sqm new building

Prime location

Good location

Average location

Below average location

1,350,000

550,000

480,000

300,000

up to

up to

up to

up to

4,200,000

1,750,000

760,000

480,000

1,400,000

650,000

510,000

350,000

up to

up to

up to

up to

5,500,000

3,100,000

870,000

490,000

4,700

3,200

2,400

1,800

up to

up to

up to

up to

8,800

5,500

3,900

2,900

6,800

4,200

3,200

2,700

up to

up to

up to

up to

12,500

6,500

4,400

3,900

16.00

11.50

10.00

9.00

up to

up to

up to

up to

24.00

17.50

13.50

11.50

17.00

14.00

11.50

10.50

up to

up to

up to

up to

26.00

19.50

15.50

15.00

The numbers are based on our market observation and show realized prices in the mentioned categories. Differences are possible for properties with qualities above or below the standard. Old buildings are buildings developed around the turn of the century with a refurbishment within the last 10 years. New buildings cover developments within the last 5 years.

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Market report | 2014/2015 | Residential investment | Colliers International Frankfurt GmbH

Focus: Westend Westend is one of the more expensive neighborhoods in Frankfurt and is particularly characterized by high-end, attractive turn-ofthe-century archictecture and a central location. Westend has been divided into a northern and southern section for administrative purposes in which a total of around 26,800 residents live in more than 16,500 households. The household-to-person ratio is similar to that of neighboring areas but considerably higher than in the Frankfurt periphery. The above-average income of these households is very apparent when you look at the statistics. The Westend North and Westend South areas are home to people with the highest average gross salaries in all the Frankfurt districts. According to the City of Frankfurt Statistical Office, more than 20% of those employed earn a gross salary of more than €5,000 a month. This figure comes to only around 9% for the city as a whole. This aboveaverage income level can be seen on the housing and real estate market as well. Supply cannot keep up with the high demand for housing in Westend, particularly by highly liquid potential tenants and property owners. Rents and sales prices are at the upper end of the spectrum, accordingly. At the same time, however, some office properties in Westend are empty, because they no longer meet the standards and requirements of today’s office tenants. Converting office into residential space by renovating it or tearing buildings down and rebuilding them and then selling the space as condominiums holds considerable upvalue potential. More than 20 office properties in Westend featuring more than 32,000 sqm of rental space have been converted into residential properties since 2012. Additional projects are lined up as well. The largest development potential for residential space in Westend lies in the conversion of the former Oberpostdirektion building on Ludwig-Erhard-Anlage. By redesigning the old building and adding a new-build, up to 400 condominiums could be created here. The most well known development in Frankfurt’s high-price segment is also located in Westend. The former AIG building at Oberlindau 76-78 is being converted into high-end condominiums. Prices here run up to €14,000 per sqm, leaving even the former high-prices in the Westend leader, in the dust. Clients are willing to pay top price for exclusive apartments with a view of the skyline and 5-star fit-outs. We can therefore expect high-priced developments in particular to continue to crop up in Westend over the next few years.

Selected residential developements in the Westend since 2010

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Market report | 2014/2015 | Residential investment | Colliers International Frankfurt GmbH

Focus: Sachsenhausen Sachsenhausen is comprised of Sachsenhausen North and Sachsenhausen South and is a diverse district attracting a variety of residents and visitors. Its location directly along the Main river across from Old Town and Frankfurt’s city center combined with the Museumsufer and its restaurant scene and nightlife make the north part of Sachsenhausen one of the most lively areas in Frankfurt, while Sachsenhausen South is the largest in terms of total area. Almost half of this subdistrict, however, is comprised of municipally owned forest. Around 30,000 residents live in Sachsenhausen North, with the share of single-person households at almost 60%, similar to that of other districts located near the city center like Westend and Nordend. Roughly 15% of those employed earn a gross salary of more than €5,000 and the average gross salary of all employed persons in Sachsenhausen North comes to almost €4,000. Looking at income levels, that puts Sachsenhausen among the top 5 Frankfurt districts. The high income level and dynamic development of Sachsenhausen is reflected in activity on the real estate market. Tenants pay rent of between €15 and €20 per sqm for modern apartments in top locations. Sales prices for condominiums are also in the higher price segment on the Frankfurt market at up to €6,800 per sqm. Many project developers are working here to renovate existing buildings so that they can partition them into condominiums. Converting older office space into housing is also a popular strategy among developers here as it is in other parts of Frankfurt. The 12,500 sqm of former garden allotments located at Stresemannallee 47-57 are being turned into 132 apartments ranging from 50 sqm to 130 sqm within the scope of the city’s efforts to accommodate population growth in Sachsenhausen. Aberdeen Immobilien bought the residential project before construction even started. Just a few meters away, Bien Immobilien GmbH is converting a former office high-rise into a residential building featuring 45 rental apartments, a daycare and a kindergarten. Mainterra Immobilien GmbH is planning to build seven rental apartments and 48 condominiums by fall 2016 on a former railway site, marking its third project in the direct vicinity of the train tracks. What is currently the largest residential development project in Sachsenhausen is being built in Sachsenhausen South on the former site of the Henninger brewery. In addition to a 140-meter-high residential tower with 207 high-price apartments, the project will create another 800 apartments, community facilities and local amenity retail space. These examples illustrate the different possibilities for creating new living space. Because of the pressure caused by ongoing population growth and the rents that can be realized here, more extensive conversions and new-build projects could be a profitable investment.

Selected residential developements in Sachsenhausen since 2010

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Market report | 2014/2015 | Residential investment | Colliers International Frankfurt GmbH

Contact

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Jan Ludwig Dipl.-Immobilienökonom (ADI) Investment Consultant +49 69 719192-41 [email protected] Dr. Tobias Dichtl Research Analyst +49 69 719192-29 [email protected]

Colliers International Frankfurt GmbH Thurn-und-Taxis-Platz 6 60313 Frankfurt am Main | Deutschland +49 69 719192-0

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