German Housing Market Stalls Amid Rising Interest Rates

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FT reports that in Germany, house prices rose more than 60 percent in the past seven years. However, the German property market has stalled since the European Central Bank started raising interest rates last summer to tackle inflation.

According to the property price index of the Association of German Pfandbrief Banks (vdp) the price changes are as follows:

Year-on-year change in prices (Q4-2022 compared with Q4-2021):

Residential/commercial properties overall: +0.8%

Residential properties in Germany: +2.1%

Residential properties in the top seven cities: +2.2%

Commercial properties: -4.4%

– Office properties: -2.6%

– Retail properties: -9.1%

Quarter-on-quarter change in prices (Q4-2022 compared with Q3-2022):

Residential/commercial properties overall: -2.0%   

Residential properties in Germany: -1.8%   

Residential properties in the top seven cities: -2.0%   

Commercial properties: -2.9%

– Office properties: -2.4%

– Retail properties: -4.2%

The housing shortage in Germany may stanch a sharp decline in prices that could otherwise result from the current interest rate climate. Fewer than 250,000 apartment units will be built in Germany this year, down almost a fifth from 2020 and well below the government’s target of 400,000, according to Deutsche Bank economist Jochen Möbert (reported in FT).

Scope of Canada’s New Foreign Buyer Ban May Include Investment in CRE

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Canada’s Prohibition on the Purchase of Residential Property by Non-Canadians Act (S.C. 2022, c. 10, s. 235) (“the Act”) came into force on January 1, 2023. The Act is intended as a response to rising housing prices. According to RBS, the Act prohibits “non-Canadians” from purchasing residential property directly or indirectly from January 1, 2023 to December 31, 2024.

Analysis by Dentons finds that the recently published regulations associated with the Act (the “Regulations”) have greatly expanded the original scope of the Act such that the Act may now effectively prohibit a broad range of commercial transactions by corporations and other entities which have a degree of foreign ownership or control. Furthermore, the foreign homebuyer ban may apply to commercial real estate, according to Dentons, as a “residential property” is not limited to traditional residential real estate such as homes, townhomes and residential condominiums, nor is current use determinative. The Regulations, according to the analysis, deem “residential property” to include any land (whether vacant or developed) that meets the following criteria: 1.) the land does not contain any habitable dwelling; 2.) the land is zoned for residential use or mixed use; and 3.) the land is located within a census agglomeration or a census metropolitan area. The broad wording of the criteria could envelope some farmland and commercial real estate assets.

Key definitions from the Act can be found here.

Arlington, Virginia Amends Zoning Ordinance To Address New and Shifting Uses in CRE

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Lexology reports that on Jan. 21, 2023, the Arlington County Board amended the Arlington County Zoning Ordinance to allow a set of new uses. The amendment is part of Arlington’s Commercial Market Resiliency Initiative, which the county describes as “[a] strategy to modernize Arlington’s regulations, practices, and processes to ensure a more nimble response to economic shifts.”

According to the Initiative, the proposed Zoning Ordinance amendments are intended to accommodate new, emerging or expanded uses within Arlington’s commercial and mixed-use districts and include permitting micro-fulfillment centers within commercial and mixed-use districts as by-right with use standards; placing universities/colleges within the Retail, Service and Commercial Use category (as office) so as to be considered by-right without a use permit or site plan amendment; and permitting artisan beverage facilities within commercial and mixed-use districts as by-right with use standards.

Policymakers Concerned About Foreign Purchases of U.S. Agricultural Land

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There is growing concern surrounding Chinese ownership of U.S. farmland. This concern is fueled in part by the current political climate. At least 11 states are considering some form of new legislation related to foreign ownership of farmland or real estate, according to the National Conference of State Legislatures (reported in The New York Times). The Times reports that some of the new and proposed legislation specifically targets Chinese nationals, whereas others aim to proscribe ownership by all foreign governments, businesses and immigrants. Still others include countries considered to be security threats (e.g., Russia, Iran and North Korea).

According to the USDA, as of December 31, 2021, China held 383,935 acres of agricultural and non-agricultural land, which is slightly less than one percent of foreign-held acres. Canadian investors own the largest amount of reported foreign-held agricultural and non-agricultural land, with 12.8 million acres (31 percent of foreign-held acres). Texas has the largest amount of foreign-held U.S. agricultural land (~5.3 million acres), followed by Maine (~3.6 million acres) and Colorado (~1.9 million acres), according to the USDA.

The U.S. has a total of about 900 million acres of farmland, according to Politico.

Santiago Is Latin America’s Most Expensive Housing Market

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Santiago de Chile ($3,571/m²), Montevideo ($2,867/m²) and Buenos Aires ($2,570/m²) have Latin America’s highest residential property prices (as of March 2022), according to the Buenos Aires Times, which references the results of a survey conducted by the Center for Research in Finance (CIF) at the Universidad Torcuato Di Tella (UTDT) and online real estate marketplace Zonaprop. Quito ($1,217/m²), Córdoba ($ 1,289/m²) and Bogotá ($1,354/m²) have the region’s lowest residential property prices, according to Real Estate Magazine, which cites to the same CIF survey.

Santiago de Chile
Photo: Ramin Seddiq

RICS Survey Paints a Picture of Downturn in UK CRE Market

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In its quarterly UK commercial property survey for Q4-2022, the Royal Institution of Chartered Surveyors (RICS) reports that 83 percent of its respondents consider market conditions to be consistent with a downturn; 49 percent still consider this downturn to be in the early stages; and only nine percent feel the market has bottomed out in this current cycle.

The all-sector net balance for tenant demand fell to -20 percent in Q4-2022, with the net balance for office at -29 percent, retail at -45 percent and industrial at +6 percent, according to the survey. In the investment market, the survey reports that buyer inquiries fell across all sectors, with a net balance of -30 percent of respondents citing a decline in investment demand.

VFOIA’s “CEO Exemption” at Play in SUP Records Lawsuit

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In September 2021, Amazon Data Services, Inc. (a wholly-owned subsidiary of Amazon.com, Inc.) acquired a 41.7-acre parcel for $39.7 million (~$952k per acre). According to Dgtl Infra, Amazon intends to construct a one-story, 220,000sf data center on the parcel, which sits at the northeast corner of Blackwell Road and East Lee Highway (Route 29) in Warrenton, Fauquier County, Virginia.

In December 2022, Citizens for Fauquier County (“CFFC”) filed a lawsuit “as part of an ongoing effort to obtain public records from the Town of Warrenton, Virginia … relating to the Town’s processing of a proposed special use permit [(“SUP”)] sought by Amazon Data Services, Inc. … to allow it to erect a proposed 220,000 square foot data center. …” The petition demands, in part, that “a writ of mandamus should issue, compelling [Warrenton] to produce [records withheld under a VFOIA exemption].”

According to the petition, “Virginia Code § 2.2-3705.7(2) allows a public body to designate one, and only one, executive officer to enjoy certain exemptions from VFOIA disclosure, and only with respect to the executive officer’s ‘working papers and correspondence.’” The petition asserts that “[b]y using the definite article, the General Assembly’s meaning is plain: the public body may assert the privilege as to only one executive official, whether that executive official bears the title of ‘mayor’ or ‘chief executive officer.’”

The petition states that Warrenton “has improperly asserted the [CEO Exemption] as applying simultaneously to both the Town Managers and the Town Mayor” and that Warrenton’s “construction of the CEO Exemption, if permitted to stand, would deprive the public of important information about the contemplated legislative actions of its own government entirely and for all time.”

According to the Fauquier Times, after a second hearing (held on January 25) regarding the lawsuit, Judge Alfred Swersky said he needs more information before handing down a decision. During the hearing, Judge Swersky indicated that the relevant statute does not provide clarity on which individuals should be exempt from a VFOIA request and stated: “I can’t believe the absence of authority on this. I would have believed it would have come up before this. There is no guidance for it” in the statute, according to the report.

The petition is also available here.

The Great Resignation’s Relation to Housing Prices

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A paper by Favilukis and Li argues that the COVID-ear Great Resignation among older workers can be explained by increases in housing wealth. For older Americans, higher house price growth is negatively and significantly associated with the probability of being in the labor force and with the number of hours worked, according to the paper. A 65-year-old homeowner’s unconditional participation rate of 44.8 percent falls to 43.9 percent if s/he experiences a 10 percent excess house price growth, the paper propounds, whereas the labor supply of middle-aged owners is relatively unresponsive to house price growth and younger owners actually work more in response to higher house price growth.

Irish Office Sector Experiences a Marked Slowdown

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According to Bloomberg (citing research from JLL), deals for office space in Ireland dropped by 83 percent in Q4-2022, as inflation, higher interest rates and downsizing by IT companies impacted the country’s CRE market. Office deals declined from €756 million in Q4-2021 to €128 million over that same period in 2022, according to the report.

The Irish Times reports that Dublin’s office vacancy rate is 13 percent—up from six percent in 2016. According to another report from The Irish Times which cites research from Savills Ireland, office take-up in Dublin is expected to total 2.25 million square feet for 2022—nearly 50 percent higher than in 2021 but still more than 30 percent lower than 2019, when take-up was more than 3.36 million square feet.

On a separate but related note, Irish banks’ cross-border CRE exposure made up just over half of their total commercial real estate exposure at the start of 2022—the highest share in the EU, according to the Irish Independent (citing a report by the European Systemic Risk Board (ESRB)).

The ULA Tax

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Last November, about 58 percent of Los Angeles voters voted yes on Proposition ULA, according to Ballotpedia. The resulting “ULA Tax” (also known as the United to House L.A. and the Homelessness and Housing Solutions Tax) takes effect on April 1, according to Los Angeles Business Journal. It imposes an additional real property transfer tax of four percent on all real property sales (residential or commercial) priced or valued from $5 million up to $10 million and a 5.5 percent tax on real property sales priced or valued at $10 million or greater, according to Mayer Brown. About 70 percent of offices, 62 percent of multifamily and 64 percent of industrial property sales would be subject to the seller-side tax, according to The Real Deal (citing data from CBRE).

On December 22, 2022, the Howard Jarvis Taxpayers Association and the Apartment Association of Greater Los Angeles filed a joint lawsuit against the City of Los Angeles seeking to overturn the ULA Tax. According to Mayer Brown, the plaintiffs argue that the ULA Tax is a “specific tax” prohibited by the California Constitution on the grounds that the revenue from the tax must be used for specific purposes.