High-Rises and Real Estate Prices
Interview with Real Estate Expert Prof. Fabian Thiel
The high-rise is experiencing a renaissance in many German cities, not least in Frankfurt am Main. While the focus for a long time was on the development of high-rise office buildings, the trend is now towards high-rise residential buildings and hybrid towers that combine multiple uses in one building. If the residential share is at least 20 percent of the total use, it is called “mixed used” or hybrid-building . The remaining uses are mostly office space, hotel space, services or retail. The SKYLINE ATLAS spoke to the professor for real estate valuation, Prof. Dr. habil. Fabian Thiel.
“It is becoming clear that the proportion of newly built high-rise residential buildings in Frankfurt has a strong influence on the average prices in the individual locations. ”
– Prof. Dr. habil. Fabian Thiel
SKYLINE ATLAS: Hello, Professor Thiel. Thank you for taking the time for us. You have been living in Frankfurt for 10 years now. How did you perceive Frankfurt and its skyline today? How important is the skyline for Frankfurt?
Prof. Fabian Thiel: The development of high-rise buildings, not only in Frankfurt, is in fact moving between the poles of the mass high-rise buildings of the 1970s, efforts to alleviate the housing shortage in cities and the later construction of (purely) residential high-rise buildings for “asylums” (meaning here, of course the well-paying employees of financial institutions and related service companies coming to Frankfurt after Brexit). For Frankfurt, the visual axes and high points created by the skyline are probably a trademark, a romantic-tourist “kitsch”. Other high-rise buildings in Frankfurt that do not form the skyline, such as the high-rise residential buildings of the 1970s in social hotspots on the “grünen Wiese“, have only recently received planning attention, by asking how urban redevelopment pursuant to §§ 171a ff. BauGB should be avoided.
SKYLINE ATLAS: In your work at the University of Applied Sciences, you occasionally address the topic of real estate valuation for high-rise buildings. Would you say that a high-rise building has a positive or negative effect on the respective city? Or is it not possible to say that in general?
Prof. Fabian Thiel: Through two student projects and by supervising a master’s thesis at the Frankfurt UAS in the field of property valuation of high and slim residential and hybrid high-rise buildings of the “new generation”, I was able to gain a lot of knowledge. In addition, two specialist events were formative for me: On the one hand, the specialist conference “High-rise master plan Frankfurt” in July 2016 of the Frankfurt Research Institute for Architecture, Civil Engineering and Geomatics and on the other hand the already mentioned event of the city to update the high-rise master plan in March 2019. It is clear that the proportion of newly erected high-rise residential buildings in Frankfurt has had a strong influence on the average prices in the individual locations. This is all the more astonishing as the market share of these buildings in new construction is only around 11 percent overall, but the “radiation effect” on the surrounding standard land values is considerable. This radiation effect has not yet been scientifically proven. In the top levels of the new high-rise residential buildings, average sales prices in 2019 were around €20,000/square meter of living space. Example: With an average purchase price of €8,700/square meter, maximum €19,000/square meter for a penthouse apartment in an assumed residential high-rise project, the resulting purchase price ranges from around €634,000 to €8.36 million. This results in a clear staggering of the purchase prices: 1st to 6th floor: €5,700/sqm, 7th to 30th floor: €6,900/sqm, 31st to 42nd floor: €9,400/sqm, from the 43rd floor: €19,000/sqm. If one now considers the profit margin with construction costs of €4,000/square meter, which cannot be derived from the existing BKI cost estimates for high-rise office buildings, no significant profit is achieved on the bottom eight floors. Profits that can be made from floors 9 to 12 are 10 percent, floors 13 to 15 are 20 to 30 percent profits, and floors 16 to 19 are 60 percent profits. On the top 43rd floor, the project developer has a clear profit of well over 100 percent in relation to construction costs and sales price per square meter. Residential rental prices (NKM) average €35.00 per square meter.
A key factor influencing the land value is the height of the building and the value-relevant floor area ratio (WGFZ) in the case of high-rise buildings – naturally much more so than in other multi-story apartment buildings. According to our calculations, the lower floors (zero to five) show a linear increase in value: the value of the land increases continuously with the height of the building. However, no conversion coefficients for purely residential high-rise buildings and hybrid high-rise buildings are available so far. The storey height also influences the land value. If this is higher than the standard stipulated in the HBO, the land value increases. In order to determine the land value, if data from the purchase price collection is missing, it can be advisable to use the residual value method, which leads to the highest and best use value, i.e. after deducting and deducting the development and financing costs, results in the profitable land value, which decides what you can do with a piece of land. Comparative prices for residential and hybrid high-rise buildings are not always available. As an extremely problematic valuation method, the residual value method is only suitable for valuation under strict conditions. As is well known, it does not lead to the market value of the undeveloped property according to § 194 BauGB. In this case, it is even obvious that a restrictive usage concept is assumed, through which the result of the valuation is pre-programmed, so to speak. Michael Debus, the chairman of the expert committee of the city of Frankfurt, rightly pointed out that the amount of rent and construction costs influence the residual in a completely incalculable way. This may be even more true under the influence of the pandemic. In my opinion, however, the residual value method will be subject to further development in the future, just not primarily in the high-rise area. The market value of a high-rise building in Frankfurt’s banking district is much higher than in a normal location, which is also due to the special micro-location. The land values affect the value of the high-rise buildings and vice versa. One can speak of a countercurrent principle. Due to the increase in high-rise buildings, which are also being built at economically interesting locations, numerous food and entertainment options (“food court”) are gradually emerging, which also increases the value of the location.
SKYLINE ATLAS: Numerous new high-rise residential buildings have been built in Frankfurt and will be built by 2024. However, one reads from time to time that nobody needs the new residential towers. We ask ourselves: why are they being built and why does a residential tower compete with a standard apartment on the market?
Prof. Fabian Thiel: According to the American architect Cass Gilbert, the skyscraper is widely regarded as a “machine that makes the land pay”. Gilbert has astutely pointed to the increase in land rent due to high-rise construction. According to David Ricardo, this rent is naturally higher in the center than in the periphery. In addition to ground rent, there is also floor space rent. One can therefore speak of “rent-seeking”. The construction of high-rise buildings, in particular the construction of hybrid high-rise buildings, is ultimately a consequence of the new structural paradigm of inner development according to § 1 Para. 5 Clause 3 BauGB. According to the architect Andreas Moser (cma, cyrus moser architekten), the new residential towers in Frankfurt are not about the functionalism of the 1970s combined with social standards. Due to the politically motivated shortage of space (“30 ha target”) and the planning protection of outdoor plots of land with the aim of permanent non-structural use and the associated increase in land (standard) values, it is a logical consequence to construct high-rise residential buildings indoors build, such as at the former Telenorma site on Güterplatz.
SKYLINE ATLAS: Investors who decide to buy an owner-occupied appartment in Frankfurt often come from abroad. Is that a problem for the real estate market and what about other countries?
Prof. Fabian Thiel: The compatibility of the Basic Law with European law and the European fundamental freedoms of the Treaty on the Functioning of the European Union (TFEU) with the freedom of establishment and the free movement of capital as well as the services directive and, last but not least, numerous bilateral investment protection agreements concluded by the Federal Republic of Germany, which also include investments in immovable property (Land) create an overall investment-friendly climate. One can speak of an “open” constitution, so to speak, which we have in Germany in relation to Art. 14 GG – the guarantee of property. With the appropriate capital resources, investors have almost unlimited access to the national real estate market. The tension between national construction and planning law on the one hand and European law and investment protection law on the other is not even clear to many; the legal situation is very dynamic and not very predictable. This is also due to the less precise and case-related judicature of the European Court of Justice and the arbitral tribunals.
Incidentally, the judgment of the Federal Constitutional Court in 2016 on the nuclear phase-out (Vattenfall) has a significant impact on the influence of international investments in the urban land market. Since Art. 14 GG does not protect private property, but the property of private individuals, the question in the Vattenfall proceedings was whether a company controlled by the Swedish state could invoke the protection of Art. 14 GG. Art. 14 GG is by its very nature not applicable to legal entities under public law. The Federal Constitutional Court, on the other hand, has granted an exception for the Swedish state-controlled company Vattenfall – which cannot be overestimated for land policy and land-use/land-use-regulating spatial planning in the Federal Republic. It has granted Vattenfall the right to lodge a complaint with regard to the freedom of establishment and the legal protection requirements of EU law and the ECHR if a constitutional complaint can be lodged in the event of direct legal intervention. A commercially active domestic legal entity under private law, which is fully supported by a member state of the European Union, can, in exceptional cases, invoke freedom of ownership and lodge a constitutional complaint because the Basic Law is friendly to European law.
SKYLINE ATLAS: Real estate prices have been rising and rising in recent years. One has the feeling that politics is powerless. Soil seems to have become an object of speculation more than ever. Is the land market regulated enough? Is it still possible to create affordable housing at all, or is it too late for that?
Prof. Fabian Thiel: However, these values can only be transferred to the residential high-rise market in Frankfurt to a limited extent. The construction of such high-rise residential buildings and hybrid high-rise buildings in Germany is a recent phenomenon, for which there is still relatively little data. In the office sector, all standard land values are converted linearly in relation to the WGFZ. However, transferring this scheme to high-rise buildings, which have higher GFZ values (floor area ratio), would lead to unrealistically high values. The specifications of the standard land value according to § 196 BauGB as the value that would result if the land were undeveloped, and the regulations of § 16 ImmoWertV2010 – the land is to be evaluated as undeveloped (as though vacant) – lead to developed high-rise Land regularly at unreasonably high land values and falsification of the valuation results. This is a serious problem, not only in high-rise valuations. In addition, office buildings have been converted into condominiums for some time. Because of this, it was seen as necessary to derive conversion coefficients for higher WGFZ values as well. It can be said that a value increase of up to a factor of 9.9 is “worth it”. After that, the curve flattens out, but there is no dampening. Above this value of 9.9, the building height practically no longer influences the land value. Incidentally, the rents do not increase 1:1 to the land (guide) value. Regulations, at least for planning law, are already in place today: In case of doubt, the enforcement of the specifications for social housing in residential high-rises is regularly possible through security mechanisms. If there is a change of owner, project and investor in a building with rent control, the tenancy law requirements must be entered as easements under land register law (servitude). In particular, the residential part can be secured permanently in the required quantity by a building encumbrance on the property. Finally, contractual penalties, possibly in connection with guarantees, can force the investor to comply with the elements of the contract. In practice, regulations on contractual penalties are mainly found in the development contract part of the urban development contract, for example by the investor obliging himself to make roads, transport infrastructure and compensation areas available at his own expense. This applies secondarily to the regulations on design or the requirements for energy efficiency. If contracts are not complied with, the building inspector can in principle intervene; it can only approve or release the use of the (hybrid) high-rise building if the investor can prove that the residential part has been created. There are therefore sufficient security instruments for the city of Frankfurt to ensure that the investor complies with the contractual agreements without necessarily having to rely on lengthy judicial enforcement of its claims. The sword of the (contractual) urban planning law and the supplementary building law according to the Hessian building code is therefore limited, but not as blunt and hopeless as one might think.
SKYLINE ATLAS: Since the city’s building land decision, builders should create 30 percent subsidized apartments for larger construction projects when drawing up a new development plan. The real estate industry groans about this rate, others are even demanding a higher value. What are the fundamental implications of this requirement for future construction projects? Won’t this slow down new construction projects? At least it is reasonable to assume that the remaining 70 percent would have to be sold at a higher price if these 30 percent did not exist. How do you see it?
Prof. Fabian Thiel: In 1972, the Viennese architect Hugo Potyka proposed that property owners who received binding planning permission for high-rise buildings should compensate the public financially for this. Potyka developed guidelines for high-rise building, which for the first time provided for development and sewer expansion contributions and also addressed the question of “high-rise building and topography”. This idea is now being rediscovered in modified form in Frankfurt, among other places. The city demands a 30 percent share of publicly funded housing construction from the 6th floor upwards in the planning of high zoning or in the case of fundamental changes in building law as part of land use planning. If, in an existing development project, the division into individual residential property and community property is planned in accordance with the Residential Property Act (WEG), this option is made more difficult in that the city enforces the stated quota for subsidized housing construction, based on the total living space, in each new apartment building. There is a restriction of property rights (Art. 14 GG; § 903 BGB) and a depreciation of the land. One can also speak of “vertical land policy”. These regulations also apply to hybrid high-rise buildings in Frankfurt. Investors are reacting to this. On the one hand, attempts are being made to change the mix of uses, on the other hand, publicly subsidized housing could be separated from privately financed housing in future in terms of building law and calculations. In essence, however, there is a cross-subsidy in favor of the price-limited owner-occupied apartments, the rent-reduced apartments and the other communal and cooperative areas (so-called GuG areas) through the freely financed living space share in a high-rise project. This development can be seen very clearly in the “Spin” and “Eden” projects in the Europaviertel.
SKYLINE ATLAS: Other cities are leading the way. “Affordable apartments” are being built there with leasehold rights in high-rise buildings, some of which are being built by cooperatives. Couldn’t that also be a model for Frankfurt?
Prof. Fabian Thiel: There are particular challenges in implementing and, above all, monitoring the goals for subsidized housing, especially in high-rise residential buildings, in a long-term and legally secure manner. Since the reduced rental prices are rising sharply, especially in the area of new rentals, the publicly subsidized housing construction with its fixed rent levels reduces the value of the land. In addition to this resulting underrent (i.e. a rent that is too low) over 30 years, the depreciation due to the rent adjustment period after the end of the commitment must also be taken into account. In high-priced locations, the subsidies and the financing advantages are not sufficient to compensate for the disadvantage caused by the tenancy restrictions. Public funding must also be limited in time (BGH, NJW 2019, p. 2016). One way out is to permanently secure the occupancy commitments for apartments in the funding route according to the WoBindG in the future by drafting leasehold contracts according to § 2 ErbbauRG. This is of course also possible in high-rise projects within the framework of vertical land policy.
On the one hand, there are restrictions on the owner through fixed rents (5.50 €/square meter and fixed prices for condominiums) and through the specification of the apartment sizes and the equipment (e.g. passive house, barrier-free). On the other hand, an owner must also take advantage of the granting of subsidies (loans or grants; the state of Hesse supports the 1st and 2nd funding path, the city of Frankfurt supports the 2nd funding path), rent subsidies and (currently still) favorable credit conditions permit. When assessing the impact of this ownership link on the value of the land, the reduced rental income between the subsidized rent and the market rent over the fixed period must be capitalized, as well as the reduced rental income between the end of the fixed period and when the market rent is reached. Then the calculation of the interest payments of the promotional loans over the commitment period and a calculation of the interest payments of comparable bank loans in the amount of the subsidies and grants are compared.
SKYLINE ATLAS: If you take a closer look at the individual new construction projects, so-called “serviced apartments” are becoming increasingly noticeable. Why do builders rely on this type of use?
Prof. Fabian Thiel: “Serviced apartments” with the appropriate furniture and other (upscale) equipment can, on the one hand, achieve significantly higher market-typical achievable income when renting compared to “non-serviced apartments” and, on the other hand, the owner can use such apartments to make any arrangements to limit the amount of rent. A real win-win situation – of course only as long as income is generated (e.g. no pandemic intervenes) and as long as the management costs, especially the risk of rent loss and the operating costs, do not rise disproportionately.
SKYLINE ATLAS: How can high-rise buildings be made more attractive to the general public?
Prof. Fabian Thiel: It’s about worms and fish. The architect Andreas Moser (cma) already mentioned here made a legendary analogy that he made at the specialist conference on the high-rise master plan at the Frankfurt University of Applied Sciences in July 2016: Architects no longer have to present their thoughts on living, but it there would be marketing specialists who would explain what the fish that the worm must taste like looks like. And according to this pattern the worm would be knitted (not the fish!). This hits the heart of the development of residential high-rises in Frankfurt. New gated communities are emerging, which are actually not wanted in Europe. A notable exception to this is Frankfurt am Main. Here, due to increased construction costs and land (indicative) values, the usual market yields (net cold rent) are being pushed up to such an extent that a comparable yield to high-rise office buildings can now be achieved with residential high-rise buildings. A high-quality design of the living environment, including a dog washing facility, is particularly important to the tenants living in the residential and hybrid high-rise buildings. This is only possible in a high-end segment. Urban planning in Frankfurt is attempting to protect every “new generation” residential high-rise through public use in the base zones (day care center, elementary school, supermarket as a full-range supplier, etc.) and, secondarily, in the area of the tower tops (rooftop bars, viewing platforms, etc.) or through compensation areas in the surrounding green spaces. In the “Grand Tower” project, at least 10 percent (approx. 3,000 square meters) of the GFA is planned as “amenities areas” such as concierge (doorman), lobby, fitness center, community garden on the 7th floor as well as pool and garden areas. It is not yet possible to foresee whether the uses are really “compatible” in practice and whether they are readily accessible to the public.
“…that with high-rise residential buildings, a return can now be achieved that is comparable to that of high-rise office buildings.”
Prof. Fabian Thiel on the development of high-rise residential buildings in Frankfurt am Main
SKYLINE ATLAS: From an urban planning perspective, is it more advisable to group high-rise buildings into clusters, or is there something to be said against individual high points?
Prof. Fabian Thiel: In order to calm the city silhouette, it is certainly advisable to work with clustering. This pre-selection also serves the efficient use of the plots. Admittedly, this strategy did not succeed in preventing or curbing land speculation, quite the opposite. And there is also high-rise construction at individual locations. In 1974, Rudolf Heinrich Appel published the wonderful book “Heißer Boden. Stadtentwicklung und Wohnprobleme in Frankfurt am Main”. Due to residential and hybrid high-rise construction, the ground has become even hotter when it comes to the allocation and determination of new uses for plots of land that have not yet been used or not used to the same extent for high-rise construction. Will it cool down at some point? It is clear to me that the “leaps in planning” (v. Lüpke 2000) have increased due to the update of the high-rise master plan. The landowners will therefore play a special role in the implementation and acceptance of the planning. The town planners are regularly the best friends of the landowners. Urban planning in Frankfurt has always been and still is economic development. According to the Federal Administrative Court, private interests include, in particular, the interests of property owners. In the high-rise, this affects the needs of 250 or 300 owners in the same building. The owner is primarily entitled to be spared the adverse effects of a planned project. This includes tenant interests with regard to the expected effects on the rented dwelling, the interests of the spouse or close relatives of the affected property owner, the acquisition opportunities of private companies indirectly affected by a planning measure, but also with regard to the financial interests of the public sector. With the designation of the high-rise locations in the high-rise master plan of 1998, the city created the right to build for these locations through stamp development plans. The years that followed have shown, however, that concessions to investors were a mistake. The intention of this concession was that the investors should start building as soon as possible and not leave the plots fallow for a long time. On the contrary, the start of construction of many high-rise projects was postponed and the plots with existing building permits were resold.
SKYLINE ATLAS: Since the beginning of the corona crisis, not a single high-rise project has been announced in Frankfurt that was not known beforehand. So the pipeline is empty. What does this mean for development in the coming years?
Prof. Fabian Thiel: I cannot make any predictions about this.
SKYLINE ATLAS: Please take a look into the future with us. What are the future challenges related to urban planning? What are your demands?
Prof. Fabian Thiel: In no other country on earth has it been possible to build long-term low-cost housing or instruments of social housing in a high-rise apartment building in order to maintain the social structure in the districts and districts, not even in the Austrian state of Vienna. Hong Kong – with a highly praised leasehold system and a high state ownership share of the entire territory – and with 7,500 high-rise buildings is also the country with the most unequal distribution of (residential) property in the world. Cass Gilbert is absolutely correct in his assumption: Its a machine that makes the land pay. This can be clearly observed in the “FOUR” project in Frankfurt. I find the approach of making the division of residential property more difficult under the Residential Property Act in an existing development project, interesting and also legally courageous, in that, as outlined, 30 percent subsidized housing, based on the total living space, is enforced by the city in every newly created apartment building. There is no question that property rights are restricted here due to the deterioration in the ratio of freely rentable and marketable living space in relation to the total gross floor area and, moreover, a depreciation of the land of around 10-15 percent. In summary, this can be described as “vertical social land policy”. So far, as far as can be seen, no residential high-rise investor has spoken of direct or indirect expropriation. However, this does not always have to be the case.
Studies show that construction costs increase exponentially with the height of the building. It is therefore basically surprising that there is such a high demand for apartments in Frankfurt. Which wealthy citizen, for example from the Taunus, wanted 10 years ago in a 250 or 300-family house with average purchase prices of 8,500 €/square meter of living space (as of 2019), on the upper floors (40-44th floor) with purchase prices of 12,000 -15,000 €/square meter of living space, live? A few questions are still unanswered at the moment.
Conclusion: Fish and Worm
At this point we must therefore come back to Andreas Moser’s quote above about the fish and the worm: There are marketing specialists who will explain what the fish looks like that the worm must taste like. And the worm would be knitted according to this pattern. In any case, the tolerability of the worm has not been clarified: are high-rise residential buildings really accepted by the market without any problems? How quickly can more than 300 residential units in one property be marketed as condominiums? Are regulations such as § 20 Para. 2 and 3 WEG, according to which every apartment owner can also demand “reasonable” structural changes if these measures affect the other owners beyond the unavoidable extent (and they agree to them), in a community of 250 or 300 individual (co-)owners at all enforceable? It should also be noted that in crisis situations – such as after September 11, 2001 or after September 15, 2008 – planned and even approved high-rise buildings were no longer implemented or were postponed. The risk of losing rent and the emergence of isolated “gated communities” would then be incalculable. The entire Frankfurt real estate market is highly volatile, which is currently being exacerbated by the corona pandemic. If one of the investors or those involved loses their nerve, disaster can ensue. It is therefore by no means certain whether all of the 22 high-rise projects planned will actually be realized.
SKYLINE ATLAS: Thank you very much for the conversation.
Prof. Dr. habil. Fabian Thiel
Fabian Thiel studied law at the University of Regensburg and geography at the University of Hamburg. Doctorate in 2001 at the University of Hamburg, habilitation in 2017 at the Justus-Liebig-University Gießen on the subject of “Legal Geography”. Professional positions include: HIS Hanover, Environmental Research Center Leipzig-Halle, integrated expert at the Center for International Migration and Development (CIM-IF) in Cambodia. From 2011-2016 substitute professor for real estate management and real estate valuation at the Frankfurt University of Applied Sciences in Frankfurt am Main. Since 2017 private lecturer at the University of Gießen, Institute for Geography. Venia Legendi in Geography. Professor for real estate valuation at the Frankfurt University of Applied Sciences since October 1st, 2018. Fabian Thiel researches and teaches in the areas of national and international property, construction and planning law, real estate valuation, land policy and legal geography.
Fabian Thiel und Verona Mach (2020): “Buying the Air” – Planning and Land Policy Interventions for Hybrid High-Rises in Frankfurt am Main. In: disP – The Planning Review, Volume 56, Issue 4, S. 10-23
Fabian Thiel (2020): Bewertung und Planung von Hochhäusern mit Wohn- und Hybridnutzung. In: GuG-Grundstücksmarkt und Grundstückswert, Heft 6/2020, S. 346-354