Development Appraisal & Residual Valuation 

• Anna Russell

Proposed uses

• Commercial - Retail

In Germany as a whole in 2023, 22% of all letting transactions were in the food and drink/restaurant sector, making the sector in second-place behind clothing and textiles (JLL, 2024a). Although Germany has been affected by high inflation and the high cost of living, which has caused consumers to shop at discounter supermarkets more often, there is potential for growth. Mintel (2024) reports that wealthier customers are more likely to buy luxury goods and premium branded products, and there is also increasing demand for home delivery services. It's important to note, additionally, that Germany is Europe's biggest market for organic food (Federal Ministry of Food and Agriculture, n.d.). There are signs that the federal government wishes to expand organic food production (Federal Ministry of Food and Agriculture, n.d.) and an increase in availability will appeal to environmentally conscious consumers, which will also likely increase demand. 

Potential commercial tenants could include the supermarket chains Rewe and Edeka, as well as Denns Biomarkt and Alnatura, both of which specialise in organic produce. 

Residential

A residential development would be able to take advantage of current and future demand for housing. The rental market in Berlin is under pressure, as demand increases and supply falls. Although prices in the owner-occupied market have fallen due to the effect of high interest rates on mortgages, it is anticipated that the market will become more favourable to potential homeowners. 

The vision is for 160 flats at the Mollstrasse site, with 80 one-bedroom flats spread over four floors, and 80 two-bedroom flats spread over 5 floors. The apartments are aimed at young professionals, couples, and small families. It is anticipated that the apartments will be sold to owner-occupiers and/or professional landlords, and due to the current pressure on the rental market, could eventually be let to tenants. We as a developer are aware of the current issues in Berlin with affordable and overcrowded housing and it is our aim that this development will contribute to alleviating this situation. 

We expect that the apartments will be in high demand with the target occupiers, given the area's excellent public transport links, availability of nearby schools and kindergartens, access to green space at Volkspark Friedrichshain, as well as the desirable location in the Mitte district.

Valuation assumptions

• Residential values

The average sale price for owner-occupied apartments in Berlin in 2023 was 5,750 EUR/sq m (Berlin Hyp and CBRE, 2024, p. 12). Moebert (2021) predicts that residential prices will rise in Germany by 24% by 2031, with an annual rise of 2.5% each year. Accounting for this yearly rise and scaling it up to 2027, the average sale price is estimated to be 6,367 EUR/sq m. 

• Commercial values and yields

JLL (2024a) reports that the average prime rent at Alexanderplatz was 170 EUR/sq m/month in 2023. The Mollstrasse site lies on the periphery of this location and would not attract this level of rental income. Some comparable properties are shown below: 

Immowelt listings

• Retail space in Alexanderplatz - 29 EUR/sq m/month:

https://www.immowelt.de/expose/2e96j53

This is a similar size to the Mollstrasse site.

• Retail/restaurant space in Prenzlauer Berg - 27.50 EUR/sq m/month:

https://www.immowelt.de/expose/28k2s59

• Retail space in Friedrichstrasse - 20 EUR/sq m/month

https://www.immowelt.de/expose/2duqh5u

Based on the above information, and the assumption that retail rents will remain stable in the next 3 years, the rental value used in the valuation is 30 EUR/sq m/month.

The prime retail yield in Berlin in H2 2023 was 3.4% (JLL, 2024). This has risen from a low point of 2.6% in Q2 2022 (JLL, 2024). Taking into account the expected fall in interest rates in the near future, the yield used in this appraisal is 3%. 

• Purchaser's costs

UK purchaser's costs have been used (at 6.8%) in the absence of Germany-specific data.

• Planning fees

It has been assumed that the project will incur municipality planning fees of around 0.5% of construction costs. This is based on evidence provided on the Real Estate Agent in Minto blog (2021). 

• Project timeline

It has been assumed that planning will take eighteen months, with the site acquired in January 2026, with building work then commencing immediately. Completion is estimated for March 2027. There will be a letting period for the retail unit of 3 months and a 6 month sales and  marketing period for the apartments (to run concurrently with the letting period). This brings the  total project length to 3.25 years. 

• Developer's profit

Developer's profit is assumed to be at a minimum of 15% based on comparable evidence from London (Savills, 2017). The margin for a residential development could be higher but this figure accounts for a potential lower profit margin from the commercial unit. Increasing or decreasing the profit margin could affect the financial viability of the project.

• Finance costs

It is assumed to be 2% higher than the current German interest rate, which is 3.6% (Deutsche Bundesbank, 2023). 

Residual valuation

Based on the completed valuation using the assumptions outlined above, the market value of the land is 63,299,384 EUR.