Residential property markets beyond A and B cities

5 questions to Prof. Dr. Tobias Just, Managing Director and Scientific Director of IREBS Immobilienakademie GmbH.

Dagmar Hotze: Prof. Dr. Just, in your recent study “How heterogeneous are German cities? About the segmentation of German real estate markets” you analysed whether the current classification into A, B, C and D cities is still accurate. What motivated you to work on this subject?

Prof. Dr. Tobias Just: That happened when I was having a conversation with my colleague and co-author about how people rely on a simple yield-risk-idea with the ABCD segmentation, what may actually underestimate the complexity of German cities.

Dagmar Hotze: Why is a new classification necessary? Coburg, Ulm and Bamberg for example are D cities according to the current classification, which is what investors may look into if there isn’t anything better available. According to your cluster, these cities are A locations instead. Or vice versa, Bonn and Mannheim are listed as B cities, but according to your scale they are D cities. How is this possible?

Prof. Dr. Tobias Just: The current ABCD segmentation is valuable because it reduces the the differences parameters between those locations. This aggregation of information helps investors to make a selection. However, with our analysis we were able to illustrate that the classification shows static aspects of the market size. Dynamic aspects, which are interesting to opportunistic investors, are unnoticed. We have thus assessed the cities according to conventional classification criteria such as the size but also a additional classification on behalf of the dynamic.

Dagmar Hotze: Which factors are crucial for the existing classification to be reconsidered?

Prof. Dr. Tobias Just: We have analysed a total of 18 different parameters. These parameters also include population, rent levels, employment rate and buying power. These data were consolidated with statistical methods in order to create homogeneous groups. For the static factors, the current ABCD classification was quite good, especially for the A cities. However for smaller cities there were still some other interesting allocations.

Dagmar Hotze: Now, from the investor’s point of view: Informing yourself about real estate in A and B locations and coming to a conclusion is easy. How are investors supposed to know how the market development in towns such as Landshut or Schweinfurt will be? Shouldn’t there be more transparency, depth and granularity in market reports?

Prof. Dr. Tobias Just: It’s important for investors to thoroughly think about investment decisions - regardless of whether they are private or institutional investors – because it’s not about buying bread or milk but possibly the biggest individual investment of a household. The market liquidity is important and is represented in the market size. However, in smaller cities liquidity doesn’t necessarily correlate with a stable yield. Dynamic factors become a lot more important than static factors. Market reports are worthwhile for this purpose. The current upswing could even become a catalyst because more investors are looking for investment opportunities in smaller cities. This in turn requires more transparency. Even if abundant real estate data are not readily available, small investors can still obtain free data on economic dynamics in cities from regional statistics - or at least from their advisors. You do not necessarily have to know the cluster procedures from the doctoral student seminar, a comparison of growth rates from individual cities are definitely informative.

Dagmar Hotze: Will you expand the new classifications? Are you planning a web-based version, where investors can inform themselves interactively? How about the possibility of entering a few individual investment criteria in order to see where they are best located regionally?

Prof. Dr. Tobias Just: This analysis is just the first step for us. Basic research is not a hundred-meter sprint. It rather resembles a 3000-meter-relay race with hurdles. Methods, data, examination periods and the variable selection must be tested. This analysis is our first offer and we look forward to other relay runners, but we will certainly continue to work on it.

Summary:

  • The ABCD segmentation of real estate locations is based on static parameters. Dynamic aspects are being overlooked.
  • Adding dynamic factors leads to a different classification of smaller cities. These results are possibly interesting for opportunistic investors.
  • The research of dynamic aspects should be further developed in order to provide investors with sustainable criteria.

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  • Fotograf: Thomas Plettenberg
  • Interview: Dagmar Hotze, Hamburg
  • Bild: Shutterstock, Igor Marx