High Technology Letters ISSN NO : 1006-6748

MARKETING STRATEGIES FOR REAL ESTATE IN NEGLECTED NEIGHBORHOODS - Case Study Saxony-Anhalt -

Jörg Petermann#1 #PhD Student at Faculty of Management, Comenius University [email protected] Supervisor: Assoc. Prof. Ing. Marie Hesková PhD

Abstract

Peripheral regions of are characterized by vacancy and neglect of real estate. In the face of low market demand, owners find it difficult to find a suitable exploitation option for their property. This article is the author's second article in the thematic series 'Marketing Strategies for Real Estate in Neglected Neighbourhoods'. The first article, which has already been published, deals with the derivation of the marketing concept (Petermann et al., 2020). This article deals with a case study in which the developed marketing concept was applied. Using a holistic marketing approach, the present study, a typical problem property in Saxony-Anhalt (Jeßnitz), shows how systematic market analysis and critical vision of the owner's goal results in a new competitive marketing concept that benefits users, owners and the community.

Keywords: 'Marketing Strategy, Real Estate, Neglected Neighbourhood, Case Study Saxony-Anhalt

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Introduction – a Marketing approach for neglected locations

While there is a housing shortage in large cities such as Berlin, Hamburg, and Munich, it is often ignored that large peripheral regions of Germany are affected by housing vacancy due to a sustained decline in population. For example, housing demand in parts of Thuringia and Saxony-Anhalt is expected to fall by up to 23% by 2030. The current frontrunners in terms of vacancy are village communities such as Raguhn-Jeßnitz at the gates of -Roßlau in Saxony-Anhalt (BBSR, 2014, S: 48).

The result of the vacancy is often the neglect of buildings and entire neighborhoods, since for the property owners a renovation and the maintained maintenance of the building at the achievable market prices is no longer worthwhile or because tenants who rent the scrap properties cheaply leave them further neglected (Böcking, 2013, online). The decline of building stock and private infrastructure due to neglect is also an unresolved problem for tenants and owners in the periphery of Dessau-Roßlau (Thiemann, 2017, online).

In a guide to the handling of scrap properties, the Federal Office of Building and Spatial Planning draws up a catalogue of measures to oblige owners for the maintenance of neglected properties and, if necessary, to expropriate them (BBSR, 2009, p. 9ff). However, this practice does not solve the problem of location neglect, since after insolvency or expropriation of the private owner, the burden of property and site maintenance must be borne by the state and thus by taxpayers' money. A private-sector solution is therefore needed to make the best possible use of real estate in problem locations in the interests of tenants, owners, and affected communities.

A publication previously published developed a marketing approach for problem locations that takes into account an analysis of the demand market and a marketing strategy that takes into account the requirements of the bidder, which has been combined into a marketing concept with regard to the specific requirements of neglected real estate. The market analysis includes location, target group and competition analysis, which enables even neglected properties to be accurately valued in the overall market. The marketing strategy develops a fundamental decision on the use of the property, a suitable target market and a realistic offer price, considering the time horizon for the marketing measure. The interaction of these strategies is illustrated Figure 1.

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Figure 1Interlinking Market Analysis and Marketing Strategy to Obtain a Comprehensive Marketing Concept for Problem Locations (Petermann et al., 2020)

The following sections examine, using this approach, the extent to which it is possible for the owner or a municipal or private purchaser to use property in a neglected neighborhood to a suitable and economically valuable use by means of appropriate marketing strategies.

Objective and Methods

The original work has been written in full in German, so the tables, as well as graphs and tables, have been left in the original language of the study.

This article is the author's second article in the thematic series 'Marketing Strategies for Real Estate in Neglected Neighbourhoods'. The first article, which has already been published, deals with the derivation of the marketing concept (Petermann et al., 2020). This article deals with a case study in which the developed marketing concept was applied.

An example is referred to a concrete case study in Raguhn-Jeßnitz. The case study approach is established in real estate marketing (e.g. Denzer & Grundmann, 1999; Ziercke, 2005; Topcu, 2010; Herling, 2018), as real estate is unique assets and can be addressed in a differentiated

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way using case study methodology. Basic conclusions for the practical conception of real estate marketing in neglected locations can be derived.

A neglected apartment building in Raguhn-Jeßnitz with a living area of 300 m2, 14 rooms spread over three floors and a plot area of 223 m2 is considered, which was built in 1900 and was renovated in 2017 at least partially with regard to the plastic windows and the central heating according to the energy certificate. Otherwise, the house is partly basement, has an analog telephone connection and an electrical installation of the 1960s, older fitted kitchens and bathrooms expanded in the 1960s. The house is in an exposed street location but centrally opposite the town hall and church. Due to the relatively small plot, only a small garden or terrace can be used.

The private owner has set the house at an offer price of 98.000, - € in real estate online portals. The property is divided into several residential units, one of which is currently available for rent with 73.3 m2 of living space. The rental price of the vacant unit is indicated by the owner with 293, - € cold rent plus 190, - € additional costs prepayment. The property has been on offer since December 2019 (Immowelt, 2020).

Market analysis for the location

The market analysis provides information on the market-side supply and demand situation and includes the location, target group and competition analysis for the property.

Location analysis: Jeßnitz is a district of the town of Raguhn-Jeßnitz, located north of -Wolfen and about 20 km south of Dessau. Halle an der Saale is about 30 km southeast and Leipzig about 35 km south. Jeßnitz has about 3,650 inhabitants, which is about as many, as in 2000. Since 1947, the population has decreased by 66% (Schönfelder, 2004, p. 145). The population of the administrative community Raguhn-Jeßnitz has about 9,500 inhabitants, has decreased by 1.2% between 2011 and 2015 and a further decline of 15.8% is expected by 2030 (Wegweiser-kommune.de, 2020). After the flooding of the city by the Elbe flood of 2002, the buildings in the Centre of the village and the offered object are damaged by moisture. A demolition permit for the church next to the building was granted due to flood damage (Bistum Magdeburg, 2003).

This information suggests that the location of the property has little growth or development potential. The numerous district towns in the immediate vicinity are better connected in terms

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of transport, economically stronger and more infrastructurally attractive. In the wake of global warming, the Centre of Jeßnitz will continue to be threatened by flooding in the future.

Target group analysis: The statistical data of the municipality Raguhn-Jeßnitz provide insight into the population structure. The natural balance of the population is slightly negative at -4.1 per 1,000 inhabitants, i.e. more people die each year than are born. The number of emigrations minus emigration was slightly negative in the region until 2014 but is in positive range in 2020 at 0.6/1,000. In 2013 to 2015, families (2015: +2.8/1,000) and people aged 18 to 24 moved to the region (+ 8/1,000), while elderly people over 65 tend to migrate from the region (- 3.7/1,000). The proportion of people under 20 is 24.5% and the proportion of the elderly over 65 is 25.5% of the total population (wegweiser-kommune.de, 2020).

The target group for the sale or rental of the property in Jeßnitz is therefore basically people who already live on site and who want to change their residence, e.g. to acquire property or to save on rental costs. For example, the property could appeal to a family or a community of young people who, due to limited financial resources, are looking for cheap accommodation or want to purchase an object to renovate it themselves.

Competitive analysis: To gain an overview of competing market offers, an online search engine via real estate portals such as Immowelt.de is suitable. It was searched for houses for sale in Raguhn-Jeßnitz.

Häuser zum Kauf in Raguhn-Jeßnitz Typ Baujahr Sanierungszustand Status Wfl. Grund Angebotspreis €/m² Wfl €/m² Grd. ZFH 1911 sanierungsbed. frei 149 1192 58.000 € 389 € 49 € EFH 2000 neuwertig frei 135 170 135.000 € 1.000 € 794 € MFH 1870 sanierungsbed. frei 211,5 355 40.000 € 189 € 113 € DHH 1880 sanierungsbed. frei 70 91 30.000 € 429 € 330 € RMH 2000 gebraucht frei 112 205 85.000 € 759 € 415 € RMH+ Laden 1910 gebraucht frei 200 507 50.000 € 250 € 99 € REH 1940 sanierungsbed. frei 110 339 65.000 € 591 € 192 € Mittelwert 66.143 € 515 € 284 €

Zielobjekt 1900 sanierungsbed. teilvermietet 300 223 98.000 € 327 € 439 €

Table 1: Houses for sale in Raguhn-Jeßnitz on 12.03.2020

From this can be inferred: The offer of properties comparable to the target object is large with 7 properties measured in terms of the population of the place. The half of the offered properties need refurbishment. Only one new object is offered.

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The offer prices range from 250, - to 1,000, - €/m2 living space and 49, - to 794, - €/m2 basic area. The price in €/m2of living space is only for the new property in a comprehensible connection with the building condition. The new property is offered at twice the average price per m2 of living space.

The rental market in Raguhn-Jeßnitz on 12.03.2020 is shown in full by the following table.

Wohnungen zur Miete in Raguhn-Jeßnitz Zimmer Sanierungszustand Wfl. Kaltmiete NK €/m² Wfl KM €/m² Wfl. WM 3 sanierungsbed. 56 310 113 € 5,54 € 7,55 € 2 sanierungsbed. 49 274 100 € 5,59 € 7,63 € Zielobjekt 3 sanierungsbed. 73,3 293 190 € 4,00 € 6,59 €

Table 2: Apartments for rent in Raguhn-Jeßnitz on 12.03.2020 (Data from Immowelt.de, 2020)

Only three apartments are offered but no houses. All three properties need renovation and the rental prices range from 4, - € to 5.50 € per m2 of living space. The additional costs amount to about 30% of the rental prices.

It should be borne in mind that offer prices are not closing prices and that discounts on the offer price are to be calculated in the event of low market demand. An observation of quotation prices and objects over a longer period can provide information about sales at a site.

Marketing strategy of the provider

The existing marketing strategy of the provider must be analyzed based on the data of the market analysis for Raguhn-Jeßnitz to find weaknesses that hinder the marketing of the target object.

The owner of the property offers the entire building on the one hand partially rented for sale and on the other hand the free apartment for rent. This approach is inconclusive, since a new lease would make it even more difficult to sell and, in the event of an upcoming sale, prospective tenants would have to be turned away. If the sale fails, the owner may lose both customers.

Regarding pricing on the purchase market, the supplier ranks in the lower third of the offer prices per m2 of living space. In terms of the price per m2 of land, however, it is well above the

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average offer price of 284, - €/m2 at 439, - €/m2. Assuming that a partial rental of an object has a value-reducing effect on the purchase price due to the existing protection against dismissal of the existing tenant, the price per m2 of living space may be justified, but the price per m2 of land appears to be high in relation to the market, since investors planning to demolish the building can only terminate the existing lease if you successfully claim a significant impairment of the value of the property and also comply with the statutory notice periods (BGB). Az.: 67 S 338/09 and Az.: 67 S 475/13).

Based on the site analysis, it can be assumed that the building stock of the target object is severely damaged by the Elbe flood in 2002. Assuming core refurbishment costs of 120,- €/m2 living space (36.000,- €), which are to be applied to the purchase price of 98.000,- € on the cost side, the calculation cost for a usable existing building is 134,000,- €, i.e. 447,- €/m2 of living space and thus higher than comparable non-flood-damaged properties in the surrounding area. Due to the risks of flood remediation, the chances of selling the existing building are therefore low.

If one considers the placement of the property on the rental market, the offer price is below that of comparable competing properties, both in terms of cold and hot rent. Although the apartment offered is larger than the other available on Immowelt, the total cold rental price is similar. The fact that the property is not rented out after 4 months suggests that rental demand in the area is very low, as housing seekers are more likely to buy a property than rent it, given low financing rates and market prices. In addition, it should be borne in mind that rental properties are available in large numbers and at similar prices in the neighboring town of Bitterfeld, in a state of repair and without flood damage. The placement of the unsanctioned apartment in the target property on the rental market is not very promising since the object does not differentiate itself from existing further price-like offers or downwards. The tenant cannot repair a fundamental flood damage.

The time horizon of the marketing of the property, which has already been four months, is thus initially due to an inconclusive offer strategy that does not specifically address any suitable customer base.

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Integration of market analysis/marketing strategy in new marketing concept

On the basis of the combination of market analysis (Section 1.3) and critical evaluation of the supplier's previous marketing strategy (Section 1.4), it is examined to what extent an adaptation of the marketing concept appropriate to the target group and location can lead to an economically sensible exploitation of the building:

Section 1.4 has shown that a sale of the existing building at the intended price is not realistic due to existing tenancies and flood damage. However, if one compares the target object with the other offers in terms of its building type, it turns out that it is the only one that is suitable for a new construction developer project, since the house is located on a corner plot, while the other offered properties are middle houses and the demolition would thus place disproportionately high demands on installation and support. Developers could be targeted more specifically if the property were not rented out and a demolition permit was in place. The chances of success in achieving this are good, as even for the neighboring church a demolition application has been approved due to flood damage. Leases can be terminated within the statutory period due to the necessary total renovation or planned demolition in accordance with Section 573 of the German Civil Code (BGB), if the landlord can justify this project due to massive reductions in the value of the property in its current condition (Az.: 67 S 338/09 and Az.: 67 S 475/13) (cancellation of the realization).

The owner could succeed in this, as he has been trying in vain to sell the property below the market price for a long time. For example, in order to prepare the property for the property developer market, he could set aside both potential risk factors, i.e. terminate existing tenancies, citing irreparable flood damage and a massive impairment of the property, and apply for a demolition permit for the building. Once the tenants have moved out, the vacant property could be offered as a developer project with demolition permission. The land price for the current offer of 439, - € is above that of the other purchase properties, but these are not suitable for developers due to the middle location. There are no alternative developer properties on offer in the village. Thus, the target object could obtain a unique selling point by marketing it to developers. Alternatively, the owner could plan his own development of the property after the demolition of the property. Flood protection can be provided in the basement and ground floor to prevent further damage in the event of Elbe flooding.

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However, the economic viability of a new building of the object must be called into question. Assuming average new construction costs (reference single-family house) of 1,400 €/m2 of living space and demolition costs of a total of € 25,000 (Federal Association of Construction, 2016), the construction costs themselves are already 30% above the highest offer price (1,000,- €/m2 of living space) for a new used single-family house in Raguhn-Jeßnitz. New houses are not currently offered in Raguhn-Jeßnitz. In Bitterfeld, a new building with 172 m2 of living space is offered at 263,000 ,- € (1,529,- €/m2 Wfl.) as well as a prefabricated house with 142 m2 of living space at 309.00,- € (2,176,- €/m2 Wfl.). In Raguhn-Jeßnitz, however, the location disadvantage must be considered as a discount on these prices. The option to re-build the property after the demolition of the existing building or to sell it to a developer is therefore risky due to the lack of reference prices for new construction projects in Raguhn-Jeßnitz.

Typ Baujahr Sanierungszustand Status Wfl. Grund Angebotspreis €/m² Wfl €/m² Grd. Istzustand 1900 sanierungsbed. teilvermietet 300 223 98.000 € 327 € 439 € Sanierung des Wasserschadens 120,00 € 300 223 36.000 € Gesamtkosten 300 223 134.000 € 447 € 601 €

Neubau nach Grundstücksverkauf an Bauträger nach Abriss Grundstück 300 223 98.000 € 327 € 439 € Abriss 25.000 € Neubau nach Abriss 1400 300 420.000 € Gesamtkosten 300 223 543.000 € 1.810 € 2.435 €

Neubau durch Eigentümer nach Abriss (Vernachlässigung der Grundstückskosten) Grundstück - € Abbruch 25.000 € Neubau nach Abriss 1400 300 420.000 € Gesamtkosten 300 223 445.000 € 1.483 € 1.996 €

Table 3Design options for the offer of the object on the purchase market

The calculation in Table 3 summarizes the recovery options of the land, remediation of the water damage, new construction after demolition and sale of land to developers as well as new construction, neglecting the property costs by the owner himself.

Given the high market supply of low-cost properties for the project on the purchase market, no economic exploitation is currently possible. Even if the land were given away, the cost of a new building per m2 would be three times the average offer price for second-hand properties in the same position. The sale of the renovated property to users therefore involves high sales risks.

As an alternative to a sale, the seller might consider keeping the property in the portfolio. Due to existing rentals, the proceeds cover at least part of the running costs. For example, only the

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vacant apartment could be renovated at first and then rented out at a higher price, which covers the long-term costs of the renovation. The calculation shows Table 4:

Sanierungskostenkalkulation Wfl. Kosten/m² Gesamtkosten annualisierte Kosten 74 120,00 € 8.880,00 € 788,98 € Zinssatz 1% Kalkulationszeitraum 12 Jahre Kaltmiete m²/Monat Gesamt p.a. ist, vor Sanierung 4,00 € 3.516,00 € Mehrung durch Sanierung 788,98 € Miete nach Sanierung 4,89 € 4.304,98 €

Table 4Renovation costs of the apartment to be rented

Assuming refurbishment costs of the 74 m2 apartment of 120,- €/m2 or 8,880,- € for a simple refurbishment and converting it over 12 years to the rental price at a calculated interest rate of 1%, resulting in annual costs of 789,- €. The current annual cold rent is 293, - € * 12 = 3,516, - € would rise to 4,304, - € or 4.89 €/m2. As a result, the renovated rental apartment would still be below the cold rental price of around €5.55/m2 of the other properties in Raguhn-Jeßnitz in need of renovation. Assuming that the other apartments in the property are previously rented out more cheaply and unrenovated, one could simply wait for a change of tenant and then plan a refurbishment of these units in each case, in order to rent correspondingly to 4.89 €/m2.

As a result, the vacant apartment and later more could be rented out after successful renovation to people who move to Raguhn-Jeßnitz based on the target group analysis: young families and housing communities of young people. As a result of the refurbishment, the rental offer can be specified to a suitable target group and the target object can become marketable.

Conclusions

Using the marketing model for real estate presented in the beginning, a promising marketing concept for the target object in Raguhn-Jeßnitz could thus be developed based on clear analyses. To this end, a comprehensive market analysis was carried out about location, target groups and competition. The existing marketing strategy of the owner was critically questioned based on the results and by means of the data obtained and owner-related objectives, alternative exploitation options were systematically examined until an economic solution was found.

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A planned approach by means of the marketing model presented can thus contribute to the focus and concretization of marketing approaches. The approach is a pragmatic solution that can be independently evaluated by owners of objects in neglected areas to develop new marketing ideas. Before the construction implementation of the determined approaches, an engineering office must always be commissioned with a detailed calculation.

However, the marketing approach presented does not guarantee that in all cases the economic exploitation of real estate is possible due to purely private sector initiatives. The case study of the sales strategy for the problem property in Raguhn-Jeßnitz has shown that in some locations there is no demand for real estate at a cost-covering price.

In order to remedy this situation, it is not only the owners themselves, but also municipalities and countries that are responsible: regions gain their attractiveness through appropriate infrastructure, which must be provided by the public authorities in order to preserve real estate in value. Tax incentives (e.g. reductions on income tax and corporation tax in structurally weak areas) should also be considered to enhance small communities in terms of attractiveness to consumers and businesses compared to large cities. By diverting housing demand from urban centers to peripheral problem locations, a reduction in the housing situation in Germany can be achieved.

Bibliography

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BBSR (Bundesinstitut für Bau- Stadt- und Raumforschung) (2016). Wohnungs- und Immobilienmärkte in Deutschland 2016, Bonn.

Bistum Magdeburg (2003). Kirche darf abgerissen werden, Archiv 2003, Abruf am 11.03.2020.

Böcking, D. (2013). Forscher warnen vor Verwahrlosung deutscher Städte, Spiegel Wirtschaft Beitrag vom 05.09.2013, verfügbar unter: https://www.spiegel.de/wirtschaft/soziales/wohnen-forscher-warnen-vor-verelendung- deutscher-staedte-a-920535.html, Abruf am 1.03.2020.

Denzer, V., & Grundmann, L. (1999). Das Graphische Viertel: ein citynahes Mischgebiet der Stadt Leipzig im Transformationsprozess; vom Druckgewerbe-zum Bürostandort. Europa Regional, 7(3), 37-50.

Herling, O., Quaiser, K., & Geier, M. Kommunikation zur Beförderung der Ortsinnenentwicklung.ziv 143. Jg. 5/2018, p. 287-295.

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Immowelt.de (2020). Mehrfamilien/Eckhaus teilvermietet, teilsanierungsbedürftig, verfügbar unter: https://www.immowelt.de/expose/2u2wl47, Abruf am 12.03.2020.

Petermann, J., Marketing Strategies for Real Estate in Neglected Neighbourhoods – a Case related Analysis -, International Journal of Management, Technology And Engineering, Volume X, Issue V, May2020, p. 77-85

Schönfelder, G. (2004). Bitterfeld und das untere Muldetal. Eine landeskundliche Bestandsaufnahme im Raum Bitterfeld, Wolfen, Jessnitz (Anhalt), Raguhn, Gräfenhainichen und Brehna., Band 66 von Landschaften in Deutschland. Werte der deutschen Heimat. Verlag Böhlau.

Thiemann, H. (2017). Verwahrlosung hinter Scheibe Nord: Anwohner verärgert über Schmutz und Unkraut, Beitrag in MZ vom 09.08.2017, verfügbar unter: https://www.mz- web.de/dessau-rosslau/verwahrlosung-hinter-scheibe-nord-anwohner-veraergert- ueber-schmutz-und-unkraut-28135888, Abruf am 11.03.2020.

Topcu, E. U. (2010). Spatial distribution of factors acting upon housing prices in Istanbul. 50th Congress of the European Regional Science Association: "Sustainable Regional Growth and Development in the Creative Knowledge Economy", 19-23 August 2010, Jönköping, Sweden, European Regional Science Association (ERSA), Louvain-la- Neuve.

Wegweiser-kommune.de (2020). Statistische Daten der Region Raguhn-Jeßnitz.

Ziercke, C. (2005). Strategien zur Revitalisierung von Shopping-Centern, HAWK Hildesheim/ Holzminden/ Göttingen, ImmoForum 16.03.2005.

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Appendix

Figure 2: Raguhn-Jeßnitz region - Relative population development since 2011

Source: Wegweiser-Kommune (2020)

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Figure 3Case study object: Raguhn-Jeßnitz apartment building (Saxony-Anhalt).

https://www.immowelt.de/expose/2u2wl47

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