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Germany’s property downturn

IFM_ Germany's property downturn
The inflation rate in Germany for 2022 is 7.9%, even though office rents climbed by 5.9% and retail rentals by 6.2% in 2022 compared to the prior year

Germany has long profited from a period of low-interest rates that fuelled a real estate bubble that lasted for ten years, but the industry is currently dealing with a significant change of events.

The largest real estate company in Germany, Vonovia, has reported losses and write-downs of multiple billions of euros, while the number of construction jobs has remained flat. As the crisis develops, consider the important enquiries mentioned below.

Decoding the ‘German Interest’

Although Sweden and the United States have also experienced real estate weakness, Germany stands out as the continent’s largest economy and real estate investment market.

According to the German Property Federation, the real estate industry accounts for one in ten jobs and around a fifth of economic output.

In contrast to the average of the previous two years, new construction in Germany fell dramatically over the first half of the year, falling 47%, while new building permits fell 27% during the first five months.

In the first quarter, home prices fell by 6.8% from a year earlier, the largest since the German statistics office started collecting data.

To break it down to simple stats, during the first half of 2023, German authorities approved the construction of 135,200 apartments, which were 50,600 fewer building permits issued during the same period in 2022.

Germany’s Federal Statistical Office (Destatis) numbers show that June 2023 alone showed an activity drop of 28.5% with only 21,800 approved dwellings when compared with the same month in 2022.

Between January to June of 2023, 111,500 dwellings were approved in new residential buildings, nearly 31% fewer than in the same period last year.

The number of building permits for single-family houses fell by 35.4%, while for two-family houses, the number of approved dwellings had fallen by 53.4%.

Data will be available in September and will provide information on the state of the construction jobs as well as how far along the trend is.

Sven Carstensen, CEO of the real estate consulting and analysis firm Bulwiengesa, predicted that the current crisis will last for a while.

What follows the slump?

The European Central Bank’s unexpected and swift increase in interest rates as it cracks down on the greatest inflation rates in decades has been the key contributing element, but there are other factors as well.

In addition, building expenses have increased, and since the COVID-19 pandemic, demand for offices and retail space has decreased. German real estate appears riskier to foreign investors as a result of the conflict in Ukraine.

“If you’re a Middle Eastern investor, Germany seems to be rather near to Ukraine. They claim that they prefer to shift funds to the United States and Asia rather than Germany,” according to Florian Schwalm, an EY consultant.

Judging the broader impact

Banks have benefited from higher interest rates since they have seen significant gains in interest income, but real estate lending also accounts for a sizable portion of their business.

Property corrections are a top concern, according to BaFin, the country’s financial authority, which is on high alert. It examines commercial and residential real estate bank financing.

The nation’s largest bank, Deutsche Bank, is downsizing its mortgage business in a move that would eliminate hundreds of jobs, while some insurers, who invest in real estate as part of their substantial holdings, are in the process of reevaluating their portfolios.

An uncertain future

Germany intends to build 400,000 dwellings a year but is having difficulty meeting its targets as millions of migrants and refugees from Ukraine flood the nation.

On September 25, politicians, ministries, and representatives from the real estate business will meet with Chancellor Olaf Scholz to try to identify solutions. Some are already vying with ideas to revitalise the industry.

Germany Housing Minister Klara Geywitz advocated for further tax credits to write off the expenses of constructing new homes last week.

To encourage new home construction, Andreas Mattner, the head of the German Property Federation, is pleading with the government to temporarily postpone a property sales tax.

The leader of the German Construction Industry Federation, Tim-Oliver Mueller, is advocating for a set of emergency measures, including the cheap sale of public land for building leases.

Current scenario of commercial property market

After a protracted period of market growth, during which the yearly number of transactions increased from EUR 10.45 billion in 2009 to EUR 68.3 billion in 2019, the volume of commercial real estate transactions in Germany has significantly reduced during the past 18 to 24 months.

In the COVID-affected year of 2020, the transaction volume decreased to EUR 59.2 billion, according to CBRE. Following that, the German market appeared to show signs of recovery in 2021 (EUR 62.1 billion), but in 2022, the transaction volume fell even more, to EUR 52.3 billion.

According to Cushman & Wakefield’s research, the number of transactions in the office sector decreased by almost 27% between 2021 and 2022, while it climbed by 4% for industrial and logistical properties.

According to the broker network German Property Partners (GPP), commercial real estate transactions for the seven largest German cities totalled about EUR 2.6 billion during the first quarter of 2023, a decline of 72% from the same period the year before.

Cushman & Wakefield’s additional research indicates that in the first quarter of 2023, the German commercial real estate investment market as a whole saw a transaction volume of EUR 5.1 billion.

In light of this, the first three months of 2023 were the year’s worst start since 2010. The strong increase in loan interest rates, as well as other political and economic factors like higher construction costs, supply shortages, higher energy costs, and political planning for climate protection measures on buildings, is leading to uncertainty and unforeseeable costs, as well as the effects of the COVID-19 pandemic and the ongoing Ukraine war, are considered to be the main causes of the current decline in transaction volumes in the real estate market.

This current shift in the real estate market comes with hazards, but it also presents several opportunities for prospective investors.

Leasable space is more readily accessible on the leasing market right now, and rents are rising more gradually. According to a report by the Institute of the German Economy from April 2, 2023, one out of every four listings for office buildings spends an average of 38 weeks on the market. Particularly, the demand for office space away from premium areas has decreased recently.

The drop in demand frequently has an impact on office properties in rural or suburban settings. The importance of being centrally located remains high, especially for commercial establishments. The Institute of the German Economy estimates that, overall, rentals for office and retail premises in 2022 fell short of the rate of inflation. The inflation rate in Germany for 2022 is 7.9%, even though office rents climbed by 5.9% and retail rentals by 6.2% in 2022 compared to the prior year.

The shift in many employees’ workdays since the onset of the pandemic, when they increasingly exploit the option of working from home offices, is another factor contributing to the demand in the office property market. To save money on office space, employers are choosing more frequently to replace it with new, innovative office concepts like multi-space offices and desk sharing, which provide a higher degree of variability and flexibility and are tailored to the specific needs of the tenant.

Germany, once propelled by a decade-long real estate boom fuelled by low-interest rates, now finds itself amid a substantial downturn. The landscape of the largest economy in Europe is transforming and the real estate sector grapples with a cascade of challenges. Vonovia’s staggering losses and construction job stagnation are stark reminders of the industry’s current predicament.

Amid this crisis, Germany’s significance in the global real estate market becomes even more pronounced. The country’s position as a major economic powerhouse and its substantial contribution to employment and economic output underscore the weight of the situation.

The severity of the situation is evident in the plummeting statistics. Drastic drops in new construction, building permits, and home prices in the first half of the year are emblematic of the challenges at hand. Predictions of a prolonged crisis by industry experts like Sven Carstensen hint at the enduring nature of the struggle.

The catalysts behind this slump are multi-faceted. The European Central Bank’s unexpected interest rate hikes, coupled with rising building costs and reduced demand for commercial spaces in the wake of the pandemic, have set the stage for this crisis. Geopolitical concerns further amplify the perception of risk, deterring foreign investment.

This slump resonates beyond the real estate sector, rippling into the financial landscape. Banks, while benefiting from increased interest rates, are now navigating concerns over their substantial real estate lending. Property corrections are at the forefront of regulatory attention, as BaFin scrutinises real estate bank financing. Even major institutions like Deutsche Bank are scaling back their mortgage businesses, and insurers are reassessing their portfolios.

As the nation strives to address the crisis, the challenge of accommodating millions of migrants and refugees from Ukraine adds to the complexity. High-level discussions scheduled with Chancellor Olaf Scholz and stakeholders from the real estate industry demonstrate the urgency of finding solutions. Various stakeholders, including Germany’s housing minister, real estate federation leaders, and industry advocates, are proactively offering ideas to stimulate the sector’s revitalisation.

In the commercial real estate transaction market, the downturn’s impact is tangible. A significant reduction in transaction volumes over the past 18 to 24 months, coupled with changes in interest rates and economic factors, has reshaped the playing field. This decline in transactions poses both risks and opportunities for prospective investors, as the market recalibrates and redefines its potential.

Regarding commercial real estate rents, the landscape is shifting as remote work practises alter demand dynamics. The availability of leasable space has increased, resulting in a more gradual rise in rents. A notable trend is the decreased demand for office spaces located away from premium areas, which has prompted a shift towards innovative office concepts that align with the evolving needs of tenants.

Germany’s real estate sector is undergoing a seismic shift, transitioning from a prolonged period of growth to a challenging downturn. The convergence of factors such as interest rate hikes, geopolitical tensions, changing work dynamics, and economic uncertainty has set the stage for this transformation. While presenting formidable challenges, this downturn also opens doors to innovative solutions and investment opportunities that could reshape the future of Germany’s real estate landscape.

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