Interest rate and economic scenarios - Impact on the real estate investment market in Germany - JLL
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Interest rate and economic scenarios Impact on the real estate investment market in Germany March 2017
Current Situation March 2017 Interest rates are still at a very low level and this remains a major challenge for all institutional and private investors in Germany. Prices in the stock market are at a very high level and consequently, yields for supposedly risk-free forms of investment such as German government bonds are still close to zero. As a result, in Germany, the high investment demands of institutional investors such as funds and insurance companies are clearly reflected in the asset class property, either in a direct or indirect form. In the case of top assets in prime locations, net initial yields for office and retail properties are 3% - 4%, and around 5% for modern logistic real estate. For real estate investors, low interest rates not only limit investments in other attractive asset classes but, with the right level of leverage, they also increase the return on equity through favourable financing conditions. The subsequent strong interest in real estate investments is reflected in the transaction results. By 2015, the transaction volume in the commercial real estate market (excluding residential property held for investment purposes) had increased for six successive years, reaching a record high of EUR 55.1 billion. Last year, the transaction volume was only slightly lower at EUR 52.9 billion, but was still EUR 20 billion above the 10-year average. So, what’s next? The uncertainty resulting from political developments around the world, low interest rates and the continued economic stability in Germany are driving factors which will shape forecasts for the coming years. Changes in any of these factors will have a significant impact on the markets. From our evaluation of the survey responses of 50 real estate experts to selected individual trends, we have identified three potential scenarios for the situation in two years’ time. © 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 2
Global trade in two years’ time is expected to be
Survey responses of 50 real estate experts February / March 2017
significantly more liberal 0%
slightly more liberal 9%
unchanged 35%
slightly affected 54%
heavily affected by, for example, protectionist
2%
policies adopted by individual states
0% 10% 20% 30% 40% 50% 60%
© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 3Expectations for Germany‘s economy in two years’ time
Survey responses of 50 real estate experts February / March 2017
60%
50%
40%
30%
20% 40%
30%
26%
10%
4%
0%
Upswing Boom Recession Depression
© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 4Interest rates in two years’ time
Survey responses of 50 real estate experts February / March 2017
Expectations for US interest rates in Expectations for Eurozone interest
two years' time rates in two years' time
4% 2% 0% 0% 0% 4%
13%
21%
73% 83%
sharply increased slightly increased unchanged slightly decreased sharply decreased
© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 5Scenario 1: ‘Cooling down’ Probability of occurrence 20% The US Central Bank increases interest rates noticeably (21% of respondents believe that the US interest rate will rise sharply within the next two years), the US Dollar remains strong against the Euro due to the more attractive interest rates in the US. The US economy benefits from the US President’s ‘America First’ policy, and is growing. In Europe, the ECB's bond purchase programme ends on schedule on 31 December 2017, and the interest rate rises across all maturities (13% expect a sharp rise in interest rates in the Eurozone) due to the reduced pressure on bond prices. Brexit negotiations are proceeding on schedule, based on an exit in 2019. Referenda on whether France and the Netherlands will remain in the EU have been set up, but not yet carried out. The new German federal government has been sworn in in Spring 2018 after difficult coalition negotiations, and proceeds with routine business. The German economy records significantly lower growth, mainly driven by falling exports to the USA and UK (40% believe that Germany will be in recession in two years’ time). Unemployment has risen slightly. Economic growth is expected to be less than 1.0%. Inflation is 2.0%. In the real estate markets in Germany in two years’ time, yields will rise again, rents will be slightly lower and transaction volumes in the investment market will be well below the record levels of 2015 and 2016. © 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 6
Scenario 2: ‘On and on’ Probability of occurrence 60% The US Central Bank increases interest rates slightly (73% expect a slight increase in interest rates in the US); the US Dollar remains stable against the Euro. The US economy continues to develop well. However, the boom in German exports is dampened slightly by turbulent trade policies (54% expect global trade to be slightly affected by, for example, protectionist policies adopted by individual states). In Europe however, the ECB extends its bond purchase programme until 31 December 2018, but at a much reduced purchasing volume of just EUR 20 - 40 billion per month. In the case of short-term maturities, the yield curve remains close to zero, but in the case of longer maturities, it rises to a level of 1.25% for the 10-year mid-market swap rate (83% anticipate a slight increase in the interest rate level in the Eurozone). Brexit negotiations are unspectacular. The negotiated trade agreement between the EU and the UK is classified as fair for both sides. In France and the Netherlands, the established parties have prevailed in the elections and govern in the same manner as their predecessors. The new German federal government continues the policies of the predecessor government. The German economy remains dynamic. The export surplus remains at a high level. Unemployment is virtually unchanged. Economic growth is expected to exceed 1.0%. Inflation is below 1.5%. In the real estate markets in Germany in two years’ time, yields will remain at their current level, rents will have grown moderately and the strong demand for real estate will ensure that transaction activity remains brisk in the investment market. © 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 7
Scenario 3: ‘The heat is on’ Probability of occurrence 20% The US Central Bank stops their policy of increasing interest rates, as the Trump government's growth programme needs to be financed. The US Dollar loses ground to the Euro. The US economy benefits from the US President’s ‘America First’ policy, and is growing. The trade deficit is reduced slightly and therefore discussions about import duties is off the table. In Europe, the ECB is expanding its bond purchasing programme again as the Southern European countries and banks have still not stabilised. The interest rate remains at a low level due to the demand-driven bond prices (13% expect interest rates in the Eurozone to remain unchanged until 2019). Interest rates for up to 5-year swap transactions are below 0%. The negotiated trade agreement between the EU and the UK is classified as fair for both sides (9% of respondents believe that global trade will be slightly more liberal in 2019 than today). In France and the Netherlands, the established parties have prevailed in the elections and govern in the same manner as their predecessors. The new German federal government is focusing on key European policies. The German economy continues to benefit from the attractive interest rates and currency levels, recording a new record export surplus. Unemployment has fallen again and is approaching theoretical full employment. Economic growth exceeds 2%. Wages and prices are rising markedly (56% believe that Germany will experience an upswing or even boom in two years). In the real estate markets in Germany in two years’ time, yields will fall to new lows due to the lack of alternative investment opportunities. Rental prices will have risen in prime and secondary locations in the major cities, and transaction volumes in the investment market will have reached a new record high. © 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 8
Conclusion March 2017 Based on the opinions of 50 industry experts and our own analyses, we believe that the real estate market is robust. It is unlikely to change significantly from its current level in two years’ time. A further record run as well as entry into a weaker phase are discussed in parallel, but are currently under-weighted given the high stability of the markets. With every fictitious event in the scenarios which becomes reality through election results or contracts, the probability of occurrence can change. © 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 9
Scenario 2: ‘On and on’ (60%)
Transaction Volume (Commercial Real Estate) in Germany
€ bn
Forecast in € bn
60.0
Transaction Volume in € bn
Average (2006-2015): €
32.8 bn
40.0
54.7 55.1 52.9
49.5 47.5 47.5
20.0 39.8
30.7
23.6 25.3
19.6 19.3
10.3
0.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* 2018*
* Forecast
© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 10Scenario 2: ‘On and on’ (60%)
Prime Yields in the Big 7 (Average)
%
High Street Unit Shops
8.00
Office
7.00 Logistics-Industrial
6.00
5.00
4.00
3.00
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* 2018*
* Forecast
© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 11Matthias Barthauer Markus Kreuter National Director Research Team Leader Debt Advisory Germany Hamburg Frankfurt +49 (0)40 350011 268 +49 (0)69 2003 1211 matthias.barthauer@eu.jll.com markus.kreuter@eu.jll.com © 2017 Jones Lang LaSalle IP, Inc. All rights reserved. The information contained in this document is proprietary to JLL and shall be used solely for the purposes of evaluating this proposal. All such documentation and information remains the property of JLL and shall be kept confidential. Reproduction of any part of this document is authorized only to the extent necessary for its evaluation. It is not to be shown to any third party without the prior written authorization of JLL. All information contained herein is from sources deemed reliable; however, no representation or warranty is made as to the accuracy thereof.
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