SPOTLIGHT Real Estate Market in Germany in early 2019 - by Dr. Franz Eilers, vdpResearch
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
SPOTLIGHT
Real Estate Market
Q1. 2019
Real Estate Market in Germany
in early 2019
by Dr. Franz Eilers, vdpResearchSPOTLIGHT Q1.2019
Real Estate Market in Germany
in early 2019
A year ago, I began this report by writing that ment properties. Fuelled by persistently
residential and office properties were expensive low interest rates and a lack of investment
and in short supply, especially in Germany's alternatives, a propensity to buy continued.
flourishing urban concentrations. Nothing has Although there was a reduction in the num-
changed in this respect in the past 12 months – ber of property transactions, this was not
except that rents, prices and capital values are due to a lack of buying interest but rather
now even higher than at the beginning of 2018. because fewer owners were prepared to liq-
uidate their properties despite higher prices.
There are good reasons why inflation on the Interest rates are unlikely to make an upward
housing and office markets has persisted and will leap, although macroeconomic developments
probably continue for the time being, at least to could dampen demand and the willingness to
some extent: invest somewhat.
1. Residential and office space is still difficult By focusing on selected indicators, the following
to secure, there are a lot of prospective cus- pages provide an up-to-date overview of move-
tomers and supply is scarce. The construc- ments in the housing and office property markets
tion of new residential and office properties in Germany. Given how sensitive real estate mar-
barely provided any relief last year. As a kets are to the economic situation, this overview
result, vacancy rates remain low on both the is preceded by a summary of macroeconomic
housing and office markets, not everywhere, conditions. As can be seen, economic growth as
but particularly where rental space is cur- well as the trends in consumer prices, incomes,
rently in demand and needed. employment and interest rates are key factors
behind the current boom in the real estate
2. Residential and office properties were also market. von Dr. Franz Eilers, vdpResearch, Berlin
very much sought-after last year as invest-
2SPOTLIGHT Q1.2019
Macroeconomic developments
Last year, the German economy From the beginning of 2010 until the
performed below expectations. Ex- end of 2018, the number of people
ceptional factors in the automotive in employment rose by a total of 4.1 All in all,
industry and less favourable foreign million, while the unemployment rate
trade conditions caused economic fell from just under 8% to below 5%. the economic
growth to lose momentum. Over the Migration was one of the main factors
year as a whole, real gross domestic fuelling job creation during this peri- background is
product (GDP) rose by only 1.5% in od. According to the Council of Eco-
2018, following a gain of more than nomic Experts, the number of foreign- solid and the
2% in each of the previous two years. ers in employment subject to social
Nevertheless, there were some posi-
tive trends: employment rose strongly
security contributions rose by almost
2 million to the present level of 3.5
interest-rate
again and the unemployment rate fell million. Without labour migration, the
to its lowest level since 1989. sharp rise in employment would not setting remains
have been possible. In the current and
In all probability, the German economy coming year, the number of people in expansionary.
will continue to expand moderately in employment will rise by 0.8% and 0.5%
2019 and 2020. The German Council respectively, according to forecasts by
of Economic Experts forecasts GDP the Deutsche Bundesbank. The result
growth of 1.5%. The Deutsche Bundes- could indeed turn out to be better, as turity of between nine and ten years
bank is forecasting an increase in real bottlenecks in the labour market are were again yielding 0.2%. This low
GDP of 1.6% this year and next. Oth- increasingly limiting growth opportu- figure does not constitute a normalisa-
ers, such as the Federal Ministry for nities. This is becoming particularly tion of interest rates, especially since
Economic Affairs and Energy, predict evident in the construction industry. inflation is around the 2% mark.
GDP growth of only 1% (2019). They all
expect domestic demand to provide The current yield on long-dated All in all, the economic background
positive impetus, while net exports (bal- German sovereign bonds was already is solid and the interest-rate setting
ance of exports and imports) are seen close to zero in 2016: this was as low remains expansionary. This will be a
as a factor putting the brakes on growth as it could possibly go. 2017 saw a contributing factor in sustaining
due to a significant increase in imports. slight rise, while there was a marginal demand for housing and offices. Eco-
It should also be emphasised that all of increase in 2018 looking at the year on nomic growth and low interest rates
the forecasts predict that the positive average. At the end of 2018, pub- have already been the main driving
trend in employment will continue. lic-sector bonds with a residual ma- forces over the past few years.
3SPOTLIGHT Q1.2019
Figure 1: Indicators of macroeconomic development
Real gross domestic product Consumer prices
Percentage change compared with corresponding period one year earlier Percentage change compared with corresponding period one year earlier
8.0 4.0
Forecast Quarterly data
6.0 Average for the year
3.0
4.0
2.0 Target for inflation
2.0
0.0
1.0
-2.0
-4.0
Quarterly data 0.0
Average for the year
-6.0
-8.0 -1.0
2007:1
2008:1
2009:1
2010:1
2011:1
2012:1
2013:1
2014:1
2015:1
2016:1
2017:1
2018:1
2019:1
2007:1
2008:1
2009:1
2010:1
2011:1
2012:1
2013:1
2014:1
2015:1
2016:1
2017:1
2018:1
2019:1
2020:1
Working population Current yield on sovereign bonds and interest on residential mortgages
Change compared to same period in previous year, in thousands As a percentage
800 6.0
Forecast Interest on residential
5.0 mortgages (10 years)
600
Quarterly data
4.0 Average for the year
400
3.0
200
2.0
0 Current yield
1.0 Quarterly data
Average for the year
-200 0
Quarterly data
Average for the year
-400 -1.0
2007:1
2008:1
2009:1
2010:1
2011:1
2012:1
2013:1
2014:1
2015:1
2016:1
2017:1
2018:1
2019:1
2007:1
2008:1
2009:1
2010:1
2011:1
2012:1
2013:1
2014:1
2015:1
2016:1
2017:1
2018:1
2019:1
2020:1
Unemployment rate Exchange rates
As a percentage Euro per dollar
11.0 1.00
Forecast
10.0 0.95
Quarterly data
Average for the year 0.90
9.0
0.85
8.0
0.80
7.0
0.75
6.0
0.70
Quarterly data
5.0 Average for the year
0.65
4.0 0.60
2007:1
2008:1
2009:1
2010:1
2011:1
2012:1
2013:1
2014:1
2015:1
2016:1
2017:1
2018:1
2019:1
2020:1
2007:1
2008:1
2009:1
2010:1
2011:1
2012:1
2013:1
2014:1
2015:1
2016:1
2017:1
2018:1
2019:1
For explanations and sources, see annex, pages 10 and 11.
4SPOTLIGHT Q1.2019
Housing market
Prices for residential properties rose within their own four walls; because there are only limited options available
significantly again in 2018. The vdp it is precisely where apartments are for redistributing demand for hous-
property price index for single-family scarce and expensive that supply is ing in a market that is tighter in some
and two-family houses rose by 8.2% low, both on the rental market and on regions than in others, the only other
and for condominiums by 5.8% on av- the property ownership market. In the approach to ease the situation is to
erage for the year. In addition, capital case of those for whom the apartment address housing supply. This requires
values for rental multi-family houses or house is primarily an investment, a significant increase in supply through
increased by 9%. Yet index figures for there are also good reasons for keep- the construction of new apartments.
Germany's top seven cities (Berlin, ing the property in their portfolio: a) Despite the marked increase seen
Hamburg, Munich, Cologne, Frankfurt, There is a lack of alternative invest- since 2010, building permits and com-
Stuttgart and Düsseldorf) rank far ment opportunities. The acquisition pletions have so far not been sufficient
above these nationwide figures. Prices
for condominiums in these locations
rose by 8%, with capital values for Germany's top seven cities:
multi-family houses climbing by 10.4%.
Prices for condominiums in
How can the sharp rise in prices last
year be explained, and how can further these locations rose by 8 %, with
trends be estimated against the back-
ground of the current rent and price
capital values for multi-family
levels? While rents for new tenancy houses climbing by 10.4 %.
agreements are mainly determined by
supply and demand for rental apart-
ments, the trend in purchase prices of other properties only leads to high to meet demand. This is clearly evident
results from conditions on the markets transaction costs; b) If it is expected from the housing vacancy rate, which
for "second-hand" residential prop- that the sustained demand will trigger is very low in many cities. The Fed-
erties. In these markets, the number further price increases, selling is not a eral Association of German Housing
of purchases has been stagnating for very attractive option, even with rising and Real Estate Companies (GdW)'s
several years, with only the amount prices and stable demand. This is be- latest market description for the city
of money being transacted increasing cause the money generated by a sale states of Hamburg, Bremen and Berlin
significantly in line with rising prices. must in turn be re-invested. shows vacancy rates of 0.9%, 1.4% and
Although the owners of residential real 1.6% respectively. New construction
estate in and around the "popular" The rise in prices is largely attributable reaching the market this year will not
cities are much richer on paper today to two factors, tight regional housing change this situation. Although various
than they were a few years ago due to markets and low interest rates. The cities now have a considerable volume
the rise in prices, the potential profits tense housing markets are leading to of dwellings not yet started or already
are not being taken. There is a lack of rising rents, while low interest rates under construction, the high degree of
willingness to sell, or the other way are driving the strong demand for capacity utilisation in the construction
around: despite the high prices, the residential property, for use both as industry alone means that it is cur-
efforts of potential buyers to acquire a home and for investment purposes. rently not possible to construct new
residential property are not finding If we want to slow down the dynamic buildings at a rate that some fear will
much favour. rent development in the prospering be excessive.
regions by addressing the root caus-
The reasons for this reluctance to sell es, it will be necessary to ease the So what options remain? It is expect-
are not clear. As a rule, owner-occupi- chronically strained housing markets in ed that the rental markets will remain
ers have no choice but to remain living the main cities of these regions. Since tight in the current year, despite an
5SPOTLIGHT Q1.2019
Figure 2: Housing market indicators
Prices and capital values residential properties
Vacancies in % of housing stock
Index, 2010 =100
220 14
TOP-7 Germany
200 Capital values multi-family houses 12 Old federal states
Prices for owner-occupied dwellings New federal states
180 Germany 10
Capital values multi-family houses
160 Prices for owner-occupied dwellings 8
140 6
120 4
100 2
80 0
2007:1
2008:1
2009:1
2010:1
2011:1
2012:1
2013:1
2014:1
2015:1
2016:1
2017:1
2018:1
2019:1
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Sales volume in the market for existing properties Dwellings not yet started or already
in thousands under construction, approved and completed,
in thousands
Residential building plots
800 Single- and two-family houses 700
Multi-family houses
Dwellings approved
700 Condominiums
600 Dwellings completed
Dwellings not yet
600 started or already
500
under construction
500
400
400
300
300
200
200
100
100
0 0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Sales volume in the market for existing properties Orders on hand residential construction
In € bn Volume index, 2010 = 100
180 300
Residential building plots Quarterly data Average for the year
160
Single- and two-family houses
250
140 Multi-family houses
Condominiums
120 200
100
150
80
60 150
40
100
20
0 50
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2007:1
2008:1
2009:1
2010:1
2011:1
2012:1
2013:1
2014:1
2015:1
2016:1
2017:1
2018:1
2019:1
For explanations and sources, see annex, pages 10 and 11.
6SPOTLIGHT Q1.2019
increase in new construction activity.
On the one hand, this will mean that
In view of low interest
the frequency at which people move rates, residential real estate
house will remain at the current low
level; relocation leads to new tenancy is highly attractive as an
agreements, which generally result
in a higher rent. On the other hand,
asset for both investors
rents under new tenancy agreements and private households.
will continue to rise and, with a time
lag, lead to higher rents for ongoing
tenancy agreements. From a social
perspective, it is hoped that the rise in occupiers, the price of an apartment ship serving as an investment is com-
rents will remain moderate. A decline can be understood as the present pared with investment alternatives. In
in rents under new tenancy agreements value of the rental payments saved in view of low interest rates, residential
is not expected. the future. The discount factor used real estate is highly attractive as an
to determine the net present value of asset for both investors and private
This brings us to the second main saved rental payments is influenced households if it promises higher
reason for the sharp rise in prices: by current interest rates. Low interest returns than, for example, bank depos-
low interest rates. Firstly, they make rates go hand in hand with a low its or securities such as government
residential property ownership more discount factor under otherwise bonds and equity investments. This
affordable and thus indirectly rein- identical conditions. A low discount is clearly the case at the moment if
force the price trend via demand for factor leads to high prices for given we consider the housing market as
property. Secondly, interest rates rents, a falling discount factor to a whole.
have a direct price effect. For owner- rising prices. Thirdly: home owner-
Conclusion
It is not possible at present to predict whether estate should remain attractive for the time
credit and capital market interest rates will rise being, without any additional impetus or
in 2019. Current trends suggest the opposite. restraining influences from the interest rate
Interest rates having started to rise very slightly side. Should interest rates remain at roughly
in the course of 2017 and 2018, they have edged the current level in the near future, we therefore
downward again since the end of 2018/beginning assume, bearing in mind expected economic
of 2019. A turnaround in interest rates is evident- growth, that the rise in prices will lose momen-
ly not imminent in one direction or the other. tum. We expect prices to rise in line with the
This means that the purchase of residential real increase in rents.
7SPOTLIGHT Q1.2019
Figure 3: Office market indicators
Office rents New construction
Index, 2010 =100 In 1,000 m²
130 3.500
Germany (vdpResearch) Germany (Federal Statistical Office) 7 cities (gif)
125
7 cities (JLL) 7 cities (gif) 3.000
120
2.500
115
110 2.000
105 1.500
100
1.000
95
500
90
85 0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Cap rates New construction, rental performance and vacancy rate
2010 = 100 As % of existing properties
120 12
Germany (vdpResearch) 7 cities (JLL) Vacancy rate Rental performance New construction
110 10
100 8
90 6
80 4
70 2
60 0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Capital values Investment volume
2010 = 100 In € bn
220 35
Germany (vdpResearch) 7 cities (JLL) Residents Non-residents
200 30
180 25
160 20
140 15
120 10
100 5
80 0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For explanations and sources, see annex, pages 10 and 11.
8SPOTLIGHT Q1.2019
Office property market
The demand for office space is essen- up. The prime rent indices of Ge- already has a high level of preletting.
tially determined by trends in service sellschaft für Immobilienwirtschaft- Secondly, the overall completion
sector jobs. As indicated at the start liche Forschung (gif) and of JLL and volume is not high enough, especial-
of this report, this trend is unequivo- the much broader vdpResearch index ly since capacity bottlenecks in the
cally expansive. When looking at the all show substantial growth rates. building trade are slowing the pace of
office market, this can be clearly seen According to gif, rents rose by 5.1 % new construction.
from the indicators "Rental per- in the course of 2018 and JLL puts
formance" and "Vacancy rate". Last growth at 7% for the period from the As far as the investment market is
year, strong employment once again end of 2017 to the end of 2018. The concerned, it should be noted first
resulted in comparatively high rental vdpResearch results, which indicate and foremost that capital values of
performance. Since at the same time, an increase in rents of 5.5%, are simi- office properties located in Germany
creation of new office space has been lar, albeit not quite as high. again rose at a faster pace than rents
below demand, vacancy rates have in 2018. This ongoing divergence is
fallen once again. At the end of 2018, Office rents will continue to rise in due to falling initial yields (cap rates,
less than 5% of office space in Ger- 2019. Although a generally weaker net initial yields). Two factors are
many was vacant; in the seven largest macroeconomic performance will crucial in this respect, ongoing low
German office markets, the weighted slow the pace of employment growth interest rates and the associated
average vacancy rate in 2018 was only and reduce the need for additional quest by institutional investors to find
around 3 %. In other words, availability new office space, overall demand for real estate investments offering higher
on the office space market has dried space and the relevant occupancy returns. Last year there was hardly any
up in the prospering conurbations. rates remain high. The upturn in new movement in interest rates, as men-
construction activity, which is reflect- tioned above, while total investment
This situation is increasingly having ed in the current plans and building in the office market, which had risen
an impact on the level and develop- permits, will not be sufficient to pro- sharply in previous years, fell only
ment of office rents. Various sources vide any general market relief for the slightly from a very high level.
indicate that office rents have recently time being. Firstly, much of the space
risen sharply as momentum has picked that is planned or under construction
Conclusion
So what will investment markets look like in the In view of the gap that already exists, however,
future? Firstly, vacancy rates on office space the question that is increasingly being posed
markets are and will remain low, and rents will, is: can this gap remain as it is, or will there be a
in all probability, rise further. This means that correction in the foreseeable future? It is virtual-
the total cash flow that office properties will ly impossible to answer this question. Firstly, it is
generate in the current year will be higher than impossible to estimate how long the low interest
in the previous year. In addition, there are no rate level will last. Secondly, up until now, there
indications that interest rate levels will rise. is no experience of the impact of persistently
Taken together, this suggests stable demand over low interest rates on the (risk) behaviour of real
the short term for investment properties on the estate investors in office markets. As a result, it
office markets, even though purchase prices are is essential to keep a close eye on further devel-
already very high. This could, in turn, mean that opments. Generally speaking, there are signs of
initial yields will drop slightly again, further wid- more cautious investor behaviour. The pace of
ening the gap between rents and capital values. decline in initial yields has slowed of late.
9SPOTLIGHT Q1.2019
Indicators Sources
Figure 1
Real gross domestic product (year-on-year-change in %)
Historical development Federal Statistical Office
Forecast for 2019 and 2020 Deutsche Bundesbank
Working population (year-on-year change in thousands)
Historical development Federal Statistical Office
Forecast for 2019 and 2020 Deutsche Bundesbank
Unemployment rate (unemployed persons as % of civilian labour force)
Historical development Federal Employment Agency
Forecast for 2019 and 2020 Deutsche Bundesbank
Consumer prices (year-on-year change in %) Federal Statistical Office
Current yield in sovereign bonds and interest on residential mortgages (in %)
Interest on residential mortgages (10 years) Deutsche Bundesbank
Current yield on public-sector bonds (residual term 9 to 10 years) OECD
Exchange rate (Euro per dollar) OECD
Figure 2
Prices and capital values for residential properties
Owner-occupied dwellings, Germany (index, 2010=100) vdpResearch
Owner-occupied dwellings, top 7 (index, 2010 =100) vdpResearch
Multi-family houses, Germany (index, 2010=100) vdpResearch
Multi-family houses, top 7 (index, 2010 =100) vdpResearch
Sales volume in the market for existing properties (in thousands) vdpResearch
Number of sales in at arm's length transactions which were calculated
on the basis of data provided by local expert committees for property
values and vdpResearch projections.
Sales volume in the market for existing properties (in € bn) vdpResearch
Sales volume in at arm's length transactions which were calculated
on the basis of data provided by local expert committees for property
values and vdpResearch projections.
Vacancies in % of housing stock
Old federal states GdW
New federal states GdW
Germany GdW
Dwellings not yet started or already under construction, Federal Statistical Office
approved and completed (in thousands)
The data for 2018 were estimated by vdpResearch.
Orders on hand residential construction (2010 =100) Federal Statistical Office
10SPOTLIGHT Q1.2019
Indicators Sources
Figure 3
Office rents (2010 =100)
Germany vdpResearch
Index for new lease rentals in a good location for office properties
in Germany as a whole (average for the year).
7 cities JLL
Stock-weighted index for prime rents in the cities Berlin, Hamburg,
Munich, Cologne, Frankfurt, Düsseldorf and Stuttgart.
7 cities gif
Stock-weighted index for prime rents in the cities Berlin, Hamburg,
Munich, Cologne, Frankfurt, Düsseldorf and Stuttgart.
Initial yields (2010 =100)
Germany vdpResearch
Cap rate index for office properties in Germany in a good location
(average for the year).
7 cities JLL
Aggregate index of net initial yields for office properties in prime
locations (prime rents) in the cities Berlin, Hamburg, Munich, Cologne,
Frankfurt, Düsseldorf and Stuttgart.
Capital values (2010 =100)
Germany vdpResearch
Ratio of rent index (Germany) to cap rate index (Germany).
7 cities JLL, vdpResearch calculations
Ratio of rent index (7 cities) to index of net initial yields (7 cities).
New construction (in 1,000 qm)
Germany Federal Statistical Office
Completed office and administrative buildings in Germany (total)
in 1,000m² floor space. The data for 2018 were estimated by vdpResearch
on the basis of building permits using a realisation function.
The realisation function shows the relationship between building permits
and completed buildings.
7 cities gif
Completions of office space in 1,000m² rental space in the cities
Berlin, Hamburg, Munich, Cologne, Frankfurt, Düsseldorf and Stuttgart.
The figure for 2015 is based on the results of a survey conducted by gif.
New construction, rental performance and vacancy rate (in %) gif, vdpResearch calculations
New construction, rental performance and vacancy rate in % of stock
of office space in the cities Berlin, Hamburg, Munich, Cologne, Frankfurt,
Düsseldorf and Stuttgart.
Investment volume (in € bn) RCA
Purchases of properties and property portfolios equal to or greater
than € 5 million. Only office properties are included in the purchases.
11Association of German Pfandbrief Banks vdpResearch GmbH
The member institutions which together make up the vdpResearch GmbH, a subsidiary of the Association
Association of German Pfandbrief Banks (vdp) have for of German Pfandbrief Banks (vdp), works intensively on
years now led the market in commercial property financing compiling, analyzing and forecasting property prices
in Germany and also hold considerable market shares in in the context of real estate financing. To this end,
the financing of residential properties. As their represen- vdpResearch examines not only individual properties
tative, the vdp looks after the Pfandbrief banks' interests but also entire property markets. Thus, its remit covers
in dealings with national and European decision-making providing comparative prices, comparative rents and
bodies as well as with a broad professional public. other valuation criteria for property markets as well as
recording and forecasting market prices by key property
The vdp's expertise is geared to the specific requirements types at the regional and national level. In its activities,
of Pfandbrief issuers in terms of the Pfandbrief itself and vdpResearch makes use of specially developed analysis
loans which are eligible as cover assets. Moreover, the vdp tools and comprehensive models designed to study
promotes the concerns of its members in regulatory mat- aggregate market trends.
ters and represents them vis-à-vis national and European
supervisory authorities. Member banks’ Pfandbrief-relat- The figures compiled by vdpResearch are today a vital
ed information and experiences are exchanged within the component for many credit institutions in evaluating and
vdp's respective bodies with a view to developing market assessing property and market risk. The nationwide prop-
standards. Additionally, the vdp provides its members erty price indices that vdpResearch prepares for the vdp
with business solutions to support the Pfandbrief banks are geared to an interested public and offer an overview
in their specific lending and issuing activities. of general price trends in Germany’s real estate markets.
Association of German Pfandbrief Banks vdpResearch GmbH
Georgenstrasse 21 Georgenstrasse 22
10117 Berlin 10117 Berlin
Telephone: +49 30 20915-100 Telephone +49 30 206229-265
E-mail: info@pfandbrief.de E-mail: kontakt@vdpresearch.de
www.pfandbrief.de www.vdpresearch.deYou can also read
