16
GERMANY
ISSUE
I
ANALYSIS
Every year since 2009, housing prices
in Germany have risen faster than rents.
This does not apply to every single city in
Germany, but to most. Rental yield, the
ratio of current rent and agreed purchase
price, fell in every third German city in
2015 to its lowest level since reunification.
In a further third of all cities, the rental
yield is nomore than 20 basis points above
the lowest level recorded. It has become
very difficult in many places to recoup
the purchase price from potential rental
income (or saved rent). Also, the afforda-
bility, measured as a ratio of purchase price
and disposable household income, has de-
teriorated in most German cities.
“NORMAL“ ECONOMIC CYCLES
As this de-
velopment can be justified by the very low
long-term interest rates, the economic
policy in the USA can prove decisive for
German real estate markets. If US interest
rates rise significantly, then institutional
investors will be shifting their capital from
Europe into the USA and from real estate
into bonds. Therefore, the question of a
speculative exaggeration is relevant for
German real estate markets, but more
important is that prices also fall when key
fundamental factors change negatively.
This could then suddenly end the upwards
pressure on prices (but not on rents). The
discussion about real estate bubbles must
not spoil the view of “normal” economic
cycles. For commercial real estatemarkets,
it could also be that the afore-mentioned
burdens from abroad would additionally
dampen user demand for commercial real
estate faster than demand for living space
because user demand is more dependent
on the overall economic development than
is demand for living space.
Fortunately, one can take comfort in
the fact that these are all up to nowmerely
risk considerations. As mentioned before,
the German domestic economy is current-
ly more important for setting the pace
than foreign trade, and therefore 2017 is
expected to be a good year for German real
estate. But investors must take the growing
risks very seriously and plan for a liquidity
buffer for rising interest rates.
tion of alliances bears risks when they are
made suddenly and haphazardly.
WHAT THE RISKS MEAN FOR THE GERMAN
REAL ESTATE INDUSTRY
These risks are
mixed for the German real estate indus-
try: an increase in macroeconomic un-
certainties with a persistently stable do-
mestic economy in the past led to more
investment demand particularly for the
housing industry because investors were
looking for reasonably safe assets. The
euro crisis could (once again) be positive
for the German real estate market as long
as Europe does not slip into a recession.
Up to now the economic forecasts for-
tunately do not assume this. This would
then bring on persistently high demand
for living space particularly in areas of
high population density and university
cities as well as support demand for retail
space. However, this means retail space in
a broader sense including logistics space
required for online trade.
Especially for housing markets, the
fact is that despite a revival in the con-
struction sector, there has not been
enough construction in metropolitan re-
gions: Although the number of completed
buildings in 2017 is likely to be twice as
high as in 2009, the 270,000 additional
residences to be built in 2017 will not be
enough tomeet the current acute demand.
In fact, the expected volume of completed
construction in 2017 does not even equal
the long-term average of the last 25 years.
Rents and prices are therefore likely to
continue to rise.
«
Prof. Dr. Tobias Just, IREBS University of Regensburg
The Trump concept
of an economic
Twitter policy of the
new US govern-
ment is a jolly mix
of libertarian tax
and banking policy,
mercantilist trade
policy and Keynesi-
an spending policy.
Photo: Jean_Nelson - Shotshop; IREBS_Thomas_Plettenberg
