Germany reaping “uncertainty” dividend from Ukraine, Mid-East crises

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German institutional asset manager KGAL says in its latest half-yearly report that the German residential property market is not only benefiting from Germany’s own stable internal economic environment, but is reaping an “uncertainty” dividend from the crises raging in the Ukraine and in the Middle East, causing investors to seek the safety of bricks-and-mortar investments.

With premium residential properties now in scarce supply, already high prices can be expected to rise still further, say the KGAL researchers. They point to the numbers: transaction volumes in German residential real estate rose in the first six months to nearly €7bn, a further rise of 3% over the same period last year. Only a lack of suitable assets led to the market losing some of its dynamic factor in Q2, leaving that quarter somewhat behind last year’s. The second half is also unlikely to see the same level of large transactions, for the same reason.

However, the researchers forecast a demand for new housing of 256,000 units annually until 2025, which will keep the market under pressure. Purchase prices for apartments rose by 1.7% in Q2, while rents rose by 1.1%, showing little sign of an end to the upward trend. Potential investors should be adjusting their strategy of looking for properties in the already-stretched A-cities and going on the “controlled offensive”, particularly in smaller German cities, they advise.

The KGAL researchers also look at the prospects for retail real estate. Despite the increased competition from the online trade, Germany remains the most attractive market worldwide for retail investment, they claim. Of a total of €16.9bn of investment in commercial property in Germany in H1, a total of €4.9bn or 30% went into retail, with nearly €10bn being allocated to the segment by year-end. Foreigners were the driving force behind these figures in H1 with a market share of more than 50%, in many cases representing retailers desperate to find suitable outlets for their international brands.

Verband deutscher Pfandbriefbanken figures

A further study crossing our desk comes from the vdp Verband deutscher Pfandbriefbanken, the association of Pfandbrief-issuing banks, which correlates closely with the KGAL study. Based on actual transactional data, the vdp figures show that Prices on the German property market advanced yet again in the second quarter of 2014. The vdp property price index for the German market as a whole climbed by 4.7% in the months April to June 2014 compared with the corresponding quarter one year earlier.

"We observed the strongest price increase in the market segments comprising multi-family houses and office premises. Against the backdrop of historically low interest rates and favorable underlying economic conditions, demand for German residential and commercial properties as an investment opportunity persists. This applies again, and to a growing extent, to institutional investors from abroad,” said Jens Tolckmitt, Chief Executive of the vdp.

In the housing market, the price of owner-occupied residential property rose by 2.5 % compared with the same period the previous year. For single-family and two-family properties, the increase on the same quarter last year was 2.6 %. The figure for condominiums was more modest, with prices rising by 2.2 % over the same period.

Multi-family house prices saw a considerably larger rise. The capital value index for multifamily houses rose by 7 % when compared with the second quarter of 2013. This was fuelled by a sharp rise in new lease rentals, which increased by 5 % against the second quarter of 2013. At the same time, there was a 1.9 % fall in the cap rate index for multi-family houses. Overall, in the second quarter of 2014, the vdp residential property price index rose by 4.8 % compared with the second quarter of 2013.