Bullish note on German residential from Gothaer

Insurer and wealth manager Gothaer Asset Management issued a bullish note earlier this month on the German residential sector, suggesting that market mechanisms were functioning well enough to allow construction to react to increased demand for residential property. After the sharp rise in prices over the past two years, and with interest rates more likely to go up than go down from here, Gothaer sees market consolidation within two years as very likely.

According to Ingo Bofinger, head of property at Gothaer, 9.6% more apartment building permits were issued in this year’s first half than in the same period last year, while in parallel the strongest price growth in the period was seen in the rental apartment sector in the largest cities, reflecting the strong trend back into the cities. “All the indicators are that the market is reacting to rising demand in the residential sector”, he says. “For existing assets, rents are rising when the tenant changes, following the trend in new construction – a clear indication that the market can handle the high demand. The proposed cap on housing rents from politicians would only lead to a new imbalance in the market.”

Low interest rates are leading to above-average yields for non-owner-occupied property, making investment in the sector continue to look good, says Bofinger. However, while financing conditions are good, they should not form the exclusive basis for investment, and traditional factors such as asset quality and location are still key. “Only when the investment meets these criteria should you invest, when the upward real estate cycle comes to an end. Even if things look good today, every market needs to take a breather and no upward trend lasts forever. Given the volume of new building and likely rise in interest rates, this could be in two years.”