DZ Hyp ‘cautiously optimistic’ despite weakening residential dynamics

A new study on the real estate market from lender DZ Hyp crossed our desk recently, and while it concurs largely with what other German banks are saying, the bank’s researchers conclude by taking a “cautiously optimistic” view on markets over the coming months.

The study highlights the resilience of the residential market in the face of the coronavirus, although it does identify ‘weakening dynamics’ in the sector, which were already becoming visible before the outbreak of the virus. Still, in cities like Frankfurt or Munich, the vacancy rate in the apartment sector is less than 1%, providing strong underlying support. However, the rate of migration into Germany’s big cities has noticeably slowed down, with excess demand becoming less important as a key driver of rising prices, according to CEO Georg Reutter. 

In the office sector, DZ Hyp anticipates increasing vacancy rates in the region of 1 to 2 percentage points. However, since some cities (such as Berlin) are currently suffering from office vacancies of less than 2%, the problems caused by the decline in demand will remain limited over the coming months.

According to the retail trade association HDE, the retail sector will experience a drop in sales of up to €40 billion this year. Despite the e-commerce boom that has been going on for years, more shopping centers have been built or have been enlarged. Their attractiveness will continue to decline, especially outside large conurbations.

According to the DZ-Hyp study, their loss will be to the benefit of local neighbourhood suppliers, whose yields have already fallen significantly in recent years. All in all, however, landlords of retail space in city centers and shopping centers will have to brace themselves for permanent lower demand for their space and falling rental income, say the DZ Hyp researchers

In the logistics real estate market, currently everybody’s acknowledged favourite sector, the dynamics of e-commerce will spur a significant increase in parcel shipments to private households. According to the German Parcel & Express Logistics Association (BIEK), the share of total parcel traffic could rise to two thirds of the total package delivery business. The association also expects deliveries to increase to 4.4 billion deliveries per year, 20% more than last year.

This will provide opportunities for space where such deliveries are prepared for dispatch, temporarily stored or loaded into the last-mile sprinter, with such space being very scarce.

This should give a boost to rents in these type of logistics properties, while logistics properties which focus on industrial goods handling are likely to have to wait until 2021 and a recovery in industrial growth to feel a positive impact on rent levels.

Again, like in most other market studies, the winner of the wooden spoon is hotels, whose investors and operators were riding high until coronavirus and the lockdown. Last year’s record number of overnight stays in Germany won’t be seen again until at least 2023, according to a recent survey by Cushman & Wakefield, and a view supported by the Frankfurter Messegesellschaft, organisers of the Frankfurt Fairs. They see both private and business travel remaining well behind the level of previous years for a long time, due to ongoing economic difficulties in countries particularly badly hit by the pandemic, along with sustainability issues. 

It’s clear that the airlines are also taking the same view, shedding large numbers of aircraft in their fleet permanently. All of this will inevitably lead to loss of rent and falling property values in the asset class.