Germany's demographics still dominate despite raft of current woes

The 6th Annual Jahreskongress Finanzierung für die Real Estate Industry took place in Berlin in mid-May, and it provided a sobering reminder of the new agenda in German real estate - which will involve taking a pragmatic approach to the very real new dangers present in the market. Several first-class presentations reminded us of the harsh realities of our economic life - realities that never really went away, but are now back, and demanding serious attention.

The event, housed in the elegant surroundings of Berlin's Humboldt Carree, was superbly organised by communications consultancy RUECKERCONSULT, and attracted upward of 150 finance-focused participants. Looming over the event was the most recent reading of the BF.direkt quarterly barometer, published just days before, in which the sentiment among Germany's real estate financial community was seen plunging to a new low, as gloom apparently gripped the industry.

Francesco Fedele, CEO of BF.direkt which was a co-sponsor of the event, opened proceedings by expressing his trepidation as to what the day might bring. When he wound down the event by addressing the audience again by early evening, he told us that his mood had lightened considerably both by what he had heard from the various speakers throughout the day, and also from the digital feedback from the representative audience, responding to an ongoing series of mini-surveys via the event's innovative and very useful app. The mood was in fact much more positive than he had dared to hope, he told us, and by no means as hesitant as his own Barometer assessments.

Three key themes ran like a common thread through most of the presentations - interest rates, inflation and the war in the Ukraine. But the opening keynote speech, from the charismatic Professor Dr. Bernd Raffelhüschen of Freiburg University, was designed to sensitise the audience to what has long been one of the biggest elephants in the room - namely, Germany's demographic bulge. No matter which way you look at it, demonstrated the professor, there will be not enough people in the future to finance the growing demands of Germany's ageing population. This is not a problem of the future, he stressed. The problem of ageing and how to support Germany's top-heavy population is already causing great strains on the system. Younger people will balk at paying ever-higher amounts into the system to support all those old people who may have thirty years or more to live, and whose living standards younger people can't hope to match. A mutiny lies ahead, we were told. And that while the country is already getting its first real taste of what a shortage of skilled labour already means.

If there was one silver lining he could offer to his real estate audience, said the professor, it was that the demographic realities offer opportunities as well as risks. The critical need for Germans to take a more hands-on approach to their own old-age pension planning would at least include continuing to view property as an attractive investment. On the other hand, even waves of immigration, whether from Syrians or more recently, from Ukrainians, won't cause much of a dint in the looming gap of skilled labour which will seriously threaten Germany's self-financing circular pension funding system, based on its ongoing intergenerational agreement. This is self-delusion on a national scale, a ticking time-bomb, that never gets fully addressed. And meanwhile, the actual home ownership rate in Germany has been going DOWN over the past few years. Food for thought, indeed.

Dr. Gertrud Traud, the chief economist of Helaba, has been our favourite economist from any of the big German banks for years. She always has something relevant to say, and doesn't hide behind walls of dry Power Point slides telling us stuff we already know. Her three big Megatrends are Demography, Decarbonisation and Deglobalisation. We were still punch-drunk from Prof. Raffelhüschen's doomsday scenario on German demographic realities, when Dr. Traud launched in with convictions that all these sanctions against Russia would ultimately come back to bite us badly.

While we in the West are largely highly critical of Russia's actions, Dr. Traud's map of the world showed just how many supporters - or at least not outright enemies - Russia still has around the globe. As the world becomes more and more distrustful, the sanctions policy will spur on individual states to raise the stakes for their own unattainable autonomy. "We're not saving the world with our sanctions", she said. When only some things are sanctioned, the effect can be withstood. But by sanctioning more things, the economic effect will hit us harder than Russia, she believes.

On interest rates and inflation, Dr. Traud pointed out that while the European Central Bank can hardly influence today's inflation rates, which are driven by various supply chain bottlenecks, it has a big role to play in managing future inflation expectations. And this it could do with more clarity in its announcements, she said - although the course of the war in Ukraine would likely prove a greater determinant of where inflation goes.

She was equally critical of our western political obsession with the three letters, ESG, which she sees as short-sighted in framing sustainability. The values of peace and security are also equally prized in the UN's sustainability goals, yet we're in danger of losing those, as evidenced by the war in Ukraine. In the ensuing panel discussion, Brigitte Adam of Mainz-based valuation consultant ENA Experts struck a chord with her audience when she highlighted how difficult it was for the purposes of valuation and the appropriate financing to capture and map the critical elements of the modern ESG taxonomy. Still very confusing, she conceded.