German Bundesbank sounds alarm over potential property ‘bubble’

Is a German property bubble on the cards? Germany’s central bank (Bundesbank) seems to think so and sounded an alert earlier this month, citing low interest rates and banks chasing yields.

Speaking at a conference in Frankfurt earlier this month, the Bundesbank's chief banking supervisor, Andreas Dombret, urged both lenders and financial supervisors to be alert to the potential danger: ‘The good news is that there is currently no property bubble threatening financial stability in Germany. But the traffic light is clearly on yellow,’ he warned.

It is an unusual situation for Germany to find itself in, a country – much like its neighbour Switzerland – where home ownership has never been the Holy Grail. Germany’s home ownership rate has hovered around 40% for years but is starting to edge upwards, fuelled by historically low interest rates.

Germans are more keen to get on the housing ladder than they used to be because property offers better returns than they can get on their savings or government bonds. As a result, ‘Betongold’, or concrete gold, is viewed by many as their most stable investment option. It’s easy to see why: house prices in 127 German cities have risen by almost 50% since 2010, according to the Bundesbank. In Germany’s ‘Big 7’, including Berlin and Munich, prices in the period have leaped by 60%.

Early warning indicators, such as credit volumes and easing credit standards, suggest that banks are now willing to take on more risk, Dombret added. ‘The mixture of a booming property market and low interest rates can become a dangerous cocktail for the banking and savings banks sectors,’ he added.

International institutional investors, for their part, are undeterred. In fact, they are upping their exposure to the German residential market. In the first quarter, there were €3.7bn in residential deals, up from €2.1bn in the same quarter last year, according to JLL. Last year, there were around €13.7bn in deals.

The increased interest is, unsurprisingly, pushing up rents, according to Dr. Konstantin Kortmann, head of residential at JLL in Germany: ‘Residential prices are still increasing in Germany but now they are being driven by asset managers rather than the big landlords, such as Vonovia and Deutsche Wohnen,’ he said. ‘Asset managers look to reposition assets and then to increase rents. Investment funds, in particular, bet on the short-to-mid-term horizon. Large listed companies, on the other hand, are more about cash flow and the economies of scale,’ he added.

In Germany’s ‘Big 7’, JLL is forecasting average rental growth this year of between 3% and 5%. ‘In smaller B cities, we expect it to be more than 5% as more people look to live outside the main cities, because it’s cheaper. Many investors are now looking at brownfield sites with a view to developing residential assets,’ Kortmann added.

For investors looking to grab a bigger slice of Germany’s residential pie, there are a couple of portfolios up for grabs in Hamburg. JLL is believed to be marketing one for around €110m and PwC is selling another of a similar size. No details have been disclosed.

Following the flurry of consolidation in Germany’s residential sector in recent years, further consolidation could also be on the cards, according to analysts: ‘Vonovia and Deutsche Wohnen might have another attempt at merging this year,’ said one UK-based analyst who asked not to be identified. ‘It would create a giant company with around 700,000 units. Consolidation has been good for Germany’s residential sector. Tenants are now treated more as consumers, the market has become less opaque and service has improved.’

Vonovia, the country’s largest landlord, launched a €14bn bid for its rival Deutsche Wohnen which collapsed in February last year after Vonovia admitted it had failed to secure shareholder support for its hostile bid for Deutsche Wohnen. The failed takeover – which was two years in the making –was described by many in the industry ‘as the most hostile deal in Germany since the Mannesmann-Vodafone takeover battle’.