German property climate sinks again after more hopeful Q1

After a brief interlude of optimism in the first quarter of 2019, the mood in the real estate market in Germany continued on the downward trend it it has been experiencing since August last year.

The German Hypo Real Estate Economy Index (REECOX) stood at 296.6 points at the end of the second quarter, or 2.2% less than in the first quarter. In the other European markets under review, with the exception of France, the real estate market declined slightly. The Deutsche Hypo Euro-Score, which summarizes all six real estate statistics, fell 1.8% to 232.7 points.

Sabine Barthauer, board member at Deutsche Hypo, commented: "It is becoming more and more apparent that increasing trade conflicts and the weakening global economy are putting a strain on sentiment everywhere. Due to the dependence of the real estate industry on the economic development, the effects are now also noticeable in our industry. How sustainable the current development is, the further course of the year will show. "

Every three months, REECOX surveys the real estate market in Germany, France, Great Britain, Poland, Spain and the Netherlands, and calculates its index for each of the six countries via five input variables. In Germany these are the Dax, the Dimax, the Economic Sentiment Indicator of the European Commission for Germany, the base interest rate according to Section 247 BGB and the interest rate for ten-year Bunds.

The components making up the German real estate index are currently in a state of tension, with DAX and DIMAX going in opposite directions. The DAX now stands above the 12,000 mark, up 7.6% from the previous quarter. In contrast, the DIMAX fell by 8.9%compared to the first quarter. The business climate of the Economic Sentiment Indicator (ESI) continued its downward trend with a decline of 3.8%.

According to José Luis Calderón Martinez, responsible for acquisitions at Deutsche Hypo, “As long as the European Central Bank continues its expansive monetary policy, the German property market will remain bullish. Consistently high levels of liquidity and low interest rates are helping to keep the party going. But an exogenous shock, from whichever direction, could pull the plug on all that very quickly.”

Another index, the pbbIX quarterly from Deutsche Pfandbriefbank (pbb), which tracks the big German office markets, also reflects the gloomier outlook in Q2. It fell slightly from 0.79 to 0.73 points, its second fall in a row. (A negative value indicates a recession, a value above 1 indicates a boom – so we’re still well in positive territory.) Still, this reading sees it at its lowest level since Q3 2013, although the office markets of the Top-7 cities still remain expansionary.

Hamburg was able to improve its pbbIX index level slightly (from 0.59 to 0.63 points), while all other markets showed declines – particularly Düsseldorf, the strongest market of the previous quarter, falling from 1.16 to 0.76 points. The index is compiled by vdp Research.

Underlining the conclusions drawn by the REECOX, the pbbIX index points to tension in the Big-7 office markets. On the one hand weakening economic prospects and political uncertainties are weighing on the market, while on the other hand rising office rents, declining vacancies and a shortage of suitable investment products are acting as a strong prop. Vacancies fell yet again, with the shortage of space leading to higher rents on newly-signed contracts. Interest rates on capital markets have fallen yet again over the last few months, making investment in property still attractive from an investor’s viewpoint.