Germany in 2018: market remains upbeat, despite political uncertainty

Despite the looming threat of entering a new year with no coalition government in place, Germany is poised for a strong 2018, real estate experts say.

However, the failure of Angela Merkel’s CDU party to form a coalition government two months after Germany’s federal election remains a dark cloud hanging over the market. Exploratory talks to form Germany’s ‘Jamaica’ coalition comprising the CDU/CSU/FDP and Green parties collapsed in spectacular fashion on 19 November when the FDP walked out of negotiations after the parties failed to reach a comprise on the key issues of migration and energy policy.

‘It is better not to govern than to govern badly,’ said FDP leader Christian Lindner. ‘The four discussion partners have no common vision for modernizing the country, nor a common basis of trust,’ he added.

Merkel is now left in the unenviable position of trying to form a minority government with the FDP or the Green Party. Social Democrat leader Martin Schulz has ruled out another ‘GroKo’ between his party and the CDU saying recently that ‘voters rejected the grand coalition’, although other SPD members have been more open to a grand coalition since the FDP abandoned talks. One analyst told REFIRE that now would be ‘the perfect time for the SPD to make a comeback without losing face’. However, if all else fails, Germany’s president, Frank-Walter Steinmeier, may be forced to dissolve the current parliament and call a snap election, although analysts maintain that any fresh election would likely yield a similar result to the one held two months ago. But for that to happen, Steinmeier would need to initiate a complicated process involving a parliamentary vote on Merkel’s role as interim chancellor.

So what does this mean for Germany’s property market? Most experts say that Germany’s property market is unlikely to be affected by its political uncertainty.

‘The political environment is what it is,’ said Joseph DeLeo, a senior partner at Benson Elliot in London. ‘Germany is still a safe place to invest and I’m confident that, ultimately, a coalition government will come together.’

Ralf Kemper, head of valuation and transaction advisory at JLL in Frankfurt, agrees: ‘Germany has always been very stable, politically, so I don’t think the drawn-out coalition talks will have any real impact on the commercial property market as long as the period of uncertainty remains short enough to avoid investors questioning political stability in the country.’

Not enough product

So what does the German market look like heading into 2018? As Iris Schöberl, managing director and head of institutional clients at Munich-based fund manager BMO Real Estate Partners Deutschland, succinctly sums it up: ‘Not much product, strong demand and high prices.’

‘The demand for property is persistently high,’ she added, ‘particularly in the retail and office sectors and also residential. Also, the one-off combination of an economic upward trend, low interest rates and greater uncertainty regarding how the economic and political framework will develop means that property is popular with domestic and international investors alike.’

Nonetheless, investors are looking at potential investments more carefully and working on more dramatic worst case scenarios, Schöberl said.

2017 will be another ‘exceptional’ year

This year is on track to be another ‘exceptional year’, according to Guido Nabben, a spokesman for German Property Partners (GPP): ‘The interest in German property on the part of domestic and international investors continues unabated,’ he said. ‘Demand is radically outstripping supply. We expect the deal volume in Germany’s Top 7 – Berlin, Hamburg, Düsseldorf, Cologne, Frankfurt, Stuttgart and Munich – to be above the long-term average of €30b.’

Office take-up is likely to hit around 3.8m m2 this year in Germany’s Top 7, according to Nabben. ‘However, as supply can’t keep pace with demand, we expect to see a lack of space in this segment until at least 2019,’ he warned. ‘Moreover, political or economic developments, such as Brexit’s impact on Frankfurt or electrical mobility in the automotive stronghold of Stuttgart can, in the short-to-medium term, also create extra demand for space.’

No end to the boom expected anytime soon

The prevailing belief is that Germany’s boom is not likely to be stopped in its tracks any time soon. ‘Demand for real estate is generated inside Germany by the country’s favourable economic performance and by the persistent global uncertainty and concerns over political and social conflicts in foreign markets,’ said Nikolai Dëus-von Homeyer, managing partner of NAS Invest.

And although players keep wondering just how long the upward trend can continue, and how hard the fall will be when it comes, Germany has not reached a turning point yet, said Dëus-von Homeyer: ‘The sound development that the German real estate market embarked on after the escalation of the global financial crisis is set to continue – especially in the commercial real estate segment. The robust economic data in Germany and the now-as-then low interest rates suggest as much. Moreover, international investors are well aware of the fact that, historically speaking, fluctuations in the German market have always been moderate. This vindicates its status as a ‘safe haven’, especially during an extended boom cycle.’