Germany braces for another year of prosperity, despite Berlin’s madness

We think there’ll be plenty to unsettle investors as the world struggles back to work after the Christmas holiday. It’s been a good year, all in all, and stock markets have defied the sabre-rattling of Trump and trade war skirmishes with China to post healthy returns. We’d be surprised if 2020 turned out to be so fruitful for investors worldwide.

Still, the outlook for the German real estate investment market remains rosy through 2020, if we are to take the views of JLL Deutschland’s top brass as representative of the industry’s expectations. With Germany becoming the undisputed European real estate investment market in 2019, with a commercial property turnover of €77bn, the pundits expect much of the same this year. Where, after all, is all this wall of money going to find an equivalent yield?

With diligent savers getting slammed every which way, capital is flowing like a torrent into alternative asset classes, pushing stock markets up to record levels and pushing yields in real estate well down below long-term averages. With over €800bn of German government bonds reaching maturity over the coming five years, another tsunami of capital will be seeking a home beyond what it can get rewarded for in sovereign bonds. Investors just can’t help themselves – a chunk of that money will end up chasing real estate, no matter what. The day of reckoning still seems far off.

And yet, we’ve surely reached peak German real estate deal volumes. In fact, it’s only rising prices that have kept Germany topping the charts over the past three years – along with the uncertainty surrounding Brexit. Now that Brexit’s going ahead, the UK may yet regain its crown as Europe’s top dog for inward real estate investment – including inflows from Germany, whose own hungry investors are now second worldwide in cross-border investment only to the Americans.

There’s life on the capital markets too – the recent marriages of Aroundtown and TLG Immobilien, and the emerging threesome of Ado, Adler and Consus Real Estate show that, if you like the properties so much, just buy the company. A rake of lesser small and mid-sized property companies have listed in the past three years, and could all be gobbled up at the right price. 

It remains to be seen whether the poisonous atmosphere emanating from Berlin in respect of residential property will take hold in other German cities. That still-dubious legislation pushed through by Berlin’s Senate is being watched carefully by other German cities and federal state administrations, under pressure from their own voters to put a lid on rising housing prices. The economic fall-out from these political decisions is not in doubt – but with the civic mood as febrile as it is, the previously unthinkable could yet become the inevitable. 

Many foreign investors have already taken the view that Germany is tying itself up in a series of mutually irreconcilable knots, and the best may have passed. For some, the search is on for pastures new, and let the Germans sort out their ideological messes themselves.

If this view takes deeper hold, the loss for Germany will be considerable. The damage, so far, is palpable but not crippling. And with effectively full employment, together with a tangible shortage of skilled labour, the cracks in the system aren’t yet glaringly visible to the naked eye. According to Berlin-Brandenburg housing association BBU, at least €5.5bn and 12,000 new apartments (housing for 24,000 people) will be lost to the capital city from its members alone over the next five years as a result of the rental freeze – and heaven knows what the indirect results will be. 

For investors, what this means is that cashflow will play an even greater prominence in their calculations, rather than capital appreciation. The Social Democrats in Angela Merkel’s still ruling coalition have announced an ambitious programme for building at least 1.5m affordable and socially-subsidised housing units over the next ten years, while clawing back control over their land by municipalities and local councils, in the form of priority bidding rights and limited leasehold periods. While the SDP may be increasingly marginal, further intrusive government intervention in property markets does look inevitable. Brace yourselves.

But the politicians will have their challenges cut out for them. Recent statistics from Destatis show that building prices have risen by 24.3% in the ten years between 2008 and 2018, while maintenance costs have likewise soared by 26% in the same period. With consumer price inflation negligible over much of this period, the surge in costs can only be down to increased regulation, higher material costs, stricter energy-saving edicts, and skilled-labour shortages. None of which merit the focus of the politicians’ ire. The housing misery cannot all be laid at the door of unscrupulous landlords, despite the outraged outcries of the world-improvers. Alas, it won’t be 2020 when the consequences of the current misappropriations become apparent.

In this issue we look at a number of views as to where value still lies for investors in German property, and even where negative trends might reverse in the course of 2020. Our own daily observations still highlight the shortage of quality efficient office space, close to central business districts, with top public transport access. Paul Guest of UBS suggests in this issue that the much put-upon retail segment could see a recovery, while the battle for quality Fachmarktzentren, or grocery-anchored retail parks, is increasingly being fought out by investors who really are bringing a range of extra tools to the negotiating table, and imaginative data-centred plans for genuinely adding hitherto unexploited value. This can only be good news.