How justified is German bullishness on prospects after Brexit?

The Brexit debate is certain to be a major topic of discussion at the upcoming Expo Real in Munich. It’s three months since the actual referendum, the initial ysteria has died down, the markets have recovered their sang-froid, and circumspection has crept in to add colour and shade to the doomsday certainties which prevailed in the immediate aftershock.

Obviously the sky hasn’t fallen in. Given that the date of the Brexit and the form it might actually take is so far in the future, this shouldn’t come as a surprise. In fact, London is remarkably chipper given the death-blow that the majority ‘Leave’ vote allegedly inflicted on it. Now that the St. Leger has been run at Doncaster, and the season is officially over, it remains to be seen whether the return of the money-men to their desks in London will be accompanied by a shift to a cooler temperature, or whether this new-found optimism will prevail.

Was that a recent tremor rippling through the otherwise remarkably buoyant German economy? Politically, the outcome of two important regional elections – one in Angela Merkel’s home state and the other in the citystate of Berlin – will ensure that the rise of parties of the left and the right will tighten the vice squeezing the more centrist policies of the SPD and Merkel’s CDU. The people have made their voices heard on the immigration issue, and Frau Merkel came as close this weekend as she has ever come to backtracking on her famous ‘open invitation’ that is viewed as the heart of the matter.

With Germany facing national elections next year, domestic issues will be dragged forcibly to the fore. For the real estate market, a recent study by the Cologne-based Institut der deutschen Wirtschaft (IW) shows that German investors now believe that prospects in the German market have probably peaked after a six-year bull run.

That caution is well placed, although as a rule German investors tend towards more pessisimism than their neighbours. Still, as we report in this issue about Germany’s state finance ministers putting their heads together to combat the property transfer tax (Grunderwerbsteuer) loophole, the forces ARE indeed mounting that seek to dampen the German party by taking away the punchbowl.

Yet so far statistics belie any actual evidence of a downturn. As long as that wall of money sees no real alternative to investing in hard assets rather than negative-yielding bonds, the German market will benefit almost by default – while even London can continue to prosper as a result of being 10% cheaper than a year ago. Everyone could be a winner, it seems – but with so many artificial props holding up the edifice, we share the investors’ mood of caution.

To the surprise of nobody who observes the German market carefully, government interference in the housing market, by virtue of the Mietpreisbremse, or rental cap, and other measures such as Milieuschutzgebiet, designed to prevent gentrification, have all proved worthless. There is even growing evidence that the laws themselves have helped to spur rent and price rises higher than they would otherwise have been.

This was predicted. It is always a side consequence of substituting market interference for real measures to promote additional house-building. Enquiries by foreigners for investment in the sort of up-market German housing, such as luxury residential towers that would escape such landlord restrictions, have doubled since the Brexit, we hear anecdotally. It certainly sounds credible.

Accentro, a privatiser of apartment condominiums in Berlin, has seen demand explode in the city, with sales volume shooting up by 40% last year. As we report in this issue, the prognosis too for office rents in the capital is extremely bullish, and the city’s unemployment rate has fallen below 10% for the first

time in twenty years. In fact, across all of Germany the office vacancy rate has fallen in the last two years, to levels not seen since 2002. On the surface, this sounds great.

But these figures can hide a myriad of weaknesses, causing disaster for individual investors who bet on the wrong horse. Long-term office leases, so beloved by the conservative investor, can contain within them the seeds of their own investors’ destruction. Leases are trying to get shorter, and the technologicial and workspace demands on properties are now far higher with the advent of the millenials in the workforce. Investors ignore these shifts in the marketplace at their peril.

With 95% of all office transactions in London now smaller than 5,000 sqm, Berlin, Frankfurt and other potential pretenders to the throne with aspirations to attract some of London’s startup and banking culture – are learning how real estate itself is evolving into a key element of the business tenant’s own mission – to be a tech enabler, a platform, an innovative incubator, whatever. Just not a boring office.

If Germany is seeing lower investment volumes in the office sector this year, it reflects the lack of supply, not lack of demand. Even at ever-lower yields, at least in the big cities, sellers aren’t selling, hence there are fewer well-flagged transactions and a lot of unsatisfied capital.

For the experienced and well-connected, having more boots on the ground in Germany is proving more critical than ever as more deals are done in secondary and tertiary cities, which don’t necessarily show up quickly on the radar screens. Yields are tightening fast here as well, and good assets do not remain unbought for long.

So while the long-term affects of Brexit are still too early to assess, we expect there will be a heightened contingent of visitors from the UK this year, mixing a visit to the Oktoberfest with a rootaround at the Expo Real, maybe looking to raise their German game – just in case.