No clear solutions after a tumultuous year for German housing

High on REFIRE's Christmas reading list this year will be "Eigenbedarf", the third in a series of (so far) excellent thrillers by Michael Opoczynski. Instead of the usual sleuth, all too frequently portrayed as a crumpled, cynical, semi-alcoholic ageing detective, Opoczynski's crusading heroes are a group called the Society for Unconventional Measures.

This team of intrepid investigators are a cheeky, quick-witted squad, happy to take justice into their own hands, who view their mission as defending the defenceless and the innocent. Their methods are not always legal, but they are effective. Unbloody, but forceful. They get results.

This doesn't come as a surprise, as their creator Opoczynski himself played a similar role on German TV's popular WISO program for twenty years, exposing true-life cases of fraud, white-collar crime and blatant injustice.

In his third fictional novel, Opoczynski takes on the case of an elderly couple in Berlin, whose apartment building has been sold to an unscrupulous investor who will stop at nothing to evict them from their home, while preparing to upgrade the property through luxury renovations. 

We cannot, as yet, tell you how it ends - although the comforting presence of the shadowy guardians of justice does suggest that the ruthless, terrorising landlord won't have things all his own way.

That's good. And it's clearly timely, as reflected by the recent overwhelming vote by Berliners, in real life, to expropriate powerful landlords giving expression to the deep dissatisfaction among large swathes of the population who find rents and price levels for basic accommodation slipping out of their grasp.

The most benign scenario sees housing prices across Germany rising yet again next year, very likely by 5% or more, followed by further rises in 2023. The spectre of inflation, historically low interest rates and the growing fear of potential homeowners of being shut out of the market completely, will keep prices rising ahead of the new government's ability to build fast enough to nullify the growing demographic pressure leading to the supply gap. 

While price rises may be slowing down, affordability is worsening - while the effects of the pandemic might seriously call into doubt the assumption of rising real wages. And frankly, we side with the sceptics when it comes to assessing the probability of the government hitting its target of building 400,000 new housing units annually. 

For a start, that would surpass any recent achievement by any German government in living memory by a large margin. The building industry is already operating at close to full capacity, with a shortage of skilled workers in several key competencies. Where will all the workers come from? 

Will we see a repeat of the 1980's, when thousands of British freelance 'chippies', 'brickies', steel-fixers and 'sparks' routinely went off to Germany to work on building sites, as memorably depicted at the time in the much-loved TV series "Auf Wiedersehen Pet"? 

That huge migration of labour in the 1970's and 80's kept thousands of British skilled (and unskilled) labourers alive during a decade-long slump in the British building industry during the Thatcher years. The skills of the British bricklayers, in particular, helped to raise standards on German building sites, which lacked knowledge of old-style bricklaying and were creaking under the burden of excessive protection and social payments for their building workers. 

The offer of a solution, by an army of dodgy, well-shod and Armani-besuited Dutch and British agents, to supply Germany's building sites with hardy skilled workers who'd show up to work on even the coldest of days for their cash-in-hand services, was welcomed by German building contractors with open arms. 

The forecourt of the main train station in Arnhem in the Netherlands, the main marketplace for the provision and allocation of all these manual jobs, was like the Grand Central Bazaar every Monday morning as the latest recruits showed up, and were hastily despatched to addresses all over Germany, often on the flimsiest description of the alleged skills on offer.

(Full confession: your editor worked as a shuttering carpenter on one of those building sites many moons ago. He still finds it difficult to suppress tears of a craftsman's pride when passing by the Siemens building in Munich-Neuperlach, whose foundations he physically helped to build.)

Sadly, however, Brexit has closed off that source of supply. So the workers will have to come from somewhere else. A tricky problem, as a lot of the skilled workers are finding themselves in big demand in their home countries, too.

Still, whether the ambitious building targets are reached or not, investment in residential is still likely to be the main game in town in 2022, as it was this year - surpassing investment in offices by a large margin for the first time.

In commercial property, a large measure of uncertainty surrounds the attractiveness and valuations of all but the finest office buildings in the best districts. It will take nerves of steel and a true feel for the value-enhancing prospects of the assets themselves for investors to plump for non-ESG-compliant properties. This will become ever-more prevalent next year as investor guidelines preclude engagements with lesser-quality assets, and the EU-taxonomy surrounding the sustainability code becomes more understood.

In any event, Germany is facing a massive wave of transformation from existing - but no longer fully functioning - buildings, including many struggling retail emporia, which traditionally would have been torn down and replaced. Now, ESG considerations and climate-neutral goals mean that the next decade will see colossal adaptation and refurbishment - and the emphasis for many investors on maintaining the value of their existing assets, rather than chasing ever-more-elusive yield.

It's been a record year for investment in German real estate. The foundations of the real estate sector are still strong, based on real-life German economic performance. There are, it is true, cracks showing in the firmament, and it remains to be seen if the new government can live up to its billing. 

Here at REFIRE we'll be back early in the New Year, doing what we've always done - keeping a close, watchful eye on all the moving parts in German real estate, and reporting on them. We wish all our readers a prosperous year in 2022.