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A recently published EY Survey offers useful insights into the current and future state of the German real estate market. Conducted by Ernst & Young (EY) Real Estate, the survey serves as a practical barometer for stakeholders, detailing the impacts of rising construction costs, fluctuating interest rates, and the resulting market dynamics.
The EY Real Estate Survey underscores a turbulent period for the German real estate market, marked by significant price drops and financial strain on developers. Despite these challenges, there is cautious optimism about future stabilisation and recovery, particularly in the residential sector.
Property prices in Germany have experienced a historic decline, the steepest since the turn of the millennium. Moritz Schularick from the Kiel Institute for the World Economy noted, “Never before have property prices fallen so sharply so quickly.” This significant downturn, particularly observed in 2023, contrasts starkly with the previously robust market.
Despite recent declines, there are signs that the market may stabilise. Jens Tolckmitt, Managing Director of the Association of German Pfandbrief Banks (VDP), anticipates price stabilisation from the summer of 2024. EY Real Estate’s analytical model suggests that new-build residential real estate prices will continue to fall or stagnate until 2025, with a gradual recovery expected by 2029. Christoph Haub, Director at EY Real Estate, states, “We expect prices for new-build residential real estate to continue to fall or stagnate until 2025, but average prices will recover by 2029.” However, Haub cautions, “In five years’ time, prices will still be well below the peak from the last real estate boom in 2022.”
Construction costs and interest rates
The EY Survey highlights the persistent issue of rising construction costs, driven by increasing prices for raw materials and supply chain disruptions. This has placed immense pressure on developers, making profitability increasingly elusive. According to the survey, 60% of developers reported significant increases in project costs over the past year.
Interest rates have also played a critical role in the market's recent challenges. The European Central Bank’s rate hikes have made financing new projects more expensive, deterring investment. Haub from EY Real Estate noted, “Interest rates will no longer reach the old lows,” suggesting that the era of cheap financing is over. This shift is expected to moderate future property price peaks. The monthly financing rates, which have doubled or tripled with the rise in key interest rates, are becoming more bearable again.
Developers are particularly hard-hit, facing negative profitability due to high costs and falling prices. Jan Ohligs, Partner at EY Real Estate, predicts that the financial situation for many developers will remain difficult. “We will not see the start of an improvement until next year, both in terms of margins and sales prices,” he said. This environment has led to a prediction of further insolvencies, especially for those who financed aggressively during the boom phase. Daniel Kress, a refinancing and restructuring expert at Hengeler Mueller, adds, “The all-clear cannot be given for project developers in the short term.”
Is an End to the Pain in Sight?
While some experts are cautiously optimistic about the market's stabilisation, the path to recovery for developers appears longer. According to the EY forecast, developer margins will start to recover around 2025/2026, but won't reach the levels seen during the last boom. “The profitability of project development companies will remain at a permanently lower level even after the recovery, particularly due to the sustained higher interest rate level,” says Haub. Developers will therefore need to develop strategies “on how to deal with lower profitability in the long term.” The message is clear: it’s time to tighten those belts and brace for a bumpy ride.
For investors, particularly in German real estate as REFIRE is constantly pointing out, these developments necessitate a strategic reassessment. The forecast suggests a window of opportunity in 2024/2025 for acquiring expertise and participating in project development platforms. Haub advises private investors against investing in apartments that have not been completed, warning, “We have seen several times recently that project developers have slipped into insolvency even in the final phase of construction completion.”
Long-Term Outlook
In the long term, the market is expected to stabilise, with gradual price recovery and improved developer margins by 2028. However, the profitability of project development companies will remain lower than pre-crisis levels due to sustained higher interest rates. Haub concludes, “Developers will need to develop strategies on how to deal with lower profitability in the long term.” So, while there may be light at the end of the tunnel, it’s best not to throw away those hard hats just yet.
The EY Survey provides a comprehensive view of the challenges and potential recovery in the German real estate market. While immediate prospects remain difficult, especially for developers, the forecast suggests a gradual improvement and strategic opportunities for informed investors.