Monthly sentiment index lurches downwards again in October

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Little good news for those hoping for a bump in the German real estate climate, with Deutsche Hypo's monthly climate index falling yet again in the month of October.

The sentiment indicator's two main components - Investment and Earnings - both deteriorated further during the month, with office property recording its lowest value since the beginning of the year.

Deutsche Hypo's index, compiled monthly for the lender by market researchers Bulwiengesa, saw the mood of the 1,200 experts surveyed fall by a further 5% over the previous month - to currently stand at 66.4 points (100 points is the +/- confidence benchmark, on a scale of 0 to 200).

In what is now the 190th monthly survey, the Investment Climate fell by 4.9% to 53.1 points. The Rental Climate also declined, by 5.4% to 83.6 points.

The reading shows a broad range of rates of change across different asset classes. The biggest faller was Office, which plunged 8.5% to 47.0 index points, after another fall in September. The Retail Climate fell 2.4% to 56.5 points, with the Hotel Climate declining by a significant 10.1% to 75.8 index points. Even the Residential Climate gauge dropped 4.5% to 102.3 points. The most confidence was expressed for Logistics, whose pointer rose slightly by 2.4% to 103.1 points.

Commenting on the October readings, Ingo Martin, head of real estate finance origination at Deutsche Hypo, said: "Selectively, there is movement in the market again - individual transactions are being worked on in the background. Unlike in the financial crisis of 2008, there IS sufficient liquidity available." However, he added that the requirements for debt service capability are now stricter, which is currently causing problems for project developers in particular.

Martin said that in the Office segment, a clear "flight to quality" could be observed, with demand for properties in prime locations remaining high while dedicated office clusters in decentralised locations were feeling the cold winds of shrinking demand. Logistics was benefiting from a surge in demand as part of the trend towards near-shoring, he said.

Martin's colleague, Florian Meyer, who heads up the Hamburg branch of the bank, had commented in September on the pressures on project developers. On the office lettings market, Meyer said his team is observing longer marketing periods and that buyers and sellers are still not finding common ground when it comes to asking prices.

"However, even in the current situation there are groups of buyers who are taking advantage of opportunities - problem properties are specifically being sought out and bought," Meyer said. Falling market values are leading to higher equity requirements, but the restrictive lending policies of many banks make it difficult to refinance projects.