The German real estate industry had its first chance to get the measure of the new government minister responsible for Housing, Urban Development and Construction at the annual Quo Vadis conference held in Berlin's Adlon Hotel recently.
The event, organised by Heuer Dialog and back fully live this year after the COVID interruptions, is traditionally the first big event in the real estate calendar, attracting a top-level audience and generally hosting a sprinkling of senior level politicians as keynote speakers.
Klara Geywitz, the new Bundesbauministerin, got a generally good reception from the audience, who appreciated her acknowledging the absence of a direct committed Ministry over the last several years to engage fully with the real estate industry.
In her 30-minute speech, the Minister conceded she had a lot to learn to get up to speed with all the challenges facing her new Ministry, but made it very clear she was wasting no time in seeking dialogue with a wide range of market participants. The bigger issues surrounding housing and construction were of primary concern, she said, as she proceeded to address social questions such as how Germany wanted to live, how young people viewed their opportunities, organising housing within its cities, hollowed-out downtown districts, the future of offices, and how to deal with climate challenges, among other subjects.
"We are on the cusp of a major new phase of the investment boom, with a huge need for investment and refurbishment, especially for buildings from the 1960s and 1970s in western Germany. Affordable housing, promoting urban development and protecting the climate may sound like impossible tasks, but we in Germany CAN drive this wave of innovation. We simply have to build in such a way that the next generation can reap the benefits of how we learn to deal with finite resources," she told her audience.
The Quo Vadis event is always timed to co-incide with the annual delivery of the so-called Frühjahrsgutachten Immobilienwirtschaft, or Spring Report on the Real Estate Industry, prepared by a committee of Wise Men (economists and real estate experts, mainly). This year the Wise Men had a sober message to deliver to the conference delegates, including warnings of excessive price exuberance, an interest rate trend reversal, the consequences of inflation and the enormous challenge of transforming Germany's inner cities.
Long-time Wise Man and economist Lars Feld, shortly to become special advisor to Finance Minister Christian Lindner, made no bones of his views that, although no radical or immediate steps are expected, the likelihood of a turnaround in the direction of interest rates was now higher than it has been for a long time. The Spring Report, he told us, contains lots of references to 'vulnerabilities', 'uncertainties', and 'price exaggerations' - the latter in particular in respect of the soaring cost of building materials which have driven up the price of construction, without rent levels being able to keep up.
Feld stressed the labour shortages now cropping up all across the economy, leading to heightened competition for skilled and in-demand workers. This, and inflation-driven demands by unions for higher wages for their members, will undoubtedly lead to higher personnel costs for employers, he forecast.
Still, while optimistic about Germany's economic recovery prospects for the coming months (this was before the Russian invasion of the Ukraine, of course, the possibility of which he alluded to in his speech), he downplayed the likelihood of 4% growth rates or more, given the backlogs in global supply chains.
Feld's co-authors of the Spring Report, largely representatives of the real estate industry delivering their outlooks for the different investment asset categories, cast a much more optimistic eye on the likelihood of the 12-year property boom coming to an abrupt end. They largely see the good times carrying on for a while yet, propelled forward by the wall of institutional money still seeing a positive spread between even lowly real estate yields and no-risk government bonds.
The huge demand for logistics properties, and industrial property in general, meant that a steady inflow of capital into the sector was assured, the report said. Sadly, there's no such good news for the hotel sector, however, the authors write. The absence of business travellers will weigh heavily on the industry until at least 2024, they believe, even if small shoots of recovery are breaking out in some city markets.
Also holding up strongly, says the report, is the healthcare and nursing-home investment market. So strongly, in fact, that many previous doubters have now overcome their earlier reluctance to invest in the sector. Demographic trends, highlighting Germany's definitely ageing population, only serve to underpin investor enthusiasm for the asset class.
Our old friend Harald Simons, board member at Berlin-based consultancy group Empirica, who has been warning for seemingly the last ten years about German residential prices being 30% overvalued, not unsurprisingly takes a close look at Germany's residential housing market in his contribution to the report.
While average asking rents in Germany rose by 3.7% to 8.46 euros/m² in 2021, purchase prices rose even more significantly. In view of an increase in the number of completions and a simultaneous decline in the growth of housing demand, new construction at the federal level has been able to keep pace with the development of demand, he suggests.
Simons' criticisms of current housing policy ARE valid, however. He points out that where there IS a real shortage is in not small but large flats, for which scarcity premiums have to be paid on the rent per square metre, especially in the A-cities.
According to Simons and his fellow-authors, housing policy needs to be adjusted to reflect this, as well as creating special subsidies for families to cushion the social consequences of the lack of large flats. The trend of building 'shoe-box'-style micro-apartments in multi-storey housing is driving families out of the cities and into the hinterlands, said Simons. This could lead to a permanent shrinkage of the A-cities, he thinks.
