Attendees at a recent online discussion held by RUECKERCONSULT will have heard little to lead them to believe any resurgence in the depressed German property market is imminent. The overriding take-home message of the discussion - "Quo Vadis Real Estate Market 2023 - How will the Market develop during the Second Half-year" - was that the repricing phase is still very much active, there's still a wide gulf between the perception of value between buyers and sellers, and we could be well into 2024 before an acceptable level of price stability returns.
Torsten Hollstein of CR Investment Management and Peter Axmann of Hamburg Commercial Bank (HCOB) both stated clearly that the market shake-out still has a way to go, and it's inevitable that this will bring a trail of insolvencies in its wake. Price visibility is hard ascertain, as the handful of current transactions tend to be of smaller size, and have a higher equity ratio. Many developers are teetering on the edge, and have little choice but to offer hefty discounts on their properties. All borrowers, but particularly developers, have to bring much more equity to the table today, and are faced with restrictive financing arrangements.
HIH Invest Real Estate
Felix Meyen, Managing Director of HIH Invest Real Estate
Felix Meyen, Managing Director of HIH Invest Real Estate, focused on the commercial asset classes as he provided an overview of the investment markets. Meyen said: “The second half-year will initially remain defined by uncertainties, even though players are gradually emerging out of their shock-frozen state and are coping increasingly well with the new market environment. The market action we are seeing is still rather slow, one main reason being that the pricing process has yet to conclude. Large-volume deals and major portfolio transactions continue to be the exception. Instead, smaller volumes are propping up the market to some extent and successively reviving it. At the same time, investors have become far more picky than they were during the boom in regard to qualities of location, asset and accommodation, and the situation is compounded by the catalytic effect of ESG requirements. Yet it presents a chance for equity-rich investors to seize opportunities on the investment market with little competition.”
Housing market has adapted to price adjustments
Arnaud Ahlborn, managing director at INDUSTRIA
Arnaud Ahlborn, the managing director at residential developer INDUSTRIA, was surprisingly optimistic about the housing market: “We've already seen the biggest adjustments to residential real estate prices during the first half-year of 2023. In the second half of the year, the price erosion will proceed at a slower rate. Prices are asymptotically approaching a low point at the moment. Just when they will bottom out is impossible to say. A realistic projection would be late 2023 or in the course of 2024.”
INDUSTRIA is planning to step up its acquisitions during the second half-year, said Ahlborn. “We acquired three properties for €68.3 million during the first six months of 2023. And we are planning to invest another €200 to €250 million during the second half-year. We are aware of great opportunities to do so. The pressure is rising on the sellers’ side. More and more developers are reaching financial breaking point. They need to put their assets on the market and accept price discounts. Some of them are approaching us proactively with their already-adjusted price expectations,” he said.
More time needed to adjust to new reality
Peter Axmann, Head of Real Estate Clients at Hamburg Commercial Bank
Veteran property lender Peter Axmann, Head of Real Estate Clients at Hamburg Commercial Bank, and a man who has seen several German investment cycles, was much less bullish on immediate prospects. “The outlook for the real estate industry remains bleak. The current level of interest rates, accelerated inflation, and uncertain economic developments are seriously slowing the transactions market. We're therefore assuming that we will be seeing a market shake-out, an increase in the number of insolvencies, and discounts of up to 30 percent on real estate values. As it emerges from a twelve-year boom cycle, the industry needs more time to get used to the new reality. We do not expect sentiment to brighten before 2024, and even this is assuming that inflation and interest levels will have consolidated by then, and that a higher number of transactions will provide a better reference point. In the short term, the pressure to sell that funds, developers and public property companies are exposed to will strengthen the supply side.”
“The task of budgeting property developments remains as difficult as ever, and most banks are taking a cautious approach to financing. This contrasts with the funding situation for core real estate and ‘green’ buildings, where the competition is steadily intensifying. In general, though, banks expect higher equity stakes from their clients today,” Axmann added. “In the medium term, Germany will remain an attractive real estate market, even if most market players are playing it by ear at the moment.”
Torsten Hollstein, managing director of CR Investment Management
Torsten Hollstein, managing director of CR Investment Management and another veteran of the non- and under-performing loans sector, commented: “We assume that the transactions market will regain its momentum in the course of 2024. It’s been only a week since the European Central Bank raised its key lending rate to 4.0 percent, and it is expected to move ahead with one or two further interest rate hikes before the end of this year. This complicates the pricing process on real estate markets, and is driving refinancing costs up even further. You also need to remember that the real estate market tends to respond to the macroeconomic development with a time lag of six to twelve months.”
