Germany - Transparency, Logistics
While preliminary Q4 data show that Germany narrowly avoided a recession in the second half of last year, economic activity has nonetheless slowed down abruptly, and GDP growth is likely to have been only 1.5% last year, against 2.5% in 2017 – figures backed up by Germany’s Federal Statistics Office. Leaving aside disruption to car production, consumer spending growth has also been hit by a sustained slowdown, as higher inflation eroded real incomes.
Capital Economics issued a note this week saying that the cooling in German export growth was leading to a poorer outlook for the German economy and increasing the downside risks for occupier markets.
While preliminary Q4 data show that Germany narrowly avoided a recession in the second half of last year, economic activity has nonetheless slowed down abruptly, and GDP growth is likely to have been only 1.5% last year, against 2.5% in 2017 – figures backed up by Germany’s Federal Statistics Office. Leaving aside disruption to car production, consumer spending growth has also been hit by a sustained slowdown, as higher inflation eroded real incomes.
Real incomes may get a boost this year due to lower energy prices, says Capital Economics researcher Hamish Smith, but with fading consumer confidence household spending will remain weak. Lower business confidence and weaker export growth will see GDP growth fall to 1% this year and next, the study predicts.
This will have an impact on office demand, particularly in Berlin and Munich. “We expect the poor outlook for the economy to dampen German occupier demand and rental growth. Indeed, the pace of job creation has already started to ease a little, with the volume of office take-up across Berlin, Frankfurt, Hamburg and Munich also showing signs of having peaked. We expect the cyclical downturn to start showing up in lower take-up volumes this year, as firms begin to pare back expansion plans.
“That said, with Germany’s labour market near capacity, we already expected that slower employment growth would hold back occupier demand. Indeed, this underscores our below-consensus forecasts for office rental growth this year and next. Even so, the more marked slowdown in the economy that we are now forecasting increases the downside risks to our rental outlook, especially in Berlin and Munich, which have relatively large supply pipelines.
And it’s not good news for the retail sector, either. “We have been similarly downbeat about the prospects for rents in the retail sector. Ordinarily a pick-up in consumer spending would be positive for rental growth. But we think that factors such online competition have led to a breakdown in the relationship between consumer spending and retail rental growth. As such, we continue to be of the view that prime retail rents are likely to mark time this year and next.
However, Capital Economics feels that the greatest risks to its rental growth forecasts are in the industrial sector. With Germany more exposed to the global slowdown than other euro-zone markets, further weakness in export demand is likely to take a toll on industrial occupier demand. Any sustained deterioration the new export orders PMI (Purchasing Managers Index) would imply a sharp slowdown in take-up, with rental growth much weaker than the already modest 1% the researchers have penciled in for 2019-21.
For Europe as a whole, Capital Economics predicts that commercial property capital values will rise again in 2019, supported by an improved outlook for yields, which will edge slightly lower this year.
That’s because, with the eurozone economy slowing faster than expected amid a weakening global backdrop, there is an increasing likelihood that the European Central Bank (ECB) will push back its plan to increase interest rates, from late this year, into 2020.
Although the ECB has drawn the curtain on its quantitative easing (QE) programme, it has noted that the balance of risk to the euro-zone economy is moving to the downside. This, together with safe-haven flows as a result of the flare-up of political tensions in Italy, has seen German 10-year Bund yields fall from around 0.5% at the start of October, to less than 0.2% currently – the lowest level since Q2 2017.
As a result of this changed economic environment, Capital Economics thinks that prime property yields will generally mark time, rather than rise, across most Western European markets.
