Under the circumstances, we are somewhat surprised that the sense of pessimism is not even greater, given that most professional medical prognoses suggests that the worst of the infections and fatalities still lie ahead. A new survey carried out by consultants EY between 19th and 24th March across a broad cross-spectrum of 300 real estate market participants shows gloom - certainly - but less perhaps than might be expected. The fresh results were compared with a similar survey taken at the end of 2019.
76% of those surveyed now expect a lower level of investment volume in Germany this year, as against 16% who expected that at the end of 2019. Only 4% expect a higher volume, whereas 14% forecast that three months ago.
According to Christian Schulz-Wulkow, head of real estate DACH at EY and the author of the study, “The current coronavirus crisis could have far-reaching consequences for the real estate economy. Real estate is strongly interwoven with the finance sector and the general economy, and so if rental shortfalls lead to liquidity bottlenecks, the negative effects could extend well beyond the real estate markets themselves.
Most likely to survive intact through the crisis are residential and logistics, respondents said, with logistics likely to even benefit short-term due to the new demand for home delivery. A third of respondents believe this could lead to price increases for logistics assets, although 28% said they saw prices falling. Prospects for the residential segment have become cloudier - three months ago 55% of respondents forecast further rising prices, while now only 16% take the same view. Those expecting prices to fall have jumped from 4% to 34%. About half the respondents expect residential prices to remain stable at their current, albeit high, level.
Prospects for office properties have taken a tumble, with 73% now expecting prices to fall, as against only 2% at the beginning of the year. Retail is viewed with the great alarm; the wave of store closures mean that those expecting further price falls have jumped from 38% to 87%. Hotels are viewed as practically a lost cause - where at the beginning of the year most respondents expected prices to remain stable. Now 95% expect falling values.
Like elsewhere, Germany’s politicians have introduced a bundle of economic measures to soften the blow of the crisis, such as heightened protection for residential and commercial tenants. Survey respondents expressed a strong wish for further measure, in particular relating to tax relief, with two-thirds of respondents looking for further improvements in both the rate and timing of tax impositions as a way of dealing with their finances. About half of respondents wanted a temporary amnesty on employment and turnover taxes to help their liquidity.
96% of respondents expect a further extension of the low interest rate regime as part of the response to the coronavirus crisis. More than 80% expect a reduction in new building construction. “New construction projects are coming under increasing scrutiny, with many investors holding back to see how the situation develops and which projects still make sense in a few months time”, said Schulz-Wulkow. More than half of respondents expect lower investment in existing real estate assets also. On the financing front, 75% of respondents expect tighter lending conditions, with more than 70% viewing even current and ongoing financing to be endangered.
“It is a high-wire balancing act - the acute measures designed to help tenants are without a doubt necessary and justified. Still, we have to balance those needs with limiting the damage to landlords to such an extent that collateral damage for the whole financial system is minimised”, said Schulz-Wulkow. The one positive aspect is the increasing digitalisation of office activities, said 85% of respondents, with the trend to home office working and video conferencing only likely to intensify.
Separately, a new study by the Hamburg-based GEWOS Institute for Urban, Regional and Housing Research claims that the German housing market will likely be hit harder and longer than the global financial crisis, with liquidity bottlenecks affecting private owners and investors more so than institutions.
German nationwide housing sales plummeted by 12% in 2008 when the crisis broke, growing only by 2% in 2009 and only returning to pre-crisis levels in 2010.
Last year, in 2019, GEWOS puts total residential sales including private and investment deals, at about 700,000 units, about the same level as in 2015. Sales volume was about €185bn, about double the annual levels from 2008 to 2010.
Now economists are predicting a decline of at least 7% in economic output and as much as 20% depending on the length and severity of the shutdown. The GEWOS researchers are pessimistic: “The corona crisis will affect broader sections of society and the (real) economy than was the case during the financial crisis", they say.
"Revenue shortfalls in the housing market are mutually dependent: rent losses as a result of declining income from private (short-time work and terminations) and commercial tenants lead to liquidity problems for many landlords and put pressure on their creditworthiness - regardless of all rescue packages." In a market in which almost 60% of all rented apartments are owned by private individuals, this can lead to serious distortions, they say, depending on the degree of credit financing. Landlords who are no longer able to service their loans will sell as a result.
"GEWOS therefore expects that private landlords and smaller property owners will be strongly affected by the effects of the corona crisis."
