Charles Kingston
Charles Kingston, CEO & Editor, REFIRE Ltd.
The cover of this week’s issue of the Economist magazine depicts a little green Ampelmännchen in his familiar striding pose, but clutching a hospital drip. After a gap of twenty-five years, the magazine’s headline writers are again asking the question - “Is Germany once again the sick man of Europe?”
Its analysts remind us how things were back in 1999, when prospects really looked grim. Anyone who remembers that time, and the years that followed while Germany under Gerhard Schröder underwent its drastic belt-tightening, can scarcely avoid a shiver of horror at the memory. But the medicine, once administered, led to a period of prosperity that gave Germany a decisive edge over its European rivals, and ushered in more than a decade of Europe’s industrial powerhouse reaping the fruits of its relative superiority.
It’s not difficult to detect that the mood music has now changed, utterly. The many deficits that Germany managed to hide in the glory years, papered over by its ongoing export success and access to cheap Russian energy, are now being nastily exposed for the critical shortcomings that they are. As a publication focused on real estate, we spend most of our days thinking about the implications of this for our industry. It’s not easy.
One thing is for sure. There’s a lot more disruption ahead, and there’ll be no return to the cosy growth projectory prevailing before COVID, the war in Ukraine, rampant inflation, and the abrupt hiking of interest rates, that have had the effect of slamming a careening juggernaut into reverse gear.
While Germany is not alone in facing huge economic challenges, its recent history of global campaigning across areas that now require radical about-turns, means that it can now take much less for granted than other economies, those not so heavily invested in strategies whose future is now a great deal murkier.
There is widespread talk of a Marktbereinigung, which is likely to sweep away up to a third of existing German project developers, delivering financial damage to untold numbers of investors. That this carnage is only in its early stages is, unfortunately, all too credible. That ‘cleansing’ has a long way to go - and not just for developers. Perhaps typically for the last stages of a major bull run, last year saw a record number of new market entrants into Germany’s real estate brokerage scene. With transactions at an all-time low, it’s inevitable that many new brokers will starve before they get the chance to build up their networks in what is now a very crowded field.
While a shock for those directly involved, the recent wave of insolvencies among big project developers - again, only the first in a phalanx of similarly over-stretched builders - does not have to spell complete disaster. Most of the skilled craft workers will be able to rapidly redeploy their skills into a marketplace which is wailing on about the Fachkräftemangel. There is no shortage of work ahead across the entire industry, given the government’s absurdly stringent demands for compliance with its climate goals. Installers of heat pumps and other energy-efficiency devices are booked out for the next five years. Refurbishment and conversion specialists have bulging order books, as the industry - particularly for offices - looks out upon a radically transformed landscape.
The old adage that, “money doesn’t disappear, it just changes hands”, is likely to prove uncomfortably true yet again as we enter into an entirely new market phase - one in which capital is plentiful, but transactions are not, while prices re-adjust. While industry bodies are screaming for help from the government, as developer corpses mount up, the unpalatable truth is that the coalition government is showing itself very unwilling to come to the rescue. There is much bleating about speeding up approval processes, cutting red tape, creating incentives for building to make sense again, and other token expressions of support. But the real estate industry is competing with large tracts of German industry now, all desperate to secure advantages (and subsidies) for their own particular interests.
The arguments for Germany as a Wirtschaftsstandort are under pressure like seldom before. The country’s self-imposed high standards are proving a crushing burden for many Mittelstand companies, almost a third of whom are considering transferring production and jobs abroad. Imagine, if you have more than 3,000 staff, having to monitor whether all your suppliers around the world scrupulously meet human-rights and environmental standards. Well, a new law demands that you do just that. Good luck.
That’s what bothers us here at REFIRE. The attraction of German real estate in the eyes of international investors is, in a very real way, directly tied to the well-being of the country and its ability to create and sustain well-paid jobs. Across a broad range of endeavours, the gloss has come off that sense of German indestructibility, too often making the country look decidedly average.
A recent excellent article by Dr. Christian Jasperneite of M.M. Warburg & Co. on LinkedIn manages to capture the essence of Germany’s problem. We’re not experiencing just a phase of economic weakness that can be resolved by the wave of a government minister’s pen, he points out. It’s that Germany’s production potential appears to have virtually stopped growing. Germany’s trend in value-added held pace with its major competitors until about 2017, but has since decoupled from that trend. Without this decoupling, German GDP in 2023 would be nearly €300bn higher than its actual value. That’s nearly €1000bn between 2017 and 2023 less in profits and salaries foregone as a result of this structural weakness. As Dr. Jasperneite chillingly states, that’s why when you come back to Germany from a vacation abroad, you get the feeling that Germany is now much less dynamic than other countries.
On this, he’s right. And on value creation, he points out that internationally, the strongest growth in value creation has been in areas that are not resource-intensive, such as software, AI, genetic engineering, entertainment or health. Fields of activity in which Germany can make no claims to leadership. It would help greatly if German politicians could show interest in ensuring that Germany will still exist as an industrial location in 30 years time.
