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Few frogs have enjoyed a more distinguished career than the one supposedly boiled alive without noticing. A fixture of management books and political speeches, it warns against changes too gradual to provoke a response. The only problem is that it is apparently not true. A healthy frog will generally notice that the water is becoming uncomfortably warm and attempt to get out of the pot.
That may be reassuring for frogs. For property markets, we are not so sure.
The frog came to mind while we were writing this issue of REFIRE #258. There has been no Lehman moment, no morning when German property woke to discover that the old market had ended. Instead, the conditions just changed by increments until the supposedly temporary began to look rather permanent.
Homeowners reaching the end of ten-year mortgage fixes are now encountering the interest-rate shock that commercial borrowers confronted several years ago. Residential projects equivalent to around 125,000 homes, scheduled for completion between 2023 and 2026, will not be completed as planned. Six open-ended property funds are suspended or liquidating, with sales beginning to expose losses that previous valuations did not.
Each has its own explanation. Together, they raise a larger question: what happened in the four years between the interest-rate shock and its consequences becoming visible?
Part of the answer lies in structures that have long distinguished Germany’s property market. Bank finance dominates, loans are fixed for long periods and property is valued on sustainable income and long-term usefulness rather than simply on today’s achievable price. Relationships matter: lenders generally prefer to repair a viable borrower rather than force an asset onto a weak market.
At a recent industry seminar, we heard a senior German banker take that philosophy to its uncomfortable extreme. If every German bank had to revalue all its real estate exposure at once, he suggested, they would all be insolvent. He was surely exaggerating. (Wasn’t he...?) Banks hold loans, many borrowers continue servicing them and much lending was conservative. Nevertheless, the remark stayed with us.
Germany’s preference for gradual adjustment has indeed provided protection. Values were reduced in stages, loans extended and borrowers given time to inject equity or revise their plans. The country avoided the violent correction that periodically clears other property markets. The speed with which some Anglo-Saxon markets discover prices can occasionally look less like efficiency than a motorway pile-up.
The open-ended property funds illustrate both the strength and the limit of this approach. Minimum holding periods and twelve-month redemption notices reduced the incentive to run first and gave managers time to raise liquidity without forced sales. But they could not make buildings liquid, nor guarantee that carrying values would be realised, or keep funds attractive once government bonds again offered a credible return. The notice period slowed the queue. It did not alter what investors would find when they finally reached the front.
Germany has bought time. But buying it was the easy part. Now it must build a market capable of functioning under conditions that are no longer temporary. For investors, the distinction between an asset given time to recover, and one merely spared recognition of its losses, has rarely mattered more.
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There are signs that the market is moving beyond waiting. Financing remains available for strong assets, sponsors and plans. As new-build economics deteriorate, renovation, conversion and repurposing are turning existing buildings from a legacy problem into an investment opportunity.
The obstacle is no longer a shortage of ideas. Germany has modular construction systems, serial refurbishment, timber engineering, lower-energy building technologies and increasingly sophisticated methods of adapting existing stock. It has an enormous domestic market in which to apply them: 44 million homes, ageing commercial buildings and an unavoidable requirement to reduce energy consumption.
Yet too many promising solutions remain trapped between the demonstration project and the mainstream market. Planning takes too long, technical standards add cost, subsidies change before developments can be completed and investors cannot always determine which rules will apply over the life of an asset. Germany has become very good at producing the pilot project and considerably less reliable at producing the next thousand.
This gap between invention and implementation is hardly new. Werner von Siemens understood how to bridge it. Nineteenth-century Germany possessed engineers, inventors and ambitious companies, but patent protection remained fragmented among its constituent states. An invention protected in one jurisdiction lacked coherent protection across the new empire. German ingenuity existed, but the framework needed to develop it did not.
Siemens did not wait for better conditions. He helped establish the Patentschutzverein, united engineers, industrialists and lawyers behind reform, and pressed for a national patent system.Its work helped produce Germany’s first imperial Patent Act and the creation of the Imperial Patent Office in 1877.
The response was striking. More than 3,200 patent applications were submitted during the first six months. By 1890, the annual number had risen to almost 12,000. The legislation neither created German inventiveness nor guaranteed the industrial success that followed. But it liberated ideas from a fragmented system and allowed them to be protected, financed and deployed across a national market.
Siemens did not simply produce another invention within an inadequate framework. He helped change the framework so that thousands of other inventors could succeed.
Germany’s property industry now needs to make the same leap: from technical possibility to commercial scale. Its next phase will not be secured by waiting for interest rates to fall or construction economics to return to their previous state. It will depend on creating conditions in which technical solutions can move quickly from prototype to normal commercial practice.
The frog, it turns out, does not wait patiently to be boiled. It notices that its surroundings have changed and moves. Germany’s property market has spent four years buying time. The test now is whether that time becomes a bridge to something better—or simply a more comfortable place from which to watch, or feel, the temperature rise.