Germany Sector Outlook
Economic developmentThe signs for Germany’s economy point to strong growth across the board. The previously particularly hard-hit services areas and private consumption, here specifically (stationary) retail, are especially likely to reap exceptional benefit from demand that has been building for months and high, above-average saving rates. Furthermore, exports, driven by ongoing lively international demand, are set to expand swiftly and fuel Germany’s export economy – this despite the recent delivery bottlenecks reported for primary products that have somewhat dampened the recovery of exports and that of the industrial sector.
Overall economic output measured against the real gross domestic product (GDP) had already reached its pre-crisis level by the third quarter of 2021. From the coming year onward, utilization of macroeconomic capacities should be above average again, with the result that companies will need to invest increasingly in replacement and expansion. Sustained strong demand for residential property, coupled with the recovery in the labor market that set in in the summer months, the still favorable interest rate environment and the release of savings involuntarily formed during the pandemic for investing in real estate should significantly boost housing construction.
Based on these fundamental data, we anticipate a sharp increase in real GDP of 3.7% and 4.9% in the current and coming year respectively.
The number of unemployed dropped sharply by 24,000 to 2.59 million in July, marking the steepest decline in the month of June for 15 years.
Despite an improved labor market situation, wage and salary increases are likely to be moderate this and next year – this even though the inflation rate rose significantly above the 2% mark in recent months on the back of basis effects such as VAT rates that have now been increased to their former level, the new CO2 emission allowances, and higher prices for energy and prices and food. As a result of the special effects, the cost of living is likely to rise temporarily over the course of the year, partly substantially.
In view of the gradual recovery of the eurozone’s overall economic situation, the ECB is likely to keep its monetary policy ultra-accommodating, at least for the next twelve months, if not for a great deal longer. We therefore assume that the short-term interest rates will not rise before 2023. Lower short-term interest rates, then more moderate inflation, and the ECB’s extensive purchasing of bonds means that long-term interest rates will linger at a low level. Consequently, real estate yields and their spreads should remain relatively attractive. In this context, we expect growing interest from institutional investors in investing above all in tangible assets and specifically primarily in property. The German real estate market is set to reap the benefit on the back of its political and economic stability and will retain its position as one of the world’s most important and safest investment targets.
Around €33.2 billion was invested in the German real estate market in the first half of 2021, down 22% compared with the year-earlier period. At €17.8 billion, the second quarter proved to be slightly stronger (+15%) than the first while consider-ably outperforming the second quarter of 2020 (+27%).
Whereas the first quarter was characterized by reticence, investor demand on the world’s second largest investment market began to pick up momentum at the start of the summer months. Security-oriented, defensive investments in the core and core plus segment continued to dominate, and excess demand in this segment will also hold steady over the remainder of the year, causing further yield compression.
Properties with long, unexpired lease terms, preferably with public-sector tenants of good credit standing, are especially desirable. Properties that feature sub-optimal framework conditions, older buildings, outdated floor plans, peripheral locations, high vacancies and short lease terms are subjected to even greater scrutiny by investors for their sustainable value.
Consequently, properties that do not offer high-grade amenities, collaborative environments and flexible floor space will find it increasingly difficult to prevail in the current competitive environment. Without these features, low rents will be the primary appeal of a property. This constellation will lead to a genuine bifurcation in the value of property.
The current low incidence figures, multiple easing of restrictions, and the ongoing rollout of the vaccination campaign are major contributing factors – even if concerns remain about a possible fourth wave in the autumn, stoked by new and/or spreading mutations. The current situation should nevertheless do much to encourage the re-turn of investors with a greater risk tolerance, signifying the reinstating of a “normal” or pre-coronavirus investment environment. Herd mentality is also at play here: this return to normality is being expedited because no one wants to miss out on a market recovery.
Investment transaction volumes in Germany*
Source: CBRE Research, 2021
*: excluding proportion of company share takeovers
**: Investment in multi-family properties (upward of 50 units)
In the commercial segment, office properties continue to be the preferred asset class of many investors. The properties on offer are in short supply, however, especially core properties in CBD locations in the major cities. We anticipate greater momentum here again in the second half of the year, above all if the leasing markets continue to rebound. The first signs are already visible, and the return to the office, along with rising demand for contemporary, collaborative floor space, will be reflected accordingly in the investment figures. Especially European investors consider office real estate the most important asset class. As a consequence of the pandemic, fit-out and building specifications that promote health and safety have become even more important. Investors are becoming increasingly prepared to rejig properties in line with occupier requirements, which is having a significant impact on underwriting. Growing attention is being paid to the appeal of offices, with flexible room design and well-being features.
Retail properties are still highly sought after by investors, above all if used to sell food. Supply shortage is the factor of constraint. Supermarkets and hypermarkets, as well as DIY centers, have seen yields dip further; prices have come under pressure as investors are likely keep focusing primarily on this segment. The other sub-asset classes in the retail segment will also benefit from opening up, particularly as consumer spending propensity is on the rise on the back of pent-up demand and restrictions on vacationing abroad. We are seeing the first signs, with shopping centers’ capital values slowly bottoming after their recent sharp decline.
Trading in logistics real estate continues to boom, a development accelerated by the coronavirus and ultimately likely to continue due to the sharp increase in the share of e-commerce and the optimization of global supply chains. All this is increasingly making this asset class attractive to a wider group of investors, which is also reflected by the strong yield compression seen over the last 12 months to currently 3.25%. It is only a question of time until yields drop below the 3% mark. The keen interest of institutional investors above all, both in Germany and even more so from abroad, is already culminating in fierce bidding.
Particularly in the case of open-ended real estate and mutual funds, the scope of green building certification in a portfolio is constantly expanding. For classification as Article 8 funds, for instance, social alongside environmental attributes must be taken into account in an investment decision and documented. The actual form this will need to take is largely still not finally clarified and will evolve in practice. There are already signs that CO2 consumption will be one of the key indicators for sustainability. Data transparency and data availability on this issue still pose the greatest challenge – and not only with open-ended funds.