Real estate, alternative real assets and other diversions

The German real estate market

The Analyst

The availability of German real estate has fallen, illustrated by a 5.3% year-on-year decline in 2017 residential permits. Since then, there has been little to no movement, with the German Federal Statistical Office reporting a 0.5% increase in residential permits through January and November 2018 from the previous year. 

This is a symptom of persistent construction bottlenecks due to workforce shortages, insufficient contractor capacity and inefficient bureaucracy. 

In Munich residential vacancy rate is near zero. Frankfurt was 40,000 homes short in 2015, suggesting that 2017’s 15% year-on-year increase in apartment prices was not just Brexit related. In Berlin, the price of terraced houses rose 14% year-on-year through 2018. 

The seven German real estate hubs of Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart are all demonstrating low vacancy rates, and purchasing prices are expected to grow. 

Meanwhile, demand is set to come under pressure from lifestyle changes, urbanisation, macroeconomic factors and political policy. This will increase house prices and lower vacancy rates even further. 

How have demographic changes increased housing demand? 

The process of singularisation is when the proportion of residents living alone grows. It is particularly pronounced in Germany, which retains an average household size of 2.0 people. This is below the European average of 2.3, with only 22.3% of German households containing children. 

The result is greater demand in individual housing units, which is putting pressure on an already underperforming supply side. 

Over the long term, demand may suffer from an ageing population. Germany’s low rate of 1.5 births per woman make its population one of the oldest in Europe.

 High levels of urbanisation may shield cities from the effects, with the populations of Berlin and Frankfurt expected to grow by 7.5% and 6.9% respectively by 2030. 

What economic factors are strengthening the German real estate market? 

Macroeconomic factors, such as low unemployment rates of 3.4% and solid disposable income growth of 3.8%, have strengthened the German real estate market. 

At the same time, low interest rates are making more mortgages readily available and are increasing residential sales. That said, interest rates are set to rise and the ECB will probably terminate its bond purchases by September. 

If yields on bonds increase as the ECB, the main buyer driving up prices since 2015, drops out of the market, companies with exposure to German bonds may suffer. 

What is the state of the German office market? 

Office real estate is doing well in Germany, with strong demand exemplified by leasing activity only 3% lower than 2017’s 10-year high in Q318 for the top seven cities. 

Supply increased only moderately during that time, putting office vacancies in the big seven at all-time lows of 3.5% in the third quarter of 2018. 

 As expected, average office rents across the big seven cities increased considerably on the back of low vacancies, with strong growth of 22%, 10% and 7% year-on-year reported in Berlin, Munich and Frankfurt respectively in mid-2018. 

What is the outlook for the German real estate market? 






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