Brexit Factor

Getting in on the Boom before it Busts

Farbig präsentiert sich am 03.09.2014 die Innenstadt von Berlin beim Übergang vom Tag zum Abend. Foto: Paul Zinken/dpa +++(c) dpa - Bildfunk+++
Berlin's property market is heating up. Could it be overheating?
  • Why it matters

    Why it matters

    In big cities like Berlin, Munich or Frankfurt, high prices mean it is hardly possible to achieve returns, which mostly are between 2 and 3 percent.

  • Facts

    Facts

    • In the latest survey of German real estate firms, 95 percent rated the apartment sector as “good.”
    • The number who believe future market conditions will be more favorable is falling, the survey showed.
    • Most real estate professionals expect international investors to show increasing interest in the German housing market as a consequence of the Brexit vote.
  • Audio

    Audio

  • Pdf

The German real estate market is hot, whether for hotels, retail warehouses or parking garages. Big investors in particular are putting their money into any piece of property that still offers returns, even if only partly promising.

Anyone who can get a piece of multi-family apartment blocks in cities like Berlin, Munich, Frankfurt or Hamburg has particular cause to rejoice, because competition is this segment is extremely intense. Investors are making a grab for uncomplicated properties, even if returns are declining.

The current climate of the German real estate industry continues to be excellent, said Michael Voigtländer, head of financial and real estate markets at the Cologne Institute for Economic Research (IW).

He based his assessment on the latest IW survey of German real estate companies, which Handelsblatt has exclusively obtained. According to the report, 95 percent of firms surveyed rated the apartment sector as “good.” None assessed conditions as “bad.”

And looking to the future, optimists are in the majority – for now. But expectations are sinking.

“This is evidence that the industry is increasingly convinced that the boom has peaked, and the business outlook will remain at this high level,” said Mr. Voigtländer.

“Real estate might seem expensive but for many large investors in particular, there is no alternative.”

Frank Pörschke,, head of Jones Lang LaSalle in Germany

Prices in 2016 rose again in Germany. In cities like Berlin, Munich and Frankfurt, high prices mean it is scarcely possible to achieve significant returns, which are mostly between 2 and 3 percent.

Frank Pörschke, head of Jones Lang LaSalle (JLL) in Germany, expects prices to continue rising.

“Real estate might seem expensive, but for many large investors in particular, there is no alternative,” explained Mr. Pörschke, whose firm is one of the largest real estate companies in the country.

Overall, however, there’s growing skepticism in the industry. According to the IW index, the number of those who believe future market conditions will be more favorable is falling.

“One reason could be that, as a consequence of the Brexit, more and more foreign investors are entering the market and exacerbating competition,” said Mr. Voigtländer. “Along with this comes the danger of overheating.”

At the end of June, a survey carried out by the German real estate association (Immobilienverband, or IVD) indicated that 59 percent of real estate professionals expect international investors to show increasing interest in the German housing market.

Thomas Zabel heads Zabel Property Management, which specializes in luxury apartments in Berlin and Frankfurt. He said that after Great Britain’s vote to leave the European Union, inquiries about German real estate doubled.

 

19 p29 Peak Property-01

 

 

However, Mr. Pörschke, head of JLL real estate, says it’s not possible to ascribe investor interest to Brexit alone, because there is so much capital in the market anyway. He says only individual conversations, not statistics, can reveal the motives behind investments.

In London, meanwhile, Brexit is definitely affecting the mood of investors. There, the real estate market is mostly quiet and prices are falling.

One of the Britain’s largest real estate companies predicted a 6-percent drop in property values in central London. It’s an indication that investors remain cautious for now. It doesn’t mean, however, that they will immediately start diverting their capital flow.

Martin Steininger, chief economist for the real estate research firm Bulwiengesa, remained skeptical. “In general, an impact from Brexit on our real estate markets won’t be evident in the immediate future,” he said.

He pointed out that the British have yet to submit a formal application to exit the bloc, let alone negotiate with the European Union over future political and economic relations. The situation is uncertain, and so are consequences for real estate markets.

The industry seems certain that, at least in commercial real estate, pressure will increase. Nine of 10 companies in the IW survey believed Brexit would lead to a further increase in demand for commercial properties in the major German cities.

“This expansion of demand will put more pressure on returns,” said Mr. Voigtländer. “If prices rise faster than rents, yields decline for investors.”

Last year, the commercial real estate market reached a record value of €56 billion ($63 billion). But very few experts believe that figure will be topped this year.

Mr. Pörschke of JLL observed that the investment level for commercial properties in Germany declined 25 percent in the first half of 2016, to €18 billion ($20 billion).

He sees a problem, however, not in an impending crisis but simply in lack of supply. Continuing low interest rates are driving more institutional investors into the real estate market, where they seek returns and investment security.

Mr. Voigtländer said there are reasons for concern, particularly because of the trend in commercial properties, where institutional investors typically plan an exit within 10 years in order to generate profits.

“If interest rates rise during this period, real estate prices could fall and losses would be incurred with the sale,” he said.

Increased demand because of Brexit could even create conditions for “a big explosion in the commercial properties market,” he said — if, for example, the British are able to negotiate a continued positive trade relationship with Europe.

But no one today knows what that would ultimately look like. Although, Mr. Pörschke of JLL is not worried.

“Of course, no one can exclude the possibility that there will be a price correction,” he said. “But for now I can’t see signs of that.”

 

Matthias Streit covers finance for Handelsblatt from Frankfurt. To contact him:  streit@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!