New Survey

Real estate sector still booming... for now

  • Why it matters

    Why it matters

    There have been suggestions that Germany is entering a property bubble, but the new survey casts doubt on that.

  • Facts


    • The survey responses produced a record-high index indicating the current state of business in the real estate sector.
    • The survey polls about 120 industry players.
    • Respondents were not very optimistic about financing conditions, with a majority expecting them to worsen.
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Baukräne vor Hochhauskulisse
Construction cranes are a common sight in German cities like Frankfurt. Photo: DPA

Real estate sector responses to the latest survey by the Cologne Institute for Economic Research (IW Köln) are positive. The index for the current state of business in the entire industry rose to a record value of 89.5 points in the fourth quarter of 2016. This means that the balance of good and bad assessments of the situation is closer to the maximum of 100 percent than ever before.

“Any other outcome would have been surprising, because the underlying conditions couldn’t have been better,” said Michael Voigtländer, head of the Real Estate Economics competence field at the IW Köln, in response to the results of the survey of about 120 industry players. The critical actors, according to Mr. Voigtländer, are stable economic development in Germany, a further increase in employment, population growth and historically low interest rates.

This quarter, the additional question asked with every quarterly index survey was: Which year will interest rates rise by more than one percent? Only about 8 percent of respondents said they could imagine this happening next year, but about 40 percent said they believed it was possible a year later. However, real estate companies tend to pay less attention to the key interest rate and more to bond yields. The yield on the 10-year German federal bond has emerged as a benchmark. But it has been rising again for some time.

The survey respondents did not believe that the future will be as rosy as the current business climate.

Mr. Voigtländer is unwilling to speculate on whether the responses, which were given before the latest decisions by the European Central Bank and the U.S. Fed, would be different today. But he believes that interest rates will not change significantly based on the most recent central bank decisions.

On Wednesday evening, the Fed raised its benchmark rate by 0.25 percentage points, to a range of 0.5 to 0.75 percent. The ECB had previously decided to leave its key interest rate at zero. It announced that it would lower its rate of purchasing bonds but extended the duration of the program by nine months, to the end of 2017. In other words, the ECB is continuing its relaxed monetary policy.

How companies assess their borrowing possibilities depends on other conditions too. For this reason, the IW Köln asks respondents for their assessment of how financing conditions have changed. Among the project developers, it was noticeable that, for the first time since the third quarter of 2015, more respondents expected conditions to worsen rather than improve.

The German Real Estate Finance Index by JLL reveals a similar picture. That index is still in positive territory but, as Markus Kreuer, head of JLL’s financing consulting unit in Germany, put it: “For the first time since the end of 2012, the pessimists are on the verge of prevailing over the optimists in the assessment of the financial climate.” In the IW survey, companies in the retail sector were especially skeptical about future financing conditions, expecting them to worsen by 30 percent.

Publicly traded commercial real estate investor DIC Asset was one of the respondents unwell to take the risks of climate change. This week, the company paid off close to €1 billion in loans with several banks, thereby cutting its financing costs for the applicable portfolio in half, to 1.7 percent.

Rising interest rates also lead to declining real estate values. For expert Voigtländer, one of the consequences is that “those who expect interest rates to turn around soon will tend to sell their real estate, while rising interest rates accompany falling prices.”

The upshot is that the survey respondents did not believe that the future will be as rosy as the current business climate. “The idea that expectations would decline in the next 12 months already emerged in the third quarter,” said Mr. Voigtländer.


Reiner Reichel specializes in real estate, closed-end fund and system models. To contact the author:

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