Fading Boom

Hot Market Cooling Down

Wohnungsbau am Spittelmarkt in Berlin
A building site in central Berlin. Is the boom soon bust?
  • Why it matters

    Why it matters

    Germany’s real estate market has been running hot for the past three years. Investors are now preparing for a cooling of the market.

  • Facts


    • The latest quarterly real estate index compiled by the Cologne Institute for Economic Research has fallen 10 points since June.
    • The index value for business expectations for the next 12 months tumbled from 34.1 points in June to just 19.5.
    • The index for business expectations among real estate developers was down from 28.3 in the second quarter to only 2.4 points.
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Whether the glass is half full or half empty depends, as we all know, on the mood of whoever is looking at it.

The same can be said of the most recent quarterly report by the Cologne Institute for Economic Research (IW) on the real estate business climate. The institute’s real estate business climate index focuses on the current mood of real estate companies and their business expectations for the next 12 months.

For pessimists, the results are worrisome because in the third quarter of this year the real estate climate has become decidedly overcast. Compared to June, the index sank by more than 10 points to 47.7 on the index counter.

Yet Michael Voigtländer, head of the research unit for real estate economies at IW, who compiled the report with his team, has a decidedly optimistic view of the new figures. Studying the detailed results, he said, revealed “80 percent of the industry still judges their current business climate as good.”

Real estate professionals are clearly more guarded when it comes to future prospects

Germany’s housing market has been booming since 2010, and questions over whether the hot real estate sector may have reached its peak have been raised for more than a year. With prices running at record levels in major cities including Munich, Berlin, Hamburg and Frankfurt, some fear that a bubble may be about to burst. Germany’s central bank, the Bundesbank, has warned that a price correction is likely, though it has stopped short of labelling the housing market a bubble.

The real estate professionals are clearly more guarded when it comes to future prospects. The IW’s index value for business expectations for the next 12 months tumbled from 34.1 points in June to just 19.5.

Two-thirds of respondents didn’t expect business to become any worse than it currently is, while just 7 percent reported they believe business will suffer more in the coming months. But only 25 percent see better results ahead, down from 40 percent just three months ago.

“But optimists among those polled are still in the majority,” said the relentlessly upbeat Mr. Voigtländer.


German Real Estate-02


Real estate developers — companies that acquire property, plan and construct a building and then sell to an investor — demonstrated much less confidence than others polled. The index for business expectations among developers plunged from 28.3 in the second quarter to only 2.4 points. Even Mr. Voigtländer said, “This decline is, indeed, considerable.”

Although the developers’ project calendars are full, many companies sense it won’t be as easy to line up interested partners willing to sign rental or sales contracts before construction begins. Generally, 30 percent of real estate space needs to be rented or sold before financing can be obtained and construction can begin. Mr. Voigtländer said the lengthy amount of time required to market new projects is reducing the willingness of developers to invest.

The estimates of property developers are particularly meaningful because, in comparison to other real estate companies and investors, they are more sensitive to changes in the business climate and quicker to react. “The impression is becoming stronger that the industry is at an absolute peak,” said Mr. Voigtländer.

The probability that things soon will go downhill again has noticeably increased.

“Actually, it was just a matter of time until the general downturn in mood would cross over to the real estate climate,” said Andreas Pohl, spokesman for the board of managing directors of Deutsche Hypothekenbank, a German real estate investment bank. He said global crises were playing a major role in the downbeat assessment.

The probability that things soon will go downhill again has noticeably increased.

The real estate climate index of the Hanover-based Deutsche Pfandbriefbank, which is calculated monthly using different ratings criteria than the IW, also declined significantly in August.

Investors are preparing themselves for a cooling of the market. Significantly more than half of the companies surveyed still want to increase their property portfolios in the coming year, but the inventory is likely to be more diverse. Almost two thirds of the companies plan to invest more in medium-sized cities, where returns are greater but so are the risks.

“That is also why investments in the big cities will not be reduced,” said Mr. Voigtländer, who views the development as a sign of caution and prudence within the industry.

Karsten Nemecek, managing director of corporate finance and valuation at the real estate service provider, Savills, has no fear of a change in the business climate. “The market is stable and would well weather a healthy cooling off,” he said.

Anne Wiktorin writes about real estate for Handelsblatt. To contact the author: wiktorin@handelsblatt.com 

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