Real Estate

No end to the price spiral for real estate in sight

The real estate industry has been talking about the coming downturn for years – but it is a long time coming. Demand is high, prices are still rising. This is particularly unpleasant for city dwellers.

The construction and real estate industry in Germany has so far defied the bad economic news from industry. The construction companies are still so busy that they can only process many orders with a wait. The real estate industry continues to do good business with both apartments and commercial buildings such as offices and warehouses. This is reported by experts from business and science before the Munich real estate fair Expo Real (7 to 9 October), which starts next week. But there are signs of a turnaround in commercial construction.

“The mood is still good,” says Klaus Dittrich, the head of the Munich trade fair company. Almost 80 percent of the almost 1,900 real estate managers and experts surveyed in the run-up to Expo Real expect their companies to do good business this year.

“Overall, we expect a stable development for office, residential and logistics properties for Germany over the next 12 months,” says Jörg Quentin, head of property valuation at Deutsche Pfandbriefbank, a major real estate financer.

The ECB’s zero interest rate policy drives prices up

At the same time, the expert says: “The current real estate cycle is well advanced.” There has been talk of a possible trend reversal at Expo Real for years, but it has not yet occurred. The ECB’s zero interest rate policy contributes to this. This makes real estate loans cheap on the one hand and reduces the attractiveness of other investments on the other.

“This is true even though the high demand from investors leads to rising property prices and thus lower returns,” says Quentin. The reason for this: Purchase prices in cities have been skyrocketing faster than rents for years. Accordingly, it takes longer for an investor to recover his costs.

The generally weaker economic environment tends to have a negative impact on real estate markets, says Quentin. “However, the effect of low interest rates should not outweigh the effects in the near future.”

This coincides with the assessment of Thomas Lang, partner in the real estate practice of the large law firm Hengeler Mueller, who accompanies many real estate deals. “Due to the persistently low interest rates, there is still sufficient liquidity in the market, and investors still expect adequate returns on real estate investments,” says Lang. “The positive development continues on the commercial real estate market, we continue to see a large number of current and upcoming transactions.”

New construction will decline in the next few years

The real estate and construction sectors deal with buildings equally, but they are not identical. Many existing buildings that do not appear in the construction statistics are also sold and rented. And construction companies also build things that are usually not sold or rented: bridges, tunnels, schools.

“The new building is booming, especially driven by the construction of apartment buildings,” says Ludwig Dorffmeister, the real estate and construction expert at the Munich Ifo Institute. “The number of building permits is continuously declining, but the pipeline is still well filled.” The new construction of single and two-family houses will gradually shrink in the coming years due to demography, the scientist predicts.

Nevertheless, the economic slowdown has now reached the construction industry: “In new commercial buildings, the signs are turning towards a downturn,” says Dorffmeister. “However, after three extremely positive years, it was to be expected that a slowdown would soon occur.” In this segment, the market cycles are significantly shorter than in residential construction. But there is still a great need for new office space and logistics real estate.

Shortages of land and skilled workers are slowing down the construction industry

Construction is slowed down in many places by the lack of land and skilled workers, which mainly affects the building tradesmen: “In addition to the lack of construction space, the finishing trade is currently the major bottleneck factor, as little progress is being made in terms of employment,” says the Ifo scientist. “Even if the mostly very small craft companies want to expand, the skilled workers required for this are generally very difficult to find.”

And what does all this mean for tenants and house builders? It will continue to be more expensive if the price increase has slowed down somewhat this year. A solution to the housing problem in the cities is not in sight. “The building permits mainly sink where they are most needed,” said Stephan Kippes, the market observer at the real estate association Deutschland Süd in Munich, recently.


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