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Fears of the real estate bubble have been put into perspective

Every year, the Expo Real – the largest trade fair for real estate and investments in Europe – takes place in Munich. But in 2020 everything will be different: Due to the corona pandemic, the trade fair will be held online for the first time on October 14th and 15th this year. At the so-called Expo Real Hybrid Summit, all kinds of real estate experts and financiers come into contact with one another and exchange their experiences online. Sascha Klaus, CEO of Immobilienbank Berlin Hyp, reveals in an interview with the Haufe Group how he assesses current developments on the real estate market in times of the Corona crisis.

Office space remains important

A survey by the digital association Bitkom among more than 1,000 German citizens aged 16 and over shows that as early as March 2020 around 49 percent of the employed people surveyed were working wholly or at least partially in the home office. The survey of 800 HR managers carried out by the Institute for Economic Research (Ifo) in the second quarter also showed that around 61 percent of employees are currently working at least partially from home – before the crisis it was only 39 percent. Nevertheless, Berlin Hyp financier Sascha Klaus is of the opinion that working in the home office will not prevail in the long term: “The direct, personal exchange between employees will otherwise be neglected,” he explains to the Haufe Group. A “mix” of the two working methods is definitely conceivable, for example three days of work in the office and two days on the move.

According to experts, the corona crisis will not trigger a banking crisis

According to publications by the Federal Statistical Office, price-adjusted gross domestic product fell by 11.3 percent in the second quarter compared to the previous year. Even during the 2008/2009 financial crisis, GDP did not suffer such a sharp decline; the biggest decline was noted in the second quarter of 2009 at 7.9 percent. Nevertheless, according to Klaus, the current situation cannot be compared with the banking crisis of the time. “The fundamental difference to the situation a good ten years ago is that it was not the real estate market or the banks that triggered the crisis, but a pandemic,” emphasized the expert in the interview. From his point of view, no new financial crisis is currently to be expected, because real estate banks are now much more stable than they were back then.

According to Klaus, there are several reasons for this: On the one hand, the interest rate is currently significantly lower than in 2008. This means that it is becoming more attractive for investors to bring in more equity. In addition, financings are now “much more conservative than they were during the financial crisis” and therefore significantly more risk-resistant than in 2009. This applies to lending money, but also to the much higher liquidity buffers that a bank maintains to cope with the crisis. In addition, according to the expert, the low demand for repayment moratoriums for the financing of commercial real estate shows that the real estate market currently appears to be fairly stable.

Long-term effects of the corona crisis on the real estate industry

The long-standing fears of bubbles forming on the real estate market are therefore no longer applicable, according to the Berlin Hyp management board. Because, in his opinion, the industry has proven to be a “long-term anchor of stability”. Although the transaction volume in the real estate industry will be lower than in 2019, it will not be as low as feared. According to Sascha Klaus, the long-term stable, low level of interest rates leaves risk-averse investors little choice but to invest in real estate. Because real estate prices have not fallen as expected in the past four quarters, but have even increased on average worldwide. According to a study by Zurich’s major bank UBS from September 2020, Madrid, San Francisco, Dubai and Hong Kong are the only cities with negative price developments compared to the previous year. All other cities saw an increase in prices compared to last year. The last time there were fewer cities with falling prices was – according to data from UBS – in 2006.

Effects of a wave of bankruptcies on the real estate market

In order to support companies in the crisis, the German government has suspended bankruptcies by law until December 31, 2020. However, this only applies to companies whose insolvency or over-indebtedness was caused by the pandemic and for which there is a prospect of eliminating the insolvency. Experts now fear a wave of insolvencies after the end of these provisions, which would also have a strong impact on the real estate industry due to the resulting lack of rental payments. According to Berlin Hyp board member Sascha Klaus, the extent to which the real estate banks will be affected depends on the structure of the respective loan portfolio. According to the financial expert, financing of retail real estate is particularly at risk. In so-called retail portfolios consisting of several retail properties, a “crisis-resistant anchor tenant”, hence a tenant with high customer attraction, is an important factor of stability in order to secure financing. According to Klaus, the food sector has also come more to the fore during the Corona crisis.

Necessary measures by the federal government in times of the pandemic

Even if, according to the chairman of the board, Germany is helping to manage the crisis effectively with its aid packages, the federal government’s debt must not get out of hand. Instead, the expert advises improving the framework conditions in the real estate industry, above all to make it more attractive to achieve climate targets. According to a recent announcement by the German government, public and private buildings in Germany are responsible for 40 percent of total energy consumption and 20 percent of total CO2 emissions. Therefore, as part of an Agenda 2050, the expert calls for an increase in the renovation rate for commercial real estate from one to three percent. “An incentive for this could be attractive depreciation options for such investments,” suggests Klaus in an interview with the Haufe Group.

Image sources: Irina Kozorog / Shutterstock.com

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