By Sara Seddon Kilbinger, Senior Reporter, REFIRE
May marks new low since long-term low in April
The number of real estate deals in Germany hit a new long-term low last month, falling below a hundred transactions and undercutting the long-term low recorded in April, according to new research by Savills.
The steep rise in interest rates and lower economic momentum coupled with high inflation, have led to “significant distortions in the German real estate investment market”, according to Matthias Pink, director and head of research Germany at Savills.
The transaction volume was more robust, albeit below average. Commercial real estate totalled €2.5 billion (5-year average: €5.5 billion) and residential real estate accounted for €900 million (5-year average: €2.1 billion). The transaction volume during the last twelve months also declined and now stands at €116.3 billion, a decrease of 2.8% y-o-y, according to Savills, which is forecasting a further drop off in investment over the summer.
“The current trend is reminiscent of the start of the COVID-19 pandemic, but the drivers are completely different,” said Marcus Lemli, CEO Germany and head of Investment Europe at Savills. “For example, although the war in Ukraine has hardly any direct consequences for the local real estate market, it is driving the already high inflation even higher. This ultimately also ensured that the turnaround in interest rates took place earlier and is stronger than had previously been expected. Both short-term and long-term interest rate expectations have risen more sharply than ever before within a very short period of time and this is obviously causing a kind of interest rate shock on the real estate investment markets at the moment.”
Trepidation in the market is also reflected by RICS’ latest Global Property Sentiment Index (CPSI), published last month. The Commercial Property Sentiment Index for Germany has fallen into negative territory at -1 in the first quarter of 2022, down from +2 in the previous quarter. Of those surveyed, 23% say the cycle is in an early downturn phase, up from 15% at the end of last year. Germany as a property investment location continues to be rated as expensive (55%) and very expensive (28%). Germany ranks third after Luxembourg and Austria in the global comparison of countries that consider their location expensive, followed by Switzerland and Israel.
Bundesbank slashes growth prediction for Germany
Last Friday, the Bundesbank slashed its growth prediction for Germany by more than half and upped its inflation prediction for this year, amid rising food and fuel prices and uncertainty over Russia’s invasion of Ukraine. The Bundesbank is now forecasting inflation of 7.1% in Germany this year, up from a previous forecast of 3.6% in December.
“Inflation this year will be even stronger than it was at the beginning of the 1980s," said Bundesbank President Joachim Nagel. “Price pressures have even intensified again recently, which is not fully reflected in the present projections,” he added.
The European Central Bank has said that it will increase interest rates in July, with further rises also likely later in the year in a bid to curb inflation. The UK and the US have taken a similar approach by increasing interest rates in recent months.
Predictably, the rise in interest rates has caused borrowing costs to rise significantly. In times of low market liquidity, it is difficult to determine prices, meaning that investors are often hesitant to push ahead with deals: “We interpret the current development as a turning point in the investment cycle,” said Pink. “Falling interest rates have been a driving force for the extreme dynamics on the real estate investment market for years, and recently probably even the decisive one. This driving force has now lost its tension not only temporarily, but for the foreseeable future,” he added.
Savills stands by its assessment that the low transaction activity represents a temporary adjustment reaction to the changed interest rate environment and in view of the high number of halted and protracted sales processes, it expects “only a few transactions and correspondingly low turnover” in the coming months. However, this also means that transactions are piling up and that activity could return to normal later in the year.
As such, it is not all doom and gloom. Although capital market interest rates have risen extremely quickly, the curves should flatten out considerably from now on, especially at the long end, according to Savills. In addition, they are predicting that the yield level on the bond markets will probably remain very low for the time being, especially for cash-on-cash-oriented investors and that subsequently real estate - together with equities - will probably remain the preferred asset class for most investors: “In our opinion, the real economy poses greater risks than the capital market,” Pink said. “If the interest rate shock were followed by an economic shock, the real estate market would also face a strong correction. However, this does not seem to be the case at the moment. Economic expectations have stabilised recently and with them the prospects on the rental markets. Another supportive factor is that higher interest rates together with high inflation should largely prevent the overshooting of supply that is typical for the end of a cycle.”
