LightFieldStudios/Envato
Charles Kingston, CEO & Editor, REFIRE Ltd.
By this time next week, the Expo REAL in Munich, Germany’s most important gathering spot for the real estate industry, will be in full swing. Despite apparent criticism levelled at the trade fair’s management from several disgruntled quarters, unhappy with the Expo’s alleged ambivalence to the beleaguered (and impoverished) state of the industry (among other gripes), for this year - at least - the annual October pilgrimage to the Bavarian capital will remain a must-visit for most active players in commercial real estate.
There’s a great deal for real estate firms to digest, two years deep into a real crisis in the industry. The lack of meaningful transactions still casts a cloud over the marketplace, making it difficult to nail down price levels. Residential house prices appear to have fallen to a point where further steep falls can probably be discounted. But across other asset classes there remains much uncertainty, with both buyers and sellers having to weigh up a multitude of factors that go beyond traditional considerations. Energy efficiency, inevitable capex, conversion potential, availability of affordable finance – these all play an outsized role in investment decisions, all of which have delayed even cash-rich investors from taking the plunge.
Now, just when you thought it was safe to go back in the water, assessments of future real estate value are being undermined by wider concerns about the health of the German economy. This is a creeping phenomenon, but one which is fostering a climate where annual rent multiples as a basis for pricing are being steadily downgraded – from 35 times annual residential rent to 22 times or less, for example. Such re-ratings downward can take an awful long time to reverse, until the market perceives there are plenty of good reasons to re-rate them back upwards. Such perception is currently in very short supply.
Take the case of Intel, for example. The chipmaker’s decision to postpone its €30bn investment in a new plant in Magdeburg is a disaster for Saxony-Anhalt’s capital city. Despite the brave protestations of the state’s economic minister Sven Schulze that he’s confident it’s just a postponement, the project is now almost certainly dead in the water – certainly to anywhere near the extent that was planned. In Berlin they’re already re-distributing the planned €10bn of subsidies that was promised for the Intel project, with many leading economists heaving a sigh of relief that they’ve got their money back before it got poured down the drain - as many had suggested.
The Intel decision is highly complex. It has a lot to do with Intel’s own market position, which is weak compared to its leading competitors. It’s looking at breaking itself up, it might well be swallowed up itself in its efforts to save its profitable chip-making division, and it radically needs to cut its cost base. Germany, with its punitive energy costs, its cumbersome regulatory framework and its crushing bureaucracy, is probably not what Intel needs to get its head around at this time.
It’s a real blow for Magdeburg, which although a small market among Germany’s large cities (population 240,000), had really high hopes that Intel’s arrival could spark a genuine renaissance in the city, fuelled by 3,000 Intel jobs and 7,000 in supportive industries. That represents a lot of housing, a lot of warehouses, a lot of hotel capacity, and a welcome boost for the region’s retailers.
Your editor can personally attest to the rejuvenating powers of a company like Intel’s arrival in town. It’s not an exaggeration to say that Intel’s coming to Ireland in the 1980’s was a game-changer for the country’s economy, bringing not just jobs but positioning Ireland as a key player in the global tech and high-value manufacturing sectors. While even in Ireland job cuts are currently being discussed as Intel re-groups, the overall ripple effect of the company’s presence over the years has been long-lasting and absolutely fundamental to Ireland’s prosperity.
Intel is no longer the dominating global powerhouse it was in the 1980’s and 90’s, and is now facing serious competition from both the US and Asia. Not surprisingly it has little to fear from European competitors, but it has a hard path ahead. The danger, from a real estate perspective, is that Intel’s decision could add to a general loss of confidence in Germany’s ability to attract and support large-scale foreign direct investment. This would have a spin-off effect in delaying real estate transactions, with buyers and sellers taking a further “wait-and-see” approach. This is not what we need, at all.
Just a few years ago we reported in REFIRE on the annual study by brokers Lübke and Kelber on Germany’s ‘hidden champions’ – cities that had inverse location risks and outstanding prospects for landlords based on factors such as population growth, socio-economic condition, the local housing market and current rental and purchase prices. For several years, Wolfsburg topped the list. As recently as 2022 Wolfsburg again topped the rankings of German’s most Sustainable Cities in an ImmoScout24/WirtschaftsWoche survey. Given the large-scale threatened layoffs by the city’s largest employer Volkswagen, will we soon be expecting to see changes at the top of these rankings? We wonder.
The truth is that the overall economic and industrial climate plays a decisive role in investors’ readiness to pay premium prices for property assets. We know that for the next few years we’ll all be busy with energy-efficient building retrofits and long-term logistics sustainability. Real estate investors will have to see clearly why all this makes economic sense to them, and why they should persist in looking for decent returns in the sector. They have many less risky options now as to where to put their money.
The giant ship that is the German economy can take a long time to turn around. It desperately needs to regain competitiveness – with cutting-edge technology, a pro-business public sector, adaptable work-forces, and realistic climate goals. If that’s too difficult to overcome, foreign investors too will take their plentiful money elsewhere and let Germany sort out its own problems.
It would be very welcoming if the Expo REAL provides a genuine fresh impulse to get transactions moving again, and fosters real progress between buyers and sellers in bringing them closer to accepting current - admittedly harsh - business realities.
