Further Course of the Group

Expected Development of the Overall Economic Environment

Upswing in Germany Remains Largely Intact

A forecast by the Kiel Institute for the World Economy (IfW) shows that the German economy is resisting the headwind from abroad. Experts at the IfW finally expect to see growth in gross domestic product (GDP) to the tune of 1.9% in 2016, with economic momentum in the six summer months expected to lag behind the high rate of expansion witnessed in the first and fourth quarters. After slightly weaker growth of 1.7% in 2017, growth is, however, expected to pick up again to 2.0% in 2018. The expectations of slower growth during the course of 2017 can be traced back to factors that will have a temporary effect, such as the Brexit vote. The German federal government, on the other hand, expects to see lower GDP growth than the IfW, pointing to a figure of 1.4% in its annual projection for 2017.

Despite the damper in the six summer months of 2016, the economy is still reportedly being fueled mainly by domestic economic drivers. According to the IfW, private consumption is expected to show dynamic growth of around 1.5% during the forecast period, mainly due to continued strong growth in real disposable incomes. This nevertheless represents a drop compared with previous years (approx. -0.4%), which can likely be explained by the recovery in oil prices, which translates into higher consumer prices and less purchasing power. The IfW expects construction activity to pick up considerably as weather-related fluctuations start to peter out thanks to the extremely stimulating overall environment, and in particular the sustained favorable financing conditions. While equipment investments were initially hindered by the continual temporary emergence of global political uncertainty, they are starting to pick up again and are expected to grow by an average of 1.3% per quarter in both 2017 and 2018. The initial damper on exports is likely to resolve itself quickly as economic activity on key sales markets gradually starts to pick up, allowing export activity to provide a boost to the upswing. The IfW predicts that German foreign trade will remain on an expansive trajectory despite a temporary slowdown. The labor market is still showing positive development, The unemployment rate fell to 5.8% in 2016. The rate could increase to 6.0% in 2017 before plateauing at 5.8% again in 2018. Despite fairly substantial increases in real wages of late, wage development remains employment-friendly, meaning that the marked increase in employment looks set to continue. The IfW believes that, while the economic impact of the large-scale migration of refugees is now showing up clearly in official budget data, it is not shaping the overall economic picture for Germany, especially since the corresponding expenditure is not likely to increase any further over the next two years. The economic momentum will allow public-sector budgets to generate further surpluses during the forecast period.

The IfW says that its forecast is subject to considerable uncertainty. The current economic pattern is unusually long/moderate, which the IfW says hinders both data interpretation and forecasting. This is compounded by the unusual monetary situation in the eurozone and in other key currency areas, as well as numerous political risks, e.g., in connection with the Brexit vote, the expected political realignment in the US or the failed referendum in Italy.

Real Estate Market: Demand for Apartments and Multifamily Residences Expected to Remain

According to experts at Deutsche Genossenschafts-Hypothekenbank AG (DG Hyp), the German real estate market is still showing very positive development. The solid economic situation, a robust labor market, a growing population thanks to immigration and low interest rates are fueling high demand for apartments and commercial spaces, as well as a considerable willingness to buy among investors. Rents and real estate prices continue to rise, whereas the yields on multifamily residences and commercial properties have been falling for several years now. This development is said to be particularly pronounced in Germany’s top locations. Although Germany’s economic momentum is expected to wane slightly, the favorable overall framework for the real estate market is expected to continue, according to DG Hyp. The demand for apartments, offices and retail spaces, as well as investor interest in German multifamily residences and commercial properties are expected to continue. The real estate service provider ImmobilienScout24 expects quoted prices for apartments to continue to rise looking at Germany on average, although the downward trend in price increases for newly built apartments witnessed nationwide since the middle of 2016 could be seen as the first sign of market activity calming down. A slight increase in quoted rents remains likely. As far as the rent ceiling is concerned, a study conducted by the German Institute for Economic Research (DIW Berlin) shows that this is not having the effect lawmakers had hoped for. By the end of 2016, the rent ceiling was in force in a total of 313 cities and municipalities in twelve federal states. It was most recently introduced in Lower Saxony on December 1, 2016. The rent ceiling could potentially come into force in Mecklenburg-West Pomerania in 2017. The federal director of the German Tenants’ Association (Deutscher Mieterbund) Lukas Siebenkotten does not believe that the Federal Minister of Justice Heiko Maas (SPD) will be able to push through the second package of tenancy legislation before the 2017 Bundestag elections. The draft version of the second package of reforms, which contains new provisions on rent increases after modernization and on rent indices, has not made it past the coordination stage between the relevant government departments to date.

According to FERI EuroRating Services AG (Feri), the German real estate market is currently at a relatively low risk of overheating in an international comparison. Nevertheless, the differences between a number of regional real estate markets and between urban and rural locations are particularly pronounced. While the risk of overheating is mounting in Germany on the whole, it remains limited to major cities and regional hotspots. According to Commerzbank, the real estate boom in Germany is starting to look increasingly like a bubble as house prices move further and further away from the fundamentals driven by the ECB’s extremely expansive monetary policy. The empirica bubble index increased again in the fourth quarter of 2016. Nevertheless, empirica does not see any conventional nationwide price bubble at the moment. Rents and purchase prices in 227 out of 402 administrative districts and self-governing cities are no longer developing in tandem, with the bubble index indicating a medium to high risk for 158 districts. Nevertheless, there are only 7 districts in which too many apartments are being built.

Due to positive income momentum and lower interest rates for construction, DB Research says that residential property ownership remains affordable on average in Germany, despite rising house prices. There are, however, pronounced differences from region to region. Even if mortgage interest rates and house prices increase slightly, DB Research still expects houses and apartments to remain affordable in 2017.

Current Construction Activity Falling Considerably Short of the Annual Need for New Construction

According to GdW Bundesverband deutscher Wohnungs- und Immobilienunternehmen e. V. (German Association of German Housing and Real Estate Companies), at least 400,000 new apartments will be required over the next few years, 80,000 of which will be social housing apartments and at least a further 60,000 apartments in the low-cost segment. As far as 2016 is concerned, GdW expects around 275,000 units to be completed across Germany. The number of new apartments being built is still too low, despite an increase in construction activity. GdW points to the long and drawn-out processes involved in making land available for construction, a lack of planning permission capacities, high construction costs, rising real estate transfer taxes and high energy-related requirements combined with insufficient investment subsidies as reasons why new construction activity aimed at creating affordable rented apartments has been unable to pick up sufficient speed.