Development of the Economic Environment

Development of the Economy as a Whole and of the Sector – Economic Momentum Accelerates Again

According to data released by the Federal Statistical Office (Destatis), the German economy continued to make substantial gains in 2017, with gross domestic product (GDP) demonstrating a strong annual result of 2.2% growth. Official upward corrections have been made to the results already published for the first and third quarters of 2017. This means that last year was not only the eighth consecutive year of growth, but also the year with the most substantial rate of increase since 2011. According to the Kiel Institute for the World Economy (IfW), this puts the rate of expansion well ahead of the rate of growth in production capacities, meaning that capacity utilization, which is already strained to begin with, is expected to increase further.

Positive impetus came primarily from the domestic economy: After both private households and the state ramped up their consumer spending considerably, the second half-year of 2017 was characterized primarily by investment growth. The utilized production capacities and favorable financing conditions fueled an increase in investments in equipment, buildings and other installations, in particular. The threat of protectionism and global economic disintegration gave rise to fears of a downward trend in German exports at the beginning of the year. Provisional calculations show, however, that exports increased significantly over the course of the year, a development that made up for the ground lost in connection with the contractive effect of foreign trade developments in the summer on the back of much more pronounced growth in price-adjusted imports. The upswing also remained intact in other sectors of the economy, in particular in most service sectors, trade and transport. Industrial companies and the construction sector, in particular, have been working at their capacity limit for some time now.

In a surprising development, the ifo business climate index nevertheless clouded over slightly in December 2017 at 117.2 points, although it remains close to the record value of 117.6 points reported only a month earlier. It would appear that potential risks were more of a focal point at the turn of the year – possibly in anticipation of the effects of Brexit or in reaction to the failed “Jamaica coalition talks.” Experts do not, however, believe that there are any more serious risks on the horizon at present. Although full economic utilization comes hand-in-hand with the risk of the start of a cyclical downturn, Germany is still expected to report further growth. Exogenous factors are expected to continue to include, first and foremost, the unclear terms of the United Kingdom’s exit from the EU, the negative impact of which will only emerge in the medium term, and the unforeseeable financial market risks associated with the North Korea conflict. Although some signs are emerging that the European Central Bank (ECB) is intending to make a gradual break with its ultra-expansive monetary policy, it is still keeping key rates at record low levels since March 2016 of 0.0%. This means that, despite all of the criticism leveled against it, the ECB plans to stimulate the economy and inflation in order to achieve an annual inflation rate of just under 2.0% in the medium term.

The labor market continued to show positive development: The Federal Statistical Office reported an average of 638,000 more people in work in 2017 as a whole than in the same period of the previous year – the biggest increase in ten years. This means that employment is at the highest level seen since German reunification. The German Federal Employment Agency (Bundesagentur für Arbeit) published an unemployment rate of 5.7% for 2017, down by 0.4 percentage points against the previous year.

Consumer price performance has already been on a slight upward trajectory since the end of last year. In 2017, the average rate of inflation is likely to have come in at 1.8% based on the consumer price index. Inflation has been primarily driven by developments in the price of heating oil and fuel, although food prices have also increased significantly.

Renewed Rise in Quoted Rents and Quoted Prices in Germany

According to experts at DG Hyp, the German real estate market is still experiencing considerable momentum. This is attributable not only to the continued growth trajectory of the German economy and the positive labor market developments, but also to population growth due to immigration and a return to higher birth rates. According to DG Hyp, low capital market yields mean that several billions in investor funds are still looking for real estate investments that hold the promise of higher returns. Rising prices and rents, and the continued drop in initial rental yields, come as little surprise in this sort of environment.

As in the previous year, quoted rents continued to increase in 2017: IMX, the quoted price index of the real estate portal lmmobilienScout24, rose nationwide by 5.0 percentage points (3.8%) in December as against the previous year. The quoted prices for condominiums also increased further across Germany in 2017. Compared with the increase in rents, these prices have been increasing at a much faster pace again. According to IMX, the prices for existing condominiums increased by 20.2 percentage points (12.5%) against the previous year in December. The price index for newly built condominiums rose by 13.4 percentage points (8.1%) during the same period. Although the prices of newly built condominiums recently showed less of an increase than the prices for existing condominiums, they are not expected to stagnate.

Sustained Keen Interest in the German Residential Investment Market

In 2017, residential building bundles and residential developments of 50 units or more accounted for a total transaction volume of around € 15.2 billion on the German residential investment market, according to the real estate consultancy firm CBRE. This puts the transaction volume up by just under 11% compared to last year’s result. Investor interest in German residential properties as an investment target remains high. Activity among international players is reported to be increasing. In line with this trend, foreign investors’ share of the total transaction volume rose by 21% year-on-year. Due to increasing trading in higher-priced portfolios and the high demand for new construction project developments, CBRE identified a further increase in purchase prices. In addition to the established top locations and high-influx cities, North Rhine-Westphalia is also proving to be an increasingly popular investment alternative. Given the short supply of existing properties that are suitable for investment purposes, the volume allocated to project developments rose by 4 percentage points year-on-year to € 4.4 billion. Asset classes such as student apartments and microapartments are also proving increasingly popular. CBRE reported a transaction volume for small-scale residential solutions in excess of € 1 billion for the first time.

Continued Short Supply on the German Real Estate Market

According to Deutsche Bank Research, the German population has increased by around 1.5 million in recent years, further exacerbating the short supply on the real estate market. The housing deficit is currently tipped to come to more than one million apartments nationwide, with the country’s metropolitan areas being hit particularly hard. Experts from Helaba Landesbank Hessen-Thüringen predict that, all in all, Germany will need around 400,000 apartments a year in the medium term. The current estimated apartment construction activity of at least 300,000 units/320,000 in 2018 is not sufficient to cover the annual need for construction. Deutsche Bank Research attributes the low supply elasticity to factors such as the shortage of land available for construction, more stringent regulatory requirements and rising construction costs, etc.