Development of the Economic Environment

Development of the Economy as a Whole and the Sector – German Economy on the Brink of a Boom

After making a strong start to the year, the economy is still making considerable progress, according to the Kiel Institute for the World Economy (IfW). Following the significant increase in production in the manufacturing sector at the beginning of the year, capacity utilization, which was already edging close to its limit, now appears to be moving towards overutilization. As financing conditions remain very favorable, the dynamic construction sector is also continuing to pick up speed. The ifo business climate index is currently sitting at a new all-time high already surpassing its previous high of 2010 this May. The positive sentiment is fueling the increase in corporate investment, among other things. As the upswing is also continuing in other areas of the economy, in particular in most service sectors, economic output is expected to expand by a good 0.6 % in the second quarter of 2017, after growth of 0.6 % in the first three months of the year.

Full economic utilization, however, comes hand-in-hand with the risk of the start of a cyclical downturn. Although private consumption is still on the rise compared to the previous quarter, the increase is more subdued than it was in the prior year. The general economic policy risks also remain difficult to judge. In particular, the lack of clarity regarding the conditions of the UK’s exit from the EU and the uncertainty surrounding the future trading policies pursued by the world’s major economic powers could pose a risk to growth. The monetary policy pursued by the European Central Bank (ECB) remains extremely expansive, with key interest rates still sitting at an all-time low of 0.0 %.

The positive overall development on the labor market continues: according to the Federal Statistical Office (Statistisches Bundesamt), the number of people in work in May 2017 was up by 648,000 year-on-year. The German Federal Employment Agency (Bundesagentur für Arbeit) published an unemployment rate of 5.5 % for June 2017. This is down by 0.4 percentage points compared with the previous year.

Consumer price performance has been picking up again ever so slightly since the end of last year. In June 2017, the rate of inflation is likely to have come in at 1.6 % based on the consumer price index. The rate of inflation is being influenced by developments in the price of food and rent, whereas developments in the energy sector were the main influencing factor in the previous months.

Continued Rise in Quoted Rents and Quoted Prices in Germany

Quoted rents in Germany remained on an upward trend in the second quarter of 2017, too. According to IMX, the price index of the real estate portal lmmobilienScout24, rents rose by 0.5 percentage points between March 2017 and April 2017 and by 0.4 percentage points between April 2017 and May 2017. The increase in the quoted prices for condominiums was once again much more pronounced than the increase in rents. According to IMX, the prices for existing condominiums increased by 1.8 percentage points against the previous month in April and 1.7 percentage points in May. The price index for newly built apartments rose by 1.4 percentage points and 1.1 percentage points during the same periods. Considering Germany as a whole, there do not appear to be any signs of the market potentially settling down, as had been previously discussed.

F+B Forschung und Beratung für Wohnen, Immobilien und Umwelt GmbH reports that the fast-growing cities are still characterized by high demand for rented homes and, in particular, properties to purchase. It reports that the gap between prices for condominiums in the top 7 locations and rent development is still widening considerably. Owner-occupation, however, plays a dominant role as far as apartment ownership is concerned. According to F+B, multifamily residences, which are much more important to the rental housing market, are showing price momentum that is clearly below-average across Germany. They report that the ratio of purchase prices to existing or new contract rents is unremarkable and provides no cause for concern in this segment.

German Residential Investment Market with Strong Half-Year Results

In the first half of 2017, residential building bundles and residential developments of 50 units or more accounted for a total transaction volume of around € 5.9 billion on the German residential investment market, according to the real estate consultancy firm CBRE. This puts the transaction volume up by around 22 % on the same period of last year. Almost one-third of the transaction volume, or around € 1.9 billion, was invested in project developments, up by almost 40 % compared to the same period in the previous year. According to the experts, the demand for German residential real estate among institutional investors and real estate companies specializing in this segment remains high. Investors are showing a preference for top locations – in particular Berlin – with increasing interest being shown in North Rhine-Westphalia. The sustained high demand is resulting in yield compression. CBRE expects to see a transaction volume of well in excess of € 13 billion in 2017.

Completed Construction Projects Lag Behind Need for New Construction

The demand for living space remains very high due to the high level of immigration over the last two years. Experts predict that at least 350,000 apartments will be required every year. According to the Federal Statistical Office, just under 278,000 apartments were completed nationwide last year. Although this figure is up by around 12 % year-on-year, the completion figures still lag considerably behind the number of apartments that is actually required. Deutsche Bank Research reports that the number of completed apartments could rise to 300,000 for the first time in 2017. This would result in a further increase in the excess demand.