Development of the Economic Environment

Development of the Economy as a Whole and of the Sector – German Economy Still Fueled by Economic Momentum

Momentum in the German economy remains high: As reported, gross domestic product (GDP) in the second quarter of 2017 was up by 0.6% quarter-on-quarter – after price-related, seasonal and calendar-related adjustments – following a quarter-on-quarter increase of as much as 0.7% (as opposed to an original calculation of 0.6%) in the first three months of the year, as the latest calculations of the Federal Statistical Office (Destatis) show. As far as the third quarter of 2017 is concerned, the Kiel Institute for the World Economy (IfW) expects the economic momentum to continue and GDP to expand by a further 0.6%.

Positive impetus will come primarily from the domestic economy: After both private households and the state ramped up their consumer spending considerably in the second quarter of 2017, the third quarter was characterized by investment growth, in particular, with investments in equipment, buildings and other installations all up on the previous quarter. Provisional calculations show that exports also increased significantly in the third quarter of 2017, a development that made up for the ground lost in connection with the contractive effect of foreign trade developments in the previous quarter on the back of much more pronounced growth in price-adjusted imports. The upswing also remains intact in other sectors of the economy, in particular in most service sectors. The fact that macroeconomic capacity utilization has increased considerably again means that both industrial companies and the construction sector, in particular, have been working at their capacity limit for some time now.

The ifo business climate index nevertheless clouded over slightly in September (115.2 points as against 115.9 points in August), a trend that is largely attributable to downgraded expectations in the manufacturing and wholesale sectors. In the construction industry, on the other hand, it touched on a new record high. This means that, all in all, the index remains at a high level in a historical comparison.

Full economic utilization comes hand-in-hand with the risk of the start of a cyclical downturn. 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 a record low of 0.0%, citing inflation risks as its motivation.

The labor market continued to show positive development, with the German Federal Statistical Office (Statistisches Bundesamt) reporting 692,000 more people in work in August 2017 than in the same period of the previous year. The German Federal Employment Agency (Bundesagentur für Arbeit) published an unemployment rate of 5.5% for September 2017, down by 0.4 percentage points over the previous year.

Consumer price performance has already been on a slight but noticeable upward trajectory since the end of last year. In September 2017, the rate of inflation is likely to have come in at 1.8% based on the consumer price index. Inflation is being driven mainly by developments in the price of food; although energy prices have also been increasing significantly again since August.

Continued Rise in Quoted Rents and Quoted Prices in Germany

As in the first half of 2017, quoted rents continued to rise at the start of the third quarter of 2017: According to IMX, the quoted price index of the real estate portal lmmobilienScout24, nationwide quoted rents increased by 0.4 percentage points month-over-month in both July and August 2017. The quoted prices for owner-occupied apartments have also increased further across Germany since the beginning of the year. Compared with the increase in rents, these prices have been increasing at a much faster pace again since the beginning of the third quarter of 2017. According to IMX, the prices for existing owner-occupied apartments increased by 1.6 percentage points against the previous month in July and 1.5 percentage points in August. The price index for newly built apartments rose by 1.2 percentage points and 0.9 percentage points respectively during the same periods. Although the prices of newly built apartments recently showed less of an increase than the prices for existing apartments, they are not expected to stagnate.

According to F+B Forschung und Beratung für Wohnen, Immobilien und Umwelt GmbH (F+B), the fact that the prices of owner-occupied apartments have been growing at a rate that is well above average for around five years now points towards a sustained trend towards medium-sized and larger cities, as this type of housing is typical for urban settlements. The increase also reflects interest rates, which have been particularly low during this period, and the growing interest in real estate as a form of investment. F+B’s nationwide housing index shows that price developments for multifamily residences and apartment complexes remain below-average. This, according to F+B, is because the effect of the high prices seen in Germany’s top 7 locations is diluted in the nationwide average, with individual transactions in many medium-sized and smaller cities pushing the average price down considerably.

Sustained Keen Interest in the German Residential Investment Market

In the first nine months of 2017, residential building bundles and residential developments of 50 units or more accounted for a total transaction volume of around € 9.8 billion on the German residential investment market, according to the real estate service provider CBRE. This puts the transaction volume up by just under one-third on the same period of last year. Despite the price increase in the country’s metropolitan areas and High-Influx cities (“Schwarmstädte”), CBRE reports undiminished interest among institutional investors. On the buyer side, listed real estate companies/REITs were very active in the ongoing pursuit of their growth targets involving existing properties in Berlin and North Rhine-Westphalia, in particular. Open-ended real estate and special funds also ranked among the biggest net buyers. Investments focused primarily on major cities and their surrounding affluent suburbs, as well as on prosperous university towns. Project developers and building contractors were some of the most active players on the selling side, selling residential building bundles worth € 2.8 billion according to CBRE. As the marketing pipeline remains full, CBRE expects to see a transaction volume of over € 13 billion for 2017 as a whole.

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. Although Deutsche Bank Research reports that the high demand has spurred on new construction activity, likely pushing the number of completed apartments up to more than 300,000 a year in 2017, even this is not sufficient to cover the annual need for the construction of at least 350,000 new apartments. It 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.