Annual Report 2019


The German economy grew for the tenth consecutive year, although the economic momentum slowed significantly. The gross domestic product (GDP) was up by 0.6% year-over-year, but is likely to put Germany second-bottom of the European rankings, with only Italy faring worse (average euro area: 1.2%). This is also due to Germany’s continued strong focus on exports, an area that is being hit hard by the weak global economy. The German economy is still, however, on a two-track course with robust private consumption, higher government spending and buoyant construction activity on the one hand, and weak export growth and very sluggish corporate investment activity on the other.

The uncertainty surrounding the trade conflicts and Brexit, as well as the economic cycle that the global economy is in, put pressure on external demand, pushing the German industrial sector into a mild recession. Key industries such as automotive construction and mechanical engineering, as well as the electronics and chemical industries were hit particularly hard, prompting companies to scale back their investments. As a result, foreign trade failed to deliver in terms of driving growth in 2019. Imports grew at an expected rate of 2.4%, therefore outstripping exports, which are predicted to have grown by only 1.3%.

There are, however, signs that incoming orders are starting to stabilize and the ifo business climate index painted a slightly brighter picture again at the end of the year. This should mean that the industrial sector will pick up some speed again over the coming months. The construction industry is still booming also thanks to very favorable financing conditions, and the number of jobs being created by the country’s consumer-related service sectors still exceeds the number being lost in the industrial sector.

This is also benefiting the labor market: Despite the weak economy, the German Federal Employment Agency (Bundesagentur für Arbeit) published an unemployment rate of 5.0% for 2019, down by 0.2 percentage points against the previous year. According to calculations released by the Kiel Institute for the World Economy (IfW), the unemployment rate is likely to remain at the 4.9% mark in 2020 and 2021 as well. All in all, however, job creation is slowing and employment risks have mounted, also because higher wage costs are creating less of an incentive for companies to hire new staff.

Yet again, consumers in 2019 proved to be another pillar propping up the economy: The high level of employment and considerable increase in disposable income levels fueled a 1.6% increase in private consumer spending, which is significantly higher growth than that witnessed in the two previous years. The IfW expects to see similarly high growth rates in 2020 and 2021. The figures available also point to an increase in government consumer spending, which includes items such as social assistance benefits in kind and employee salaries. Inflation based on consumer prices was moderate in 2019 on average, rising by 1.4%. This was driven primarily by energy and food costs. In light of the low production capacity utilization level, the IfW does not expect price developments to pick up, forecasting an inflation rate of 1.5% in 2020 and 1.6% in 2021.

As a result, both the German federal government and the IfW expect to see GDP growth of 1.1% in 2020, with part of this development due to the increased number of working days (0.4 percentage points). Fiscal policy is also contributing to this gradual recovery by stimulating the economy in the form of relief with regard to tax and social security contributions, higher government transfer payments and increased government consumer and investment spending. Looking ahead to 2021, the German federal government predicts GDP growth to come to 1.3% (IfW: 1.5%).

The global economic conflicts remain present. The trade agreement with the United Kingdom still has to be ratified and even after January 31, 2020, the risk of a hard Brexit will not have been banished completely. While the United States and China have reached a partial agreement in their trade dispute, the measures have not yet been rolled back in full. Geopolitical risks have reared their heads again in Iran, Iraq and Libya. The German economy is still faced with several challenges: The automotive industry is grappling with unit sales problems, structural change would appear inevitable and policymakers are engaging in more intense discussions regarding investments in the future and debt policy.

According to experts at Landesbank Hessen-Thüringen (Helaba), no turnaround on the housing market is in sight. Key market drivers such as the influx of people into metropolitan areas, favorable financing conditions and inadequate construction activity continue to apply, in some cases accompanied by restrictive housing policies. After years of substantial price increases in the country’s major cities, however, the momentum is shifting more to their surrounding areas. As the Federal Statistical Office (Destatis) recently reported, the growing population has put increased pressure on the housing market in recent years, particularly in Germany’s major cities. By 2018, the German population was already up by 2.5 million as against 2012, with the figure likely to have increased further in 2019. Major cities have witnessed disproportionately strong growth due to an influx of mainly young people.

This is not an unbroken trend, however; the research and consulting institute empirica has reported a drop in the number of people moving to Germany’s high-influx cities. People looking to move are instead opting for nearby, but less attractive and, as a result, more affordable towns/cities or the areas surrounding the major cities. In addition to the demographic trend toward migration to the cities, the demand for housing has also, according to experts at the EBZ Business School, benefited from the favorable income trend in recent years.

The German Association of German Housing and Real Estate Companies (GdW) reports a risk that the shortage of housing will become a permanent situation. Deutsche Bank Research reports that the number of completed apartments is likely to come to less than or close to 300,000 in 2019 and the following years, falling considerably short of the annual demand. Although the use of vacancy reserves made a key contribution to taking pressure off the housing market for some time, the reserves available in Germany’s prospering high-influx cities have now been exhausted, according to empirica. The Cologne Institute for Economic Research (IW) reports that demographic trends are creating increasing disparities between urban and rural areas, i. e., while the major cities are faced with a huge shortage of housing, other, often rural, regions are left with an excess supply.

Residential real estate prices continued to rise overall in 2019, as empirica reported based on an analysis of its price database. The empirica price index for condominiums (all years of construction) increased by 11.0% in the fourth quarter of 2019 compared to the prior-year quarter (new construction 7.6%). Once again, the quoted prices for condominiums grew at a faster rate than rents. According to empirica, average rents over all years of construction increased across Germany by 3.8% in the fourth quarter of 2019 compared to the same quarter of the previous year (for new construction, the increase was 3.0%). By contrast, experts from F+B Forschung und Beratung für Wohnen, Immobilien und Umwelt GmbH (F+B) observed a trend toward stagnating or even slightly falling quoted rents (nationwide average of -0.3%) during the same period. F+B reported another increase in 2019, namely by 1.4%, in rents under existing rental contracts. The experts from empirica and F+B agree that the pace of the rent increases in the top 7 cities has slowed considerably. According to empirica, the increase in rent is shifting, together with the migration trend, more toward the areas surrounding the high-influx cities, or toward more affordable cities nearby.

Deutsche Bank Research does not expect to see any changes to the fundamental situation on the real estate market to speak of in 2020, with ongoing high demand for apartments driven by robust income development and the positive situation on the labor market. The only change the experts predict is slightly lower price and rent momentum in 2020. The German Tenants’ Association (Deutscher Mieterbund) expects the standard local comparative rent to rise by a nationwide average of between 2.5% and 3% in 2020. As the ECB is likely to stick to its zero interest rate policy for a few years to come, the residential property market is expected to once again benefit from credit-driven price impetus in 2020, with the result that, according to Deutsche Bank Research, the risk of a bubble forming will increase in the years that follow on the back of sustained brisk lending activity. The empirica bubble index for Germany shows a moderate to high risk of a bubble for 293 out of 401 administrative districts and self-governing cities in the fourth quarter of 2019.

As the global real estate service provider CBRE reports, investors continued to show a keen interest in German residential properties in 2019. The transaction volume, based on transactions involving 50 residential units or more, is almost at an all-time high at around € 16.3 billion. While the fundamental mood on the German residential investment market remains positive, the lack of existing portfolios and declining new construction activity will restrict the products on offer. CBRE expects to see a transaction volume in excess of € 15 billion in 2020.

The trend on the residential property markets is creating major challenges as far as housing policy is concerned. The German Tenancy Law Amendment Act (Mietrechtsanpassungsgesetz), which is designed to ensure greater transparency with regard to the rent cap and to limit and simplify the modernization allocation, has been in force since January 2019. Also with the aim of putting a damper on the increase in rents, the German Bundestag (lower house of parliament) made the decision at the end of 2019 to expand the observation period used to create rent indices from four to six years. Moves to step up and extend the rent cap regulations until 2025 were adopted by the German Bundestag (lower house of parliament) in February 2020. The housing allowance reform means that low-income households have been receiving more housing allowance since January 1, 2020. A law on fiscal incentives to build housing for rental came into force in the summer of 2019, and investments in energy-efficient refurbishment measures for owner-occupied residential real estate are to receive tax incentives for a limited period starting in 2020. At the end of January 2020, the Act on Rent Controls in the Housing Sector in Berlin, known as the rent freeze, was passed by the Berlin House of Representatives. It entered into force in February 2020. The law, whose constitutionality remains in doubt, essentially involves public-law restrictions on rent levels in Berlin for a period of five years. Further legislation under discussion that is relevant to the real estate sector includes the intended amendment to the German real estate transfer tax system that aims to make share deals less attractive.