Annual Report 2020


The pandemic continues to shape activity around the world. After a ten-year period of growth, the German economy experienced a severe recession last year. According to provisional calculations by the Federal Statistical Office (Destatis), gross domestic product (GDP) in price-adjusted terms fell by 5.0% year-on-year in 2020, although this economic slump was less pronounced than the 5.7% contraction witnessed in connection with the financial crisis in 2009. Disruptions to international supply chains and the global slump in demand triggered by the first lockdown in the spring were the main factors behind the decline. Industrial production plummeted by almost 30% within a very short space of time, with exports and equipment investments also showing drastic declines. The immediate measures taken to limit contacts in Germany also hit private consumption hard as opportunities to consume fell away. The German economy started to bounce back in May thanks to swift economic policy support measures taken by the government and the European Central Bank (ECB) on the one hand, and with the easing of contact restrictions following a drop in infection figures, the return to functioning supply chains and the economic revival abroad on the other. In particular, those aggregates that had previously been hit hard expanded considerably, and after contracting by 9.7% in the second quarter, GDP increased by 8.5% in the third, bringing it to around 96% of the level seen in the final quarter of 2019, prior to the outbreak of the pandemic.

The renewed lockdown measures imposed in November 2020, which were tightened up further later on in the year, put an end to this recovery for the time being, although GDP development showed a slight increase of 0.1% in the closing quarter of the year. The impact of the setback varied from economic sector to economic sector. The export-oriented German industrial sector, in particular manufacturing, benefited from the global economic upswing and clawed back in the third quarter a significant part of the drop in production levels seen in the first half of the year. While this trend was slowed by measures to contain the second wave of infection, global production remained on an upward trajectory overall. China made a particular contribution to this trend, with strong economic momentum. All in all, economic output in the manufacturing sector (excluding construction) slid by 9.7% as against 2019. The construction industry was able to hold its own during the crisis. Starting from a high level of construction activity and a lull at the beginning of the coronavirus crisis, capacity utilization returned to an upward trend in the third quarter, producing a 1.4% increase in 2020. Looking ahead to 2021, the Kiel Institute for the World Economy (IfW) expects to see a further increase of around 2.5%. The braking effect of the new restrictions, on the other hand, hit parts of the service sector particularly hard – as in the spring. Revenue levels in the hospitality, culture and entertainment as well as in the travel and transportation sectors, for example, were down considerably. The retail sector paints a mixed picture: online retail increased significantly, while some parts of the bricks-and-mortar retail trade were deep in the red. The coronavirus pandemic also left a visible mark on the demand side. Unlike during the financial and economic crisis, when overall consumption propped up the economy, private consumer spending fell by 6.0% year-on-year in 2020, the most pronounced drop ever witnessed. Government consumer spending, on the other hand, had a stabilizing effect, climbing by 3.4% even during the coronavirus crisis, helped along by purchases of protective equipment and hospital services, among other things. The IfW expects private consumption to increase by 2.7% in 2021, with public consumption tipped to rise by 1.2%. The resurgence of the coronavirus pandemic recently triggered a return to gloomier business expectations. Indicators of economic policy uncertainty have also risen significantly. Nevertheless, the corporate sector, particularly in those sectors that have not been affected directly by the pandemic, is unlikely to slash its investments significantly again now that there are clear hopes that the pandemic can be curtailed permanently in the course of the year. In light of the above, the IfW expects corporate investments to increase by 6.0% in 2021, after contracting by 6.3% in 2020. Exports and imports of goods and services fell in 2020 for the first time since 2009, with exports sliding by 9.9% and imports by 8.6%. The slump in service imports was particularly pronounced, mainly due to the sharp decline of the travel sector. The IfW expects exports to increase by 10.3% in 2021.

For the first time since 2011, Germany recorded a budget deficit again in 2020 and an increase in its debt ratio from 59.5% in 2019 to 72.6% of GDP. The government budget came under additional pressure on the revenue side due to the economic downturn, and on the expenditure side as a result of further aid packages. The support measures offered in Germany ranged from guarantees, liquidity support and takeovers to the € 130 billion-strong economic stimulus program. The short-time work scheme, in particular, is likely to have limited the impact of the pandemic on the labor market so far. According to the German Federal Employment Agency (Bundesagentur für Arbeit), the unemployment rate rose by 0.9 percentage points year-on-year to 5.9%. While the situation on the labor market will improve again as the year progresses, the average number of people out of work will be even higher than in 2020. The IfW expects to see an unemployment rate of 6.1% in 2021.

According to calculations by Destatis, the average inflation rate based on consumer prices was low at 0.5% in 2020, mainly due to the temporary reduction in VAT rates and lower prices for energy products. After the VAT reduction expired at the end of 2020, the inflation rate will rise more significantly again this year, especially with prices of energy, and in particular gasoline, expected to jump due to the introduction of the CO2 tax. DB Research predicts an inflation rate of 1.4% for 2021.

In view of the continued and tighter lockdown at the beginning of the year in Germany and in other European countries, economists do not expect the predicted economic recovery to materialize until the second quarter of 2021 at the earliest. On the one hand, pent-up demand is likely to be unleashed, while on the other, the billions in aid provided by the government and the European Central Bank (ECB) will have a supportive effect. The considerable differences in the economic forecasts released by the leading economic research institutes are due, on the one hand, to the large number of unresolved questions relating to the pandemic (duration and extent of the lockdown, infection rate trend, vaccine availability, willingness of the population to vaccinate) and, on the other, to the fact that everyone’s answers to these questions are different. The German Institute for Economic Research (DIW) and the IfW have revised their forecasts for GDP growth in 2021 downward to 3.5% and 3.1% respectively, whereas the RWI – Leibniz Institute for Economic Research expects the recovery effect to be faster and anticipates GDP growth to the tune of 4.9%.

There are also still lingering risks that have nothing to do with the pandemic. Even before the coronavirus crisis emerged, there were signs pointing towards a marked slowdown in global economic development, primarily due to a slump in industrial production. The volume of global trade also declined. These developments can be explained, at least in part, by ongoing uncertainty in the context of trade conflicts that remain unresolved. Fortunately, it was at least possible to seal a trade agreement between the United Kingdom and the EU before the end of the year.

According to the German Association of German Housing and Real Estate Companies (GdW), the housing industry has so far shown itself to be relatively stable throughout the economic crisis triggered by the pandemic. Experts from the global real estate service provider CBRE say that residential real estate, as an asset class, can even be crowned one of the winners in the current crisis. Housing is considered to be one of our most important basic needs, and the very small-scale tenant structure coupled with the high granularity of rent payments make the residential real estate segment a very defensive and stable asset class that is associated with a low rent default risk. This applies all the more so given that government support systems have helped to secure and stabilize rent payments. According to Helaba, the fundamental overall conditions in the housing market have barely changed. Brisk demand is being fueled by a combination of low interest rates and the influx of people into metropolitan areas. Residential construction is limited by high levels of capacity utilization in the construction industry, which explains why a large gap remains between supply and demand.

According to GdW, the situation on Germany’s housing markets in attractive conurbations and fast growing regions has changed rapidly in recent years from a largely balanced to a tense market situation. Driven by immigration, the past few years had brought steady population growth. Population growth appears to have been halted for the time being in 2020 in the wake of the coronavirus pandemic, with border closures in response to the pandemic, for example, reducing levels of immigration. In the long term, however, additional demand for housing could arise in Germany’s major cities driven by an influx of immigrants from the ailing economies on Europe’s periphery. The experts at DB Research expect net migration to increase again to the pre-crisis level of around 300,000 people. According to Helaba, the increase in working from home could also boost demand for housing in the future and shift demand more from central inner-city locations to the outskirts of conurbations. In any case, when it comes to the internal migration links between Germany’s major cities, one trend is starting to reverse. As the capacity in metropolitan areas to accommodate more people moving into the area becomes increasingly scarce, people looking for housing are being pushed out into areas surrounding the major cities, or are once again focusing more on the dream of owning a house with a garden on the outskirts of the city or in neighboring areas. According to CBRE, the rental housing market has long been characterized by extremely low vacancy rates. In addition, the turnover rate in Germany’s major cities, which was already low to begin with, has fallen further in recent months. CBRE expects vacancy rates in Germany’s major metropolitan areas to fall further, rather than to increase, in the foreseeable future. But not all regions are reaping the benefits of population growth. GdW reports that sparsely populated administrative districts located far from the country’s metropolitan centers, in particular, are faced with shrinking populations. The shortage of housing is particularly pronounced in major cities, metropolitan areas and university cities.

Despite increasing construction activity, the number of homes being built remains too low. Only 92% of the 320,000 homes per year that the country needs, according to GdW, were actually built in 2019. According to DB Research, the number of apartments completed in 2020 will stagnate at the 2019 level, with the figure unlikely to exceed 300,000 apartments in 2021 either. This is despite the fact that residential construction was barely affected by the measures taken to contain the pandemic, according to Helaba, meaning that most construction activity continued. It is possible that individual project developers will start to focus more on residential construction in the future and that more resources can be deployed there.

Quoted prices and rents are proving to be largely unaffected by the coronavirus situation. Residential real estate prices rose again overall in 2020, as figures from the analyst empirica based on the empirica-systeme market database show. The empirica price index for condominiums (all years of construction) increased by 12.2% in the fourth quarter of 2020 compared to the prior year (new construction 9.2%). DB Research reports that the flight to security and the low interest rate environment are likely to explain much of the marked price increase in 2020. Apartment rents are still showing less dynamic development than purchase prices. According to empirica, average rents over all years of construction increased across Germany by 4.0% in the fourth quarter of 2020 compared to previous year (for new construction, the increase was 3.9%). The developments nevertheless vary from location to location. Experts from Immowelt, for example, are reporting an easing of the situation in smaller university cities. Less face-to-face teaching at universities because of the coronavirus means that fewer students are looking for a place to stay. Berlin, where the rent freeze introduced in 2020 is designed to prevent further rent increases, is a special case. While existing apartments, which are in ever-shorter supply, are becoming cheaper, rents for unregulated new buildings are rising all the more sharply. Unlike empirica, experts at F+B expect to see an ongoing sideways movement in average quoted rents in Germany in the fourth quarter of 2020. According to F+B’s analysis, growth in new contract rents came to +0.1% year-on-year in the third quarter of 2020. Meanwhile, F+B reported another increase, namely by 1.4%, in rents under existing rental contracts during the same period. DB Research expects rent growth in 2021 to roughly reflect inflation, while nationwide house and apartment prices are expected to rise considerably by more than 6% year-on-year. The empirica bubble index for Germany showed a moderate to high risk of a bubble for 324 out of 401 administrative districts and self-governing cities in the fourth quarter of 2020.

As CBRE reports, the pandemic has not had any negative impact on the residential investment market. The transaction volume in 2020 came to around € 20 billion, up by 21% on the previous year. This represents the second-highest transaction volume ever achieved on the German residential real estate market after 2015. This trend can be explained by the increase in investment demand as well as by the takeover of Adler Real Estate by Ado Properties, a transaction that accounted for approximately € 6 billion. CBRE reports that the pandemic resulted in more investors who otherwise focus on other real estate asset classes shifting their attention to the residential sector as (prospective) buyers in 2020. There was a marked surge in the demand for housing, with the high level of investor interest set to continue in 2021. CBRE expects to see an investment volume of more than € 15 billion in 2021.

The debate on housing policy measures and more stringent regulation is likely to make the headlines in 2021, not least because of the German Bundestag elections. In a quest to curb rent increases, for example, the observation period used to prepare rent indices was extended from four to six years in 2020, and the decision was made to tighten up and extend the rent cap until 2025. At the end of 2020, the German cabinet approved the government’s draft proposals for a reform of rent index law. The aim is to strengthen the quality of rent indices, ensure that they are more widely used and increase legal certainty for tenants and landlords alike. The housing allowance reform means that low-income households have been receiving more housing allowance since the beginning of 2020. The “rent freeze” came into force in Berlin 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. The Federal Constitutional Court is expected to pass a judgment on the issue in 2021. The measures taken by the German government in the wake of the coronavirus pandemic include, first and foremost, temporary security of tenure for tenants. Other legislative projects that are relevant to the real estate sector include, for example, the Building Land Mobilization Act (Baulandmobilisierungsgesetz), which is designed, among other things, to make it more difficult to convert rental apartments into condominiums. CO2 pricing was introduced on January 1, 2021, and will have an impact on housing costs, for example on heating costs. The “Baukindergeld” housing subsidy for families with children is expected to expire in 2021 and the special tax allowances for investments in rental apartments will come to an end. The intended amendment to the German real estate transfer tax system, which aims to make share deals less attractive, has been on hold for more than a year now.

Vacancy Rate
The vacancy rate is the number of empty units as a percentage of the total units owned by the company. The vacant units are counted at the end of each month.