Half-Year Report 2020


The coronavirus pandemic is currently dominating the entire global economy. The fact that the German economy contracted by only 2.2% quarter-over-quarter in the first three months of 2020 is due entirely to the fact that it made a fairly good start to the year. Widespread testing and high healthcare capacities meant that the containment measures taken in Germany were of a shorter duration and less stringent than those taken in other major European economies. While this softened the blow of the economic downturn, uncertainty and lower demand have had a major impact on corporate (equipment) investments (-6.9%) and export activity (-3.1%) in key sectors of the economy, particularly in the manufacturing industry. Service sectors were also hit very suddenly by severe restrictions due to a combination of measures taken by the authorities and changes in individual behavior. According to the Federal Statistical Office (Destatis), private consumption contracted by 3.2% in the first quarter of the year, although construction investments and government consumption had a stabilizing effect. The Kiel Institute for the World Economy (IfW) predicts that gross domestic product (GDP) will have fallen drastically, by 12%, in the second quarter of 2020. This means that the coronavirus crisis marks the most severe economic slump in the history of the German Federal Republic and has plunged the German economy into a deep recession. The slump was also due to private consumer spending, which is normally a stabilizing factor in economic development. The IfW expects to see an unprecedented drop in consumer spending of 13% in the second quarter of 2020. The export business was also hit by drastic losses. Exports lost almost a quarter of their prior-month value during the lockdown period and although they bounced back in May, rising by 9.0%, this is still down by 29.7% on the same month of the previous year. Business sentiment clouded over considerably at the same time. The ifo business climate index dropped back from 96.0 points at the start of the year to 74.3 in April. Sentiment is now starting to recover again, with the index rising to 86.2 in June – the most substantial increase ever recorded. The economic slump and the restrictions imposed as a result of the pandemic had a huge impact on the labor market. Although this has been cushioned by the state-subsidized short-time working scheme, the number of people out of work rose considerably in the period from May to June as a result of the coronavirus crisis, albeit once again at a slower rate than in the previous month. The unemployment rate rose by 0.1 percentage points to 6.2%, up by 1.3 percentage points compared with June of the previous year. Destatis is reporting an inflation rate of 0.9% in June as against 1.7% in the first few months of the year. Prices for transport, telecommunications, education and culture have fallen in particular, whereas food and service prices have risen.

The German economy is only very gradually starting to get back on track following the slump triggered by the coronavirus. Although the development appears to have bottomed out, it will take the economy some time to make a full recovery to the pre-crisis level. Key customer markets, for example, have been hit harder economically by the coronavirus pandemic than Germany, meaning that exports are only making a very slow recovery. Companies in Germany and abroad look set to remain reluctant to invest for some time to come given the high level of uncertainty surrounding the further development of the pandemic and the extent to which the slump in unit sales has eaten into many companies’ equity base. Private consumption is likely to make a speedier recovery, also because the savings rate, which skyrocketed during the lockdown period, is likely to gradually fall again as the restrictions are eased, with pent-up purchasing power likely to fuel demand. Some private households have, however, suffered income losses and could postpone larger purchases given the increased uncertainty surrounding their jobs.

The GDP forecasts issued by the various economic institutes for 2020 vary considerably. Whereas the Hamburg Institute of International Economics only expects to see GDP drop by 5.0%, the German Institute for Economic Research (DIW) predicts that GDP will contract by 9.4% in a year-over-year comparison. As the coronavirus pandemic is not showing uniform development across the globe, and given the restrictions on global trade, Deutsche Bank (DB Research) expects the recovery to be less dynamic than hoped for earlier, and anticipates a drop in GDP of around 9%. The IfW expects to see production make a stronger recovery in the second half of the year, partly thanks to the impetus provided by the most recent economic stimulus package, including the reduction in VAT. All in all, the IfW expects GDP to drop by 6.8% in 2020 before rising by 6.3% in 2021. There is, however, a big question mark hanging over the outlook for further economic development. If the number of new infections increases considerably again, this could unsettle economic players again, particularly if a need for renewed restrictions slams the brakes on the economic recovery.

The labor market is highly unlikely to make a full recovery before the end of 2021, with the unemployment rate set to remain at around the 6% mark. Excess capacity will help to ensure that inflation remains at a low level in the foreseeable future. The IfW expects consumer prices to rise by 0.7% in 2020, with the reverse VAT effect, in particular, likely to have an impact in the following year (2021: 2.7%).

The German government has launched anti-crisis packages of unprecedented proportions, focusing not only on a mix of public subsidies, ramped-up healthcare spending, tax relief and short-time work as a labor market policy tool, but also using extensive public-sector guarantees and large-scale investment and lending programs to counteract the downward economic trend. This is sending the debt ratio soaring: According to calculations performed by Deutsche Bank (DB Research), it could correspond to between 82% and just shy of 100% of GDP by the end of 2021, depending on the scenario applied.

The development of economic output has an impact on the disposable incomes of private households, making it a key factor driving the demand for housing as a consumer and capital good. After years of a boom, the German residential real estate market is facing the start of a new phase triggered by the current pandemic. The impact of this development will be manifold, with a combination of factors putting pressure on prices and effects that will provide support. Any forecasts are subject to an exceptional degree of uncertainty at the current time. Experts from Landesbank Baden-Württemberg (LBBW) believe that the latest data points to a stable to positive price trend at the moment. According to the German Association of Real Estate Consultants, Agents, Managers and Experts (IVD), huge losses in value, insolvencies faced by key market players and irreversible changes in market conditions on the residential real estate market are not on the cards as things stand at the moment. Even in times of crisis, general demand in the housing sector remains high, with a large number of German cities still unable to meet it, as is confirmed by the real estate consultancy firm NAIapollo. As reported by Destatis, 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, a figure that 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; 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. Although the German Association of German Housing and Real Estate Companies (GdW) is reporting that the situation is easing on some residential property markets thanks to new construction activity, there is still a considerable need for new apartments to be built – particularly in the country’s popular metropolitan areas, where the housing markets remain permanently strained. There are, however, differences from region to region within Germany. While the country’s metropolitan regions and university cities are faced with a shortage of housing, those regions where the population is on the wane have their own challenges to deal with. As the additional need for housing is driven, in particular, by immigration, it will be key to keep a close eye on future developments as a result of the coronavirus crisis. In the short term, immigration is likely to drop, for example due to border closures. In the long term, additional demand for housing could arise in Germany’s major cities as people move to Germany from those countries on Europe’s periphery that have been hit by economic difficulties.

Construction activity recently picked up again. According to Destatis, around 293,000 new apartments were completed in 2019. Although this is around 2% more than a year earlier, the total number still falls short of the 320,000 new apartments required according to the GdW. According to DB Research, the known root causes, e.g., the shortage of land available for construction and complex regulations, are likely to continue for years to come. While many indices suggest that the construction industry was hit by relatively mild restrictions during the months of the lockdown period, the GdW expects the number of building permits to fall during the coronavirus crisis, as building authorities have not been working to full capacity in recent months.

Based on an analysis of their market database, experts from empirica-systeme report that the quoted prices for existing properties (excluding new-builds) have been unaffected by the current coronavirus situation. The purchase prices for apartments are still rising on average nationwide, climbing by 3.1% in the first quarter of 2020 and by around 3% in the second quarter of 2020 in a quarter-over-quarter comparison. Apartment rents are once again showing less dynamic development than purchase prices. As against the previous quarter, quoted rents for existing apartments (excluding new-builds) rose nationwide by 0.7% in the first three months of 2020 and by 0.4% in the second quarter of 2020. This means that they are more or less stagnating, continuing on the flattening trajectory witnessed in previous quarters. The developments nevertheless vary considerably from location to location. Experts from Immowelt, for example, are reporting an easing of the situation in some university cities. As many universities have switched to online teaching, fewer first-semester students, for example, are looking for new apartments. This would appear to be having an impact on the rental market in cities that have traditionally had a large proportion of students. According to the real estate service provider CBRE, Germany has only seen rent deferrals on a very small scale, and virtually no rent losses at all, in the residential sector so far. The experts at empirica-systeme report that no price effects relating to the coronavirus can be identified so far, and that the market has only been shaped by limited volume effects, particularly during the lockdown period. Leading indicators suggest that no price correction is on the cards for the third quarter of 2020 either. According to NAIapollo, the further development of the residential real estate market will depend on how severe and widespread any economic downturn is, and on how long it lasts. DB Research expects the house price cycle to continue until at least 2022. Key factors that could bring the cycle to an end earlier than predicted include a prolonged coronavirus crisis, an even more stringent rental policy and a stronger macroprudential headwind after the coronavirus has come to an end. The empirica bubble index for Germany shows a moderate to high risk of a bubble for 301 out of 401 administrative districts and self-governing cities in the first quarter of 2020.

As CBRE reports, the German residential investment market would appear to be untouched by COVID-19. The transaction volume in the first half of 2020 came to around € 12.5 billion, up by 87% on the first half of 2019. This is due primarily to the takeover of Adler Real Estate by Ado Properties, a transaction that accounted for approximately € 6 billion in the first three months of 2020. The crisis has further increased the demand pressure for residential real estate on the investment market, as investors that had previously focused more on commercial real estate have started to turn to the residential sector. Given a pipeline that remains full, a transaction volume of up to € 20 billion could be achieved by the end of 2020.

The trend on the residential property markets is creating major challenges as far as housing policy is concerned. With the aim of putting a damper on the increase in rents, for example, the German Bundestag (lower house of parliament) made the decision in 2019 to expand the observation period used to create rent indices from four to six years. The amendment came into force on January 1, 2020. In February 2020, the German Bundestag adopted moves to step up and extend the rent cap regulations until 2025. The housing allowance reform means that low-income households have been receiving more housing allowance since January 1, 2020. Investments in energy-efficient refurbishment measures for owner-occupied residential real estate have been receiving tax incentives for a limited period since 2020. The Act on Rent Controls in the Housing Sector in Berlin, known as the rent freeze, came 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. The Federal Constitutional Court is not expected to pass a judgment on the issue until early 2021 at the earliest.

The immediate action taken by the German government and the federal states in the wake of the coronavirus pandemic includes, first and foremost, a temporary ban on the termination of lease agreements if tenants are unable to pay their rent. In addition, many larger institutional landlords have demonstrated a willingness to temporarily suspend the use of measures such as evictions and rent increases. Other legislation under discussion that is relevant to the real estate sector includes the intended amendment to the German real estate transfer tax system, which aims to make share deals less attractive, and the planned Building Land Mobilization Act (Baulandmobilisierungsgesetz), which is designed to tighten up building law regulations and make it more difficult to convert rental apartments into condominiums.