Over the past few years, Germany's commercial real estate market has gone from strength to strength, following in the footsteps of a record boom that has gripped nearly the entire property market of Europe's largest economy.
But now, with the storm clouds gathering over residential real estate, many investors and analysts are worried that office space in Germany's biggest cities, a lucrative investment over the past five years, could be next to take a major hit.
“The needle of the compass is beginning to tremble,” said Lutz Aengevelt, owner of the Düsseldorf-based estate agents Aengevelt Immobilien, when asked about investor sentiment in his sector. “I'm sure uncertainty about the market outlook is running higher than many would admit in the light of the current boom.”
In Germany, the market for office buildings, hotels and warehouses continues to do brisk trade. Investors from Germany and overseas helped make 2015 a record year, spending some €55.2 billion, or around $62 billion, on commercial property, a 40-percent jump on the previous year.
The last quarter of the year, traditionally the best-performing phase, earned the sector around €17 billion, making it the strongest fourth quarter in the past five years.
Will the boom continue into 2016 and beyond? Some market players are more optimistic than others.
The needle of the compass is beginning to tremble. Lutz Aengevelt, Owner, Aengevelt Immobilien
Ignaz Trombello, who heads the investment consulting department at the real estate agent association Colliers International Germany, remained upbeat.
“The situation will stay as it is,” he said. In the current era of uncertainty and low interest rates, he predicted that a shortage of safe alternative investment options and high liquidity would persuade investors to pump more funds into real estate and less into other types of investment.
“At the same time, property owners are taking advantage of the good market situation and are preparing to sell bigger real estate packages,” he said.
For this reason, he predicted Germany's real estate market would continue to grow this year. “An increase of the transaction volume towards the €60 billion-euro level is completely plausible,” he said.
Such opinions are hardly going to drag on market confidence. The capital markets, however, paint a bleaker picture.
The year has started badly for stock markets, hit by the Chinese slowdown and commodity market jitters. Anthony Martin, investment advisor at the international property consultants CBRE, warned the global financial downturn could affect real estate investors too.
“If the turbulence in the share markets ends up in a downward spiral, this would signal a worsening outlook, which, with some time lag, would also drag the real estate sector down,” he said.
And it would be naive to assume that Germany would be able to detach itself from the global trend. Early warning signs have been sighted, in the form of the Ifo index, an influential monthly gauge of business confidence, which sank in February for the third month in a row.
Commercial real estate is also dependent on things like job growth. But after five years of consistent growth, the number of office employees in Germany is forecast to wane in 2016, according to the Cologne Institute for Economic Research, known as the IW.
Such a decline would rattle both buyers and real estate owners. At the end of the day, the number of office workers is the motor behind rental demand. If this number stagnates, or even starts to decline, it would send a strong signal to those renting out office space in Germany, a fact which is reflected in forecasts of earnings for those owning commercial property over the next five years.
To be sure, it's not just the value of a property that makes owning commercial real estate enticing. Investors generate profits based on the rental income they get. Over the past give years, it's been fantastically good business: Owners of top office property in one of Germany's five biggest real-estate markets, Berlin, Düsseldorf, Hamburg, Frankfurt or Munich, amassed average total returns (before operating costs) of 11.2 percent between 2011 and 2015, according to the international real estate advisor Savills.
But more than 40 percent of these total returns are related to the real estate boom. In other words, rising demand has pushed up prices, which in turn boosts the value of real estate in investors' portfolios. The danger is that this trend is about to come crashing to a halt.
Analysts at Germany's Dekabank, for example, are now working on the premise that prices for top office space in Germany are actually likely to fall between now and 2020. That means property value will actually be a drag rather than a boon to commercial real estate managers.
As a result, the bank predicts overall annual returns will decline to 4.8 percent – driven instead by a forecast increase in yields from rents. It's a sharp drop overall, though perhaps better than nothing in today's low interest-rate environment.
“In the current market phase, the sustainable long-term earnings will be the decisive factor,” said Marcus Cieleback, who heads research at the German real estate investor Patrizia.
That sounds like a wise strategy given an unpredictable market context. Against this backdrop, Lutz Aengevelt said there is one point he can be sure of: “Right now, all investors are treading carefully.”
Anne Wiktorin is an editor with Handelsblatt, based in Düsseldorf. To contact the author: [email protected]