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Germany's real estate market is hot, in some ways almost too hot to handle. While a stable economy, favorable financing conditions and a lack of investment alternatives are driving market prices, these same factors are also depressing yields. At the same time, there are very appealing business opportunities in lesser-known niches such as student housing, specialty shopping centers and logistics properties. These areas, however, require a deeper level of expertise than traditional real estate investments – both for developers and banking institutions.
When will the bubble burst? The purchase prices for apartments and buildings in Germany are on a steady rise. This has been the case since 2009, in diametrical opposition to interest rate development. After a decade of uninterrupted boom, there are more and more warnings coming from every corner. The German Central Bank points to these warnings at least once a year in its monthly reports. The analysts at the Empirica, part of the German Institute for Economic Research and the Cologne Institute of German Economics have recently taken up the same position.
Peter Axmann, Head of Real Estate Clients at Hamburg Commercial Bank, takes a more relaxed view of the situation. He also notes massive price exaggerations in some residential and commercial properties in Germany. But in his view, the problem is primarily in the major cities. Germany shows no signs of a nationwide real estate bubble like those created in the USA and Spain by building far beyond actual demand. Vacancies are, in fact, not at all a problem in Germany. He also notes, "An unhealthy level of credit financing has not yet been observed for either apartments or office properties. And that's exactly what would have to happen to create a real bubble," says Axmann.
New commercial real estate investments in Germany by institutional investors in billion Euros
Source: bulwiengesa AG 2018
Nevertheless, as an experienced real estate expert, there are some challenging trends he can't ignore – particularly the declining returns. Two-figure interest rates have long been commonplace for investment properties. Project developers have to be very careful to avoid missteps in a landscape of declining returns and increasing risks.
For Peter Axmann, however, this situation is neither uncomfortable nor unfamiliar. "This is the time for the real expert players to shine. It's not hard to invest in a boom. But generating adequate returns in an increasingly tight market requires skill and years of experience," he says.
One such investor with both experience and staying power is the TAS Group, a long-time client of Hamburg Commercial Bank. "Creating value with vision" is the motto of TAS, which was founded in Hamburg in 2003 by the father and son team Thomas A. Schwarz and Marcus Schwarz. TAS is active throughout Germany as an investor and project developer. Students are among those to see the benefits of the real estate company's projects. When the "Kiel Gaarden" mixed construction project on the banks of Kiel Fjord is completed in 2023, students will have around 100 subsidized apartments available to them.
Area volume in trading development of German A-cities 2008 to 2018 in million square meters
Source: "Project development study 2018," bulwiengesa AG
Student housing, hotel projects, corporate headquarters: The German real estate market is still thriving in niches where bigger challenges make for bigger returns – in contrast to conventional areas of project development. This can be seen in the latest figures from the independent market analysts at bulwiengesa. "While last year saw an additional increase in real estate developments, current analysis clearly indicates that the market is stagnating," according to the agency's recent "2018 Project Developer Study." But as always, it is worth taking a look at the details of the study. It quickly becomes clear that there's no such thing as THE real estate market. Everything depends on the niches and the developer's niche expertise. The TAS Group, for example, has been focusing on the hotel market for some time now. And for good reason, as the statisticians at bulwiengesa confirm: According to their 2018 project development study, project volume in the hotel segment is growing for the third year in a row.
Peter Axmann also sees retail parks and logistics properties as probable top performers in the coming years. While inner city retailers are finding it increasingly difficult to attract shoppers, there is a boom among specialty shopping centers, which are often more easily accessible. Demand is high for such centers, and the land prices are comparatively more appealing. It should also come as no surprise that demand for logistics real estate is also on the rise. After all, somebody has to store, pack, ship and deliver all the goods that are being ordered online. For the current year, the German Federal Logistics Association is expecting domestic industry sales of 279 billion euros – this figure reached 253 billion euros only in 2015.
It's not just niche construction projects that offer good returns. An increasing number of Axmann's clients are looking at ways to handle further developments. "This includes such things as repair and modernization, as well as repurposing and re-leasing at higher prices," says Axmann. According to his observations, investors are currently particularly drawn to properties that promise a value-add.
Types of use for which real estate professionals in Germany expect an increase in 2018/2019
Source: EXPO REAL, Trend indicator 2018, 1,380 exhibition visitors, inquiry in July 2018
Being able to see how the ugly ducklings of the real estate world can be transformed into beautiful (and valuable) swans takes more than experience and foresight on the part of project developers. Lending banks also need a high level of real estate expertise and a good understanding of locations, market developments, and future trends.
Hamburg Commercial Bank is one of the most important real estate financiers in Germany. "We listen to our customers' concerns, understand their business plans and work with them to develop individual solutions, from traditional mortgage loans to complexly structured financing," says Peter Axmann, Head of Real Estate Clients. Naturally, this includes knowing the risks and keeping them under control. "We proceed with caution, particularly in an increasingly mature market – at the same time, we ensure a balanced mix in our loan portfolio."