Global Head of Real Estate
The rise in inflation and interest rates poses major challenges for the German real estate sector. Peter Axmann, Head of Real Estate Clients at Hamburg Commercial Bank, now assessed recent and, above all, future developments in the real estate sector at an online press conference.
The high inflation rate of currently 7.4 percent is having a variety of effects on the economy as a whole and not least on the real estate and project development business in Germany. In recent months, inflation and the rise in raw material and construction prices have led to a significant increase in investment costs. Interest rates for ten-year real estate loans have also more than doubled very rapidly in the past four months, from around 1.0 percent to over 2.5 percent.
Many market participants, especially institutional buyers, are unsettled and are waiting... The situation is particularly challenging for project developers: Serious and reliable costing of project developments is hardly possible anymore, also because increased building material prices can no longer be passed on to customers via higher sales prices. Financing banks are becoming more cautious and are reviewing their portfolios. The rising refinancing level and higher risk costs are being factored into lending, financing standards are being tightened, and a higher equity ratio is expected on the customer side. Nevertheless, the market expects more loan defaults in the future, especially in the project development sector.
These are the key findings of the online press conference "Inflation and interest rates pick up significantly: What does this mean for the real estate markets?". In mid-May, the participants included Peter Axmann, Head of Real Estate Clients at Hamburg Commercial Bank, Professor Felix Schindler, Head of Research at HIH Invest Real Estate, and Torsten Hollstein, Managing Director at CR Management.
Peter Axmann addressed the situation of project developers in particular: "Price increases, supply bottlenecks, construction delays and higher financing costs are clearly noticeable. Project developments are more difficult to calculate or potentially unprofitable. We are noticing a clear reluctance on the part of developers, with almost a third of project developments already being postponed. In contrast, rising interest rates and stagnating rents for existing properties are ensuring that only small increases in value are possible, if at all."
Currently, increases in construction costs, rising interest rates and the weakening economy are having a dampening effect
on the German real estate market. "How things develop depends on future interest rate developments and economic growth. In the base scenario, we assume a 'soft landing', with interest rates rising only moderately and the economy recovering soon. Germany would then remain a 'safe haven', with relatively stable rents and prices. However, if a massive rise in interest rates and stagflation strangle the economy, significant value corrections of 20 to 30 percent would be possible," Axmann said. "To prepare for a possible downside in the real estate market, we are currently monitoring the market very closely and focusing on stringent risk management and rather cautious lending."
The effects of rising interest rates are being felt particularly in residential real estate transactions, said Torsten Hollstein, Managing Director of CR Investment Management: "We are observing very cautious behavior on the transaction market among all market participants, especially among institutional investors. The office, logistics and residential use types continue to perform at a high level. However, greater restraint has been evident in the residential segment for some months now. Nevertheless, we see the macro trend for the real estate asset class as quite positive, because inflation usually entails a flight to real assets."
Commenting on the development of construction prices, Professor Schindler said: "Construction prices already rose sharply in the wake of the Corona pandemic. A certain normalization followed, but with the outbreak of the Ukraine war, prices shot up again. This applies, for example, to bitumen, solid structural timber and reinforcing steel. Much of the latter comes from Ukraine and Russia. Prices are very volatile overall, which makes calculations and planning even more difficult."