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Germany’s Real Estate Supply and Demand Dynamics to Drive Investment Opportunities in Economic Re-emergence

Enrico Imbraguglio, managing director at Optimum Asset Management, explores the significant investment opportunity in German real estate as the region seeks stability following an unprecedented period of disruption.

Published on: Institutional Real Estate Europe

The fundamental supply and demand mismatch in Germany’s residential real estate sector means there remains significant opportunity to invest in key cities, such as Berlin, Hamburg, Dresden, Leipzig, Cologne and Düsseldorf, despite the unprecedented declines in transaction volumes across European markets as a result of Covid-19.

As countries across Europe commit to the controlled, cautious reopening of economies, the assessment of the impact of the pandemic increasingly shows a story of imbalance. While all economies have been hit, Germany has been amongst the least affected in terms of GDP forecasts, which is expected to shrink between 6-8 per cent in Germany, compared to 11 per cent in Italy and 14 per cent in the UK.

Underlining this was Germany’s preparedness to face the pandemic relative to other European countries. Pre-pandemic, low unemployment combined with widespread, above-inflation wage increases over a number of years ensured the labour force was in a relatively comfortable position when Covid-19 hit.

Decisive action was then taken at the onset of the pandemic. A massive €1.1 trillion rescue package was agreed in March, comprising loan guarantees, subsidies, deferral of tax obligations and a beefed-up shorter-hours programme to avoid job cuts. This was followed by fresh stimulus in June, when the German government unveiled a €130 billion stimulus package to kick start the economy, including a significant cut in VAT, support for worst-hit sectors, a child bonus for families and a limit to social security contributions.

Crucially, government support has been linked to specific obligations, including rental payments, service charges, delivery payments or salaries. This, combined with prompt and robust testing and a less stringent lockdown compared to other countries, enabling construction sites and some factories to stay open, has put Germany and its investors in a better position to build on the recovery.

For investors in real estate, the drivers that make Berlin and other cities an attractive proposition are as apparent today as they were pre-pandemic. In the short term, resilience in Berlin’s real estate market has been characterised by continued rent payments and, largely, an absence of defaults, with investors benefiting from safe, stable cash flows during the pandemic.

Mid to long-term, the fundamental supply and demand issue is set to continue. The volume of construction activities is still insufficient versus an ongoing influx of population in many cities and their suburbs. This is an issue made more acute by potential migration trends post- pandemic. It is conceivable that the large population across Europe made unemployed as a result of Covid-19 might look to new opportunities in Germany.

There also exists wider questions around the future of work. As an increasing volume of companies adopt a more fluid approach, with working from home becoming more accepted and adopted, changes in the model for residential are likely to follow. Demand for larger apartments with a dedicated space to work may be a biproduct, further fuelling demand in the residential market.

At the investor level, with lower interest rates for longer, the spread with government bonds at all-time lows and financial markets proving too volatile for many investors, there is now a huge amount of liquidity to be invested or reinvested. While this means large price reductions for assets are perhaps unlikely, which is a factor that may even deter new international players to the market, this reflects strong domestic demand that is set to endure.

With these drivers rooted in Germany’s economy, we expect real estate to retain its popularity in Berlin and other major cities. Earlier this year, Optimum Asset Management announced the launch of its fourth German real estate fund, German Real Estate Fund IV (GREF IV), to generate opportunities in this market. The fund will seek to acquire a diversified portfolio of residential and commercial properties in the region, adding value to well-located residential and office assets near major infrastructure and employment hubs, with a focus on the Berlin market.

As Europe and Germany look for stability after an unprecedented period of disruption, we remain optimistic in the ability of established investors with regional presence, experience, and expertise, to be a part of the recovery.