Economic situation: Sentiment remains depressed, but lowest point seems to have passed
The German economy ended 2022 with some positive signals: The Covid-19 pandemic appears largely under control. The mild temperatures in December entailed limited gas consumption and falling purchase prices on the energy exchanges. The inflation rate stabilised at a still high 10 %, but according to economic experts, it should gradually decline in the coming months. And China abandoned its zero-Covid strategy, which will lead to higher production output and a return to stronger trade in goods with Germany in the medium term.
Against this background, the ifo business climate index brightened significantly. Business sentiment remains depressed, but with cautiously optimistic tendencies compared to the previous months, especially with regard to business expectations. One exception is the construction industry, which assessed the current business situation as worse than in the previous month and is thus lagging behind other sectors such as trade, services and manufacturing.
Consumer sentiment, which is surveyed monthly by the gfK, improved overall for the third successive month, but remains clearly in negative territory. Consumers' propensity to buy remains low, but at least seems to be stabilising. The federal government's relief packages to cap energy prices are having an effect here. In addition, the labour market is still dominated by a shortage of skilled workers, even though the Federal Employment Agency is again registering more applications for furlough subsidies.
According to the current forecasts by Moody’s Analytics, the German economy will shrink steadily in the first three quarters of 2023 and will not recover until the fourth quarter. The recession could thus remain limited to minus 0.04 % for the year as a whole. The prerequisites are a secure energy supply, which must be achieved entirely without Russian gas in 2023, and a lower inflation rate than in 2022.
Real estate market: Cautious activity accompanied by intensive probing
The ECB has raised the key interest rate in four steps since July 2022 to the current 2.50% and has announced further increases are to come. This means that investors continue to find themselves in an uncertain interest rate environment. Many possible sales negotiations are therefore on hold or being broken off, which could continue in the coming months. Nevertheless, market participants are intensively probing the market and taking advantage of good opportunities when they do arise.
Demand for office space stalled slightly in the fourth quarter. Large space users in particular are reconsidering their relocation plans against the backdrop of the current economic outlook and have therefore postponed their leasing decisions. Occupiers who rented their space in the recent past with expansion in mind are increasingly offering space to sublet resulting in higher vacancy rates. Nevertheless, rising rents are still expected for prime space.
28 November 2022
Recruiting in Germany falters - business climate index rises
In view of the official announcement that the country is in recession, many companies have revised their recruitment plans. In October, the ifo employment barometer was at its lowest level since April 2021. There is great caution in the retail sector in particular. Here, layoffs are to be expected - the Galeria department store chain intends to close more than 40 of its 131 locations. On the other hand, Lufthansa is to hire around 20,000 additional employees by the end of 2023 and the shortage of skilled workers in the STEM sector is at a new high. The medium-term is definitely perceived more positive than the short-term.
This is also shown by the ifo Institute’s November business climate survey. The current situation is again assessed more negatively than in a month ago, but the expectation for the next six months is less pessimistic.
Disappointment over results of COP 27 - business and local authorities called upon to act
The results of the World Climate Conference were received with disappointment by German politics and business. Even if the agreement on the financing of "loss and damages" by the major greenhouse gas emitters can be considered a success, at the same time there was criticism that it was not possible to agree on ambitious measures to accelerate the reduction of greenhouse gases.
Companies and municipalities are therefore all the more called upon to do their part to preserve a sustainable world. In the real estate sector, awareness of the need for sustainable building stock has risen sharply in recent years and manifests itself in new buildings and ESG-compliant urban neighbourhood developments, while the existing stock has so far been tackled hesitantly. The €600 million loan from the European Investment Bank for a major refurbishment project by Vonovia could set an encouraging example.
High completion figures continue to drive up office vacancy rates
While office take-up in 2022 will again fall well short of pre-Covid levels, completion figures continue to rise. While newly-completed office space represented about 30% of office take-up in 2019, the figure for 2022 is expected to be 50%. Vacancy rates, especially in existing stock, will rise and are likely to exceed 6 % in 2023 for the first time since 2015.
Investor restraint continues
On the investor side, the reluctance to invest in real estate, which began in the early summer of 2022 will continue unabated. Due to uncertainty concerning economic and interest rate developments, prices are still considered too high. Nevertheless, investors are still taking advantage of opportunities. Relatively brisk activity can be seen in the industrial sector. Data centres, still a niche market, will also gain in importance against the backdrop of increasing data flows required by smart working, smart living and smart mobility.
28 October 2022
Overcoming the energy crisis remains the dominant issue. Although the gas supply seems to be secured for the winter, energy prices will continue to be significantly higher than the level of previous years and will have a noticeable impact. In the meantime, the government expects a decline in gross domestic product of 0.4 % and average inflation of 7 % in 2023, provided that the planned gas “price brake” is effective and the energy supply is actually secure.
In order to cushion the additional financial burdens, in the second half of October the Bundestag decided to take on up to €200 billion of debt. However, the measures planned so far have met with massive criticism from large sections of the business community and the public. While the planned state subsidy of a major part of the December consumer levy is welcomed, the start in March 2023 of the gas price and district heating price is criticised as being clearly too late. For large industrial consumers, a gas price brake will probably take effect from January 2023, applying to a quota of 70% of the previous year's consumption.
Gas savings potential of real estate not yet exhausted
A survey of companies by Randstadt-ifo showed that only a small percentage of small companies have an emergency plan for the energy crisis. Since the beginning of October, a maximum heating temperature of 19 degrees Celsius has been in effect for public buildings with a floor space of 1,000 m² or more. The city of Hamburg also wants to invest around €4 million in technical measures such as the installation of thermostats, which could ultimately provide heating energy savings of 30 %. The Kopernikus project Ariadne considers this savings potential to apply to the entire German building stock if changes in heating behaviour are accompanied by technical adjustments and renovations.
According to surveys by the ifo Institute, the number of cancellations in residential construction has increased. The reason for this - apart from the current challenges - is above all the planning uncertainty about how financing conditions as well as construction and energy prices will develop. This endangers the federal government's plan to complete 400,000 partly publicly subsidised flats per year.
Investment market yields continue to rise
There is still great uncertainty about the level at which prices will settle. It is undisputed that yields will continue to rise significantly across all property classes. Against this background, market participant continue to be hesitant. Nevertheless, opportunities are opening up for equity-strong investors.
ESG-compliant office space in demand - prime rents stable
Rising energy costs and corporate self-image are increasing the pressure for companies to present themselves as occupying sustainable and ESG-compliant spaces. Prime rents for first-class office space will therefore remain at least stable in the coming months.
20 September 2022
Remote working: some companies reducing space
Office property: Strong late summer in Munich’s and Berlin’s real estate investment market
Property market: sharp rise in key interest rates changes investment environment
08 August 2022
Sars-Cov2 pandemic: no lockdowns in winter
Property market: temporary restraint among investors
Building refurbishment: Federal subsidies for efficient buildings
07 Juli 2022
Economic situation: Concerns about gas supply and inflation remain high
Despite the currently stable gas supply, German fears of a shortage in winter have intensified in recent weeks. This is because Russia has been supplying only 40% of the maximum amount of natural gas since mid-June and the Nord Stream 1 pipeline will be out of service for about 10 days in July due to maintenance work. In addition, a further curtailment of supply by Russia cannot be ruled out. The goal of filling Germany’s gas storage facilities to 90% by November would then become unachievable without additional measures. Companies and private consumers must therefore prepare themselves for further increases in gas prices.
Office real estate market: Constantly high prime rents, trend reversal in purchase prices
Demand for office space has remained consistently high in recent weeks despite changes in the economic environment. In addition, the demand for modern and ESG-compliant office space caused prime rents in the five most important German markets to rise again.
Office properties also remain fundamentally sought after as an investment asset class. However, buyers and sellers are finding it increasingly difficult to set prices, as it is not yet clear how strong the rise in interest rates will be and how this will affect financing. The FED and the Bank of England have already raised key interest rates significantly (to 1.75% and 1.25% respectively), the ECB announced a first interest rate step from 0% to 0.25% in mid-July, but remained vague about further steps. Helaba forecasts a value of 0.75 % by the end of the year and at the same time expects yields on 10-year government bonds to rise to as much as 2 %. It is thus obvious that yields for office properties will rise, but unclear to what level by the end of the year. Against this background, many sales processes are currently being delayed until there is more clarity concerning the market.
07 Juni 2022
Meanwhile, the monthly consumer sentiment survey by GfK reached an all-time low in May. Above all, inflation (7.4% in April 2022 compared to April 2021) is depressing consumers' propensity to buy. However, GfK does not expect sentiment to deteriorate further in June. The relief package adopted by the German government should also contribute to this. Among other things, the federal government is investing around €2.5 billion in a nationwide public transport experiment. From June to August, the entire local public transport system can be used for €9 per person per month.
Census 2022: building and housing census without commercial properties
Property market: Landlords' participation in CO2 levy planned
Real Estate Market: Fewer Self-Sustaining Sales of Commercial Real Estate
04 Mai 2022
Corona-Pandemie: Annähernde Normalisierung des Alltags
In the public consciousness, the Sars-Cov-2 virus has now clearly receded into the background. Although the 7-day incidence remains high, the predominantly mild illness caused by the Omicron variant does not pose a threat to public health. Meanwhile, compulsory testing and masking only applies in certain circumstances. In addition, the quarantine period to be observed in the event of infection has been reduced from ten to five days.
Economic growth: Federal Government lowers forecast for 2022
As a result of the normalisation of everyday life, Germany’s gross domestic product at the end of the first quarter of 2022 had grown by 4% compared to a year earlier. This trend is now being severely slowed as a result of the Ukraine conflict. In addition, the German economy continues to be burdened by production stoppages and port closures in China.
As a result, the German Government corrected its forecast for economic growth in 2022 from 3.6% to 2.2 % a few days ago. The inflation rate was 7.4% in April. This was due to an increase in both energy and food costs as a result of higher producer prices and ongoing supply chain problems. According to the monthly gfK Consumer Sentiment Index, consumer sentiment has fallen to its lowest point since the survey began in 1991. To counteract the energy price trend, the cabinet recently approved a €30 billion consumer relief package.
Energy supply: Dependency on Russian fossil fuels reduced
Germany's high level of dependency on Russian fossil fuels has been reduced in recent weeks. Compared with 2021, in the case of anthracite from 50% to 8%, oil from 35% to 12% and natural gas from 55% to 35%. German industry is still critical of the embargo on Russian natural gas currently under discussion by the EU. This is because immediate substitution is scarcely possible due to the high dependency of some specific sectors.
Real Estate Industry: Markets Trending Positive in the First Quarter
The real estate markets were robust in the first quarter of 2022 despite the changed background conditions. The transaction volume for sales of commercial real estate development sites and properties reached a record value of €18.2 billion, and office space take-up in the five largest German markets was higher than in the first quarters of 2021 and 2020, at around 654,000 m².
Nevertheless, high inflation and the expectation that the ECB will raise key interest rates in the second half of the year are causing concern. Investors have already started to adjust their business plans accordingly. The phase of steadily compressing real estate yields is likely over for the time being. A positive market driver remains the legally mandated transformation of the real estate sector towards sustainability, which is expressed in a change in users and investors’ demand behaviour, and which cannot be implemented without investing in existing stock.
Depressed sentiment: economic forecasts significantly lowered
The war in the Ukraine has significantly weighed on German business sentiment. In the latest economic survey by the ifo Institute in March, companies assessed their current business situation as only slightly worse than in the previous month, however expectations for the next six months exhibited an exceptionally sharp decline. The reasons for this are the continuing supply bottlenecks for raw materials and intermediate products as well as the sharp rise in energy prices.
According to surveys by Gesellschaft für Konsumforschung (GfK), consumer sentiment has also deteriorated. In addition to high energy costs, rising food prices are also reducing consumers' purchasing power and increasing their propensity to save. No reversal in these trends is expected in the coming months.
Against this background, rating agency Moody's has adjusted its German economic growth forecast to 2.2% and expects inflation to reach almost 7%.
COVID-19 pandemic: basic level protective measures since 3 April
On 2 April, the extension option for nationwide protective measures against COVID-19 expired. Since 3 April, protective measures been reduced to a basic level. If necessary, these can be tightened again by the state parliaments designating regional hotspots.
Meanwhile, the abolition of the mask requirement in retail, catering and leisure and cultural venues means enormous relief for these sectors. There is however concern that the associated increased risk of infection with the Omicron variant could lead to a renewed increase in infections. Some cultural venues and service providers are therefore making use of their domiciliary rights and continuing to require mask wearing.
No decision has yet been made regarding compulsory vaccination in Germany. There is still no majority in favour of any of the proposals submitted to parliament.
COVID-19 pandemic: case numbers decline - legal basis for restrictions expires on 19 March - compulsory vaccination still under discussion
As expected, the infection figures peaked at the end of the third week of February. The situation in hospitals is no longer alarming but remains tense.
Therefore, most restrictions will be phased out by 20 March. Already, recovered and vaccinated persons are allowed to meet privately again in unlimited numbers, eased access conditions apply to gastronomy, hotels and clubs, and significantly more spectators are allowed at large events. The obligation for employers to allow their employees to work remotely also expires on 19 March. However, certain protective measures such as compulsory wearing of masks, distancing requirements and compulsory tests in health facilities will continue.
According to calculations by the Ifo Institute and the German Economic Institute, the pandemic has so far depressed German economic output by €330 to 350 billion and the German Bundesbank also expects a decline for the first quarter of 2022 - because of the Omicron wave. In the meantime, the German Government has extended easier access to short-time work subsidies and the bridging allowance until the end of June 2022. No progress has been made so far on the issue of compulsory vaccination.
Putin’s war slows economy - above-average inflation also in 2022 - ECB reaction expected
The latest monthly economic survey of German companies by the Ifo Institute showed a more positive mood than in previous months. However, Russia's attack on Ukraine is likely to cloud the picture again. Transport routes are disrupted or failing, supply chains are collapsing. Energy prices are higher than at any time since the 1970s oil crisis. Due to current events, the German Government has stopped the Nord Stream 2 Russian gas pipeline coming on-stream and announced the construction of LNG terminals in Brunsbüttel and Wilhelmshaven. However, it is likely to take another two to three years before they are in operation.
Expert opinion is unanimous that inflation this year will definitely exceed the 3.1 % of last year. In January alone, electricity was two-thirds more expensive and the price of natural gas more than doubled. The cost of living was 0.9 % higher in February than in January, and even 5.1 % higher than February 2021. So far, the ECB has not reacted to this. A rate correction has been hinted at for the meeting on 10 March. Interest rates for long-term construction loans have already risen slightly.
Construction costs continue to rise
Construction costs rose sharply in 2021 and will continue to do so in 2022. According to the Central Association of the German Construction Industry, construction prices rose by 6% in 2021 and are expected to rise by 4% in 2022. This is mainly due to higher material prices, but also bottlenecks in the supply chains and the lack of skilled workers. It is therefore to be expected that construction projects will be delayed or have to be recalculated. Likewise, higher energy prices will also drive up the management costs of buildings. Energy-efficient buildings are therefore not only good for the climate, but also keep costs lower.
COVID-19 pandemic: calls for relaxation grow louder
The number of new daily COVID-19 infections has been rising steadily in Germany for several weeks. At the beginning of February, the national 7-day incidence climbed to over 1,200. At the same time, the vaccination rate is progressing only slowly. In the last week of January, there was therefore a controversial debate in the German Bundestag on making vaccination obligatory, however this has still not been decided. Obligatory vaccination for medical and nursing facilities, was already agreed in December 2021 and will come into force in mid-March. However, there is some concern that some nursing staff will resign rather than be vaccinated, thus further exacerbating staff shortages. In addition, not all technical points regarding enforcement and penalties have been clarified yet.
Notwithstanding these issues, there are increasing demands for relaxation of the current restrictions. Businesses in particular are pushing for the Federal Government to communicate opening plans as soon as possible in order to give companies planning security.
Meanwhile, restrictions are already being eased regionally. In Baden-Wuerttemberg, Saxony, and Thuringia, for example, instead of the nationwide 2G regulation in the retail sector (access only for those who are healthy and vaccinated), the 3G regulation now applies again, which additionally allows persons with a current negative test access. In Schleswig-Holstein and Hesse, the 2G rule was recently lifted altogether. In Hesse, on the other hand, wearing an FFP2 mask is now obligatory.
Residential construction: Market turmoil after temporary subsidy freeze for energy-efficient buildings
On 24.01.2022, an announcement by the Ministry of Economics stating that KfW (German state development bank) subsidies for energy-efficient buildings would be temporarily suspended caused market unrest. In addition, new construction subsidies for the Efficient House/Efficient Building 55 standard would be permanently discontinued with immediate effect, seven days before the date previously stated. The Ministry of Economics stated that the reason was a flood of applications that far exceeded the budget set aside for the funding programme. The financial shortfall was estimated at around €5.4 billion.
The unexpected announcement was met with widespread incomprehension, especially in view of the goals proclaimed by the ‘traffic light coalition’ (SDP, liberal and green parties) regarding new housing construction and promoting the energy efficiency of buildings. About 24,000 applications for the EE55 and EE40 efficiency house standards were affected by the stop, with a funding volume of about €7.2 billion. After harsh criticism from the building industry and consumers, the Federal Government relented in order to avoid a loss of confidence. The Minister of Economics, the Minister of Finance and the Minister of Construction agreed on 02.02.2022 that all applications received prior to the funding freeze would be processed in accordance with the previous criteria and approved if eligible.
In principle, however, it remains the case that the subsidising of energy-efficient construction and renovation will be restructured. In the medium term, new funding programmes will be introduced.
COVID-19 pandemic: Omicron causing concern
As a result of the vaccination campaign by the Federal Government, states and organisations, the vaccination rate in Germany has increased. The proportion of those vaccinated once is now around 75%, the proportion of those vaccinated twice is over 70% and the proportion of those boostered is over 40%.
Nevertheless, politics and business are concerned at the rapid spread of the Omicron variant. According to experts, this could lead to significant staff shortages and bottlenecks, especially in critical infrastructure (energy supply, healthcare, and the fire brigade). Existing social contact restrictions have therefore been tightened while the quarantine regulation have been relaxed somewhat.
At the same time, there is growing discontent among some of the population about the measures taken to combat the pandemic. This is being expressed, amongst other things, in an increasing number of nationwide demonstrations. The Federal Government's original hope that a sufficient proportion of the population would be vaccinated voluntarily has not yet been fulfilled. Compulsory vaccination is therefore also being discussed.
The travel and the trade fair sectors are also being directly affected by the tightened restrictions. German airline Lufthansa, for example, cancelled about 33,000 flights in December 2021 in response to the ongoing pandemic. This corresponds to about 10% of the number originally planned. In early January Messe Frankfurt, in turn cancelled four traditional spring trade fairs, including the world leading Ambiente event. This means that the hospitality sector is suffering further losses.
Real estate market in good shape
Meanwhile, positive signals are coming from the office letting market. With take-up of over 900,000 sq m, Berlin’s 2021 total was already similar to pre-crisis levels. The office markets in Frankfurt, Düsseldorf, Hamburg, and Munich also recorded significantly higher take-up in 2021 than in 2020. Although not yet at pre-crisis level, the continuing rise in demand for large spaces points to further increases in take-up in 2022. A certainty here is that more users than in the past will consider sustainability criteria when seeking space, bringing corresponding challenges for property owners.
On the transaction market, too, ESG compliance will increasingly be factored into decision-making and pricing in 2021. Against this background, well-located new office development projects or core refurbishment projects have become even more attractive to end investors. In total, properties and office development projects worth almost €19 billion changed hands in the five major German office markets. More than half of the capital flowed to Munich and Frankfurt - where investors were able to take advantage of large-volume opportunities. Some investors are increasingly showing interest in planned, inner-city urban district developments offering the benefits of sustainability, short distances and mixed-use and can fulfil important ESG criteria.
New Government, new impetus
Under the leadership of Chancellor Olaf Scholz, the new federal Government began work on 8 December 2021. Key points are laid down in the coalition agreement between the SPD, Bündnis 90/Die Grünen and the FDP. The focal points are reflected in changes in the structure of various ministries, such as the expansion of the Ministry of Economics’ remit to include climate protection, with international aspects of climate protection assigned to the Ministry of Foreign Affairs. The topic of digitalisation is assigned to the Ministry of Transport, and the topic of construction has been spun-off into a separate Ministry of Housing, Urban Development and Construction.
The goal is to build 400,000 new residential apartments every year and at the same time comply with the upper limit for daily additional land consumption formulated in the Climate Protection Plan 2050. This project is made more difficult by a shortage of building land in many locations as well as long planning and approval processes. In addition, the policy orientation towards the 1.5-degree climate target requires stricter specifications on the climate protection conformity of old and new buildings.
The overriding issue in Germany remains the COVID-19 pandemic. In view of the new Omicron variant, there is already talk of a possible fifth wave. Due to the still low vaccination rate of just under 70%, stricter measures have been adopted. Unvaccinated persons are currently banned from cultural and leisure facilities as well as from retail stores, apart from those selling daily necessities. In addition, ever more companies are recommending that their employees work from home if possible. This further reduces the commuter footfall in the retail highstreets. Many Christmas markets have also been cancelled, which in normal years also boost footfall. Additionally, burdened by supply bottlenecks, bricks-and-mortar retail therefore expects a slump in profits of around 40% in Christmas business. As a direct result of the COVID-19 restrictions, the Galeria department store group has therefore applied for a further aid loan from the state economic stabilisation fund amounting to over €200 million.
Ever more companies are adapting to the fact that in the future work will not be exclusively office-based and are granting their employees remote working days. The most recent example is the credit institution DekaBank, which has set the minimum time spent in the office at 60 per cent of weekly working hours. With a 40-hour week, this corresponds to up to two days of remote work. The ratio of 3:2 (three days in the office, two days elsewhere) or 2:3 has been cited in several studies over the last 15 months as the most likely for implementing remote working concepts. The intention is to safeguard the preservation and fostering of corporate culture. Provided that the new way of working is complemented by attractively fitted-out office space.
Germany is currently in the grip of a fourth wave of COVID-19. The 7-day incidence has now reached its highest level since the beginning of the pandemic. At the same time, there are increasing warnings from hospitals of an emerging overload. Nevertheless, the current national epidemic State of Emergency is to end on 25 November. It may be replaced by a new bill providing for the reintroduction of free tests and a “3G” rule (vaccinated, recovered, tested) for office workplaces. Meanwhile, for restaurants and cultural, leisure and sports venues, the “2G” (vaccinated, recovered) or “3G-plus” rule (only PCR tests recognised) already applies in some federal states. The aim of the policy measures remains to avoid another lockdown.
Economic growth forecast
On 10 November, the German Council of Economic Experts presented their autumn report on the economy to the federal government. This included a lowering of the growth forecast for 2021 from 3.1 to 2.7%. The adjustment is due to continuing supply bottlenecks for raw materials and intermediate products. For 2022, the experts expect a normalisation of industrial manufacturing and private demand for services and forecast strong economic growth of 4.6%. This assumes that the supply bottlenecks are remedied and that there are no health policy restrictions.
Strong attractiveness of the German investment market
In a recent study by PwC and Urban Land Institute on the attractiveness of 31 European cities as real estate locations, four German cities reached the top 10. Berlin was in second place behind London, Frankfurt and Munich follow in fourth and fifth places behind Paris, with Hamburg in eighth place. The German cities mainly impress with their stable investment and development prospects, but also with comparatively short commuting times to the city centres. In terms of commercial real estate transaction volume, Germany holds a stable second place behind the United Kingdom. In the first three quarters of 2021, at €38.9 billion. Around 46% of this was generated in these four top German cities, with office assets being most in demand, accounting for €10.8 billion of the total.
City-defining high-rise developments in Frankfurt taking shape
In the first half of November it became known that two planned high-rise development projects are gaining momentum. Both pursue a sustainable approach. 1) The general contractor agreement was concluded for the "central business tower" planned in the banking district. By the beginning of 2028, the 205-metre-high office building is to be constructed in the vicinity of the "Quartier Four", which is currently under construction. 2) The architectural competition for the mixed-use "Millennium Areal" development, which is planned at the entrance to the Europaviertel district, was concluded. This is where Frankfurt's tallest skyscraper, of 300 metres, is to be built. The public presentation of the results is planned for the beginning of December.
Since 11 October, most of the German population no longer receive COVID-19 tests free of charge. In contrast, vaccination against COVID-19 remains free. Almost 70% of the population is currently fully vaccinated. Meanwhile, everyday office life continues to be affected by the pandemic. Most companies allow an occupancy rate of about 50 % in their office spaces. In many places, agreements are struck with employees on the number of days’ attendance per week. In recent months, there has also been more movement in the demand for office space as companies seek ways to implement post-pandemic office concepts. Wüstenrot & Württembergische (W&W), for example, recently announced that in future only 4,000 workplaces will be required for 6,000 employees as a result of changes in desk-sharing quotas.
New Federal Government
In the elections to the German Bundestag on 26 September, the SPD became the strongest party ahead of the CDU/CS. But in all likelihood, there will be no resumption of the ‘grand coalition’ of recent governments. Negotiations between the SPD, the Greens and the FDP to establish a possible tripartite will begin this week. Despite partly differing policy ideas, an agreement is considered likely. Among other things, it must be clarified which measures are to be taken to comply with agreed climate targets and how these are to be financed.
Climate neutrality in the building sector
Two recent studies have examined the measures which would be required for Germany to be climate neutral by 2045. The ‘Ariadne Project’ (funded by the BMBF) concludes that the annual renovation rate of extant buildings would have to increase to as much as 2% by 2030. In addition, about 5 million heat pumps would have to be installed and about 1.6 million buildings would have to be newly connected to district heating networks. The German Energy Agency's lead study ‘Aufbruch Klimaneutralität’ has calculated that CO2 emissions in the building sector would have to fall from 120 million tonnes per year (2018) to 67 million tonnes per year by 2030, which could be achieved via energy-efficient renovations and the use of climate-neutral fuels. It also advocates the designation of more neighbourhoods as climate protection priority areas due to the shared use of energy infrastructure. Regulations as well as cumbersome approval procedures are still proving to be a hurdle, but the real estate industry has already turned its attention to this topic.
Smart Cities - Frankfurt only in midfield
The industry association Bitkom has published this year's study on the degree of digitalisation of 81 German cities with more than 100,000 inhabitants. Criteria such as administration, IT and communication, energy and environment as well as mobility and society were considered. Five cities that are among the top office market locations also appear in the top 10 ranking - with Hamburg in first place, Cologne in second place, Munich in fourth place, Stuttgart in eighth place and Berlin in ninth place. Frankfurt, on the other hand, is only in 47th place, with a particularly weak rating in the area of energy and the environment.
Frankfurt commercial tower - The planned ‘Porsche Design Tower’ in the west of Frankfurt's Europaviertel is now to accommodate around 45,000 sq m of office space instead of 260 apartments. In addition, the height of the tower will be reduced to 80 metres. The investor apparently considers there is more potential in office letting than the luxury segment of Frankfurt's residential market. This is because the newly built office towers in the city centre are almost completely let, and the demand for modern space remains unbroken.
Takeover bid - Vonovia continues to work on strengthening its position as Germany's largest housing group via a merger with Deutsche Wohnen and has now removed the minimum acceptance threshold from its takeover bid - while nonetheless pursuing the goal of increasing its stake in Deutsche Wohnen to over 50 percent. The acceptance period of the offer for shareholders ends on 4 October 2021.
Berlin housing market - It has also emerged that the state of Berlin is to buy around 14,700 flats from Vonovia via its state-owned housing companies (cost: around €2.4 billion). The city's goal is to increase its municipal housing stock to 400,000 apartments by 2025. In addition, the city’s senate has decided to lobby for a nationwide regulation enabling the individual states to regulate rents via caps.
08 SeptemberRetail - Despite rising vaccination rates, only cautious optimism for H2 prevails in the German retail sector. In July 2021, the Federal Statistical Office recorded a real decline in sales of 5.1% compared to the previous month. The rising inflation rate is also contributing to uncertainty, reaching its highest level in 20 years at 3.8%. While retail companies are considering reducing space or relocating, owners of commercial buildings are increasingly integrating office or residential space into their properties at the expense of retail space. The trend towards a changed mix of uses is also being seen in shopping centres.
High-rise offices - Investors’ appetite for large-volume office towers with a signal character remains strong with several properties in Frankfurt at the centre of attention. In July 2021, both the Skyper (35 storeys, built 2006) and the T1 (54 storeys, completion 2024) changed hands, for over €500 million and over €1 billion euros respectively. A sale of the Marienturm (38 storeys, completed 2019) may also take place in the next few months.
Data centres - In terms of data throughput, Frankfurt is considered the world's largest internet hub. Due to the attractiveness of the location, even more new data centres are being built in the city and its surrounding area. Interxion, for example, began developing Digitalpark Fechenheim in August, which could supply 10,000 single-family homes with energy from waste heat alone after completion in 2030. Meanwhile, in the neighbouring municipality of Offenbach, CloudHQ is building one of the largest data centres in Germany. Several data centres are also to be built in nearby Hanau, among others for Google’s cloud services.
COVID-19 pandemic - The number of new infections is increasing again in Germany. In a decision by the heads of the German federal states, vaccinated, recovered and tested persons are to be permitted liberties denied to non-vaccinated persons from 23 August 2021, even at 7-day incidence levels above 35 per 100k. This is an important signal for business. However, the country is still a long way from herd immunity (vaccination rate of over 80%).
Hotel sector - Hotels continue to face a challenging situation. The general ban on overnight stays was lifted in May 2021, however the number of overnight stays remains below pre-pandemic levels. In June 2021, for example, 39% fewer overnight stays were registered in German hotels than in June 2019. Business and trade fair travel in particular are recovering only sluggishly. Hotel chain Fleming's has reacted by announcing the closure of three of its nine hotels in Frankfurt.
Climate change - Both the private and public sectors are reacting ever more aggressively to climate change: Frankfurt, for example, is reducing the road space available for cars in the city centre in favour of cycling. In a draft law, the Berlin State Government has stipulated that from 2024 onwards, one fifth of the site area of new buildings must be green. And ever more investors are launching new funds that take consideration of ESG aspects in accordance with Article 8 of the EU Disclosure Regulation, especially in the logistics and housing sectors.
Commodity bottlenecks - Supply bottlenecks and rising commodity prices continue to weigh on the German economy. With far-reaching consequences: for example, some economic institutes have slightly downgraded their economic growth forecasts for 2021. And in the construction industry, many completions are likely to be forced to postpone until next year - with consequential further increases in real estate rental and purchase prices.
Due to the Berlin’s tight residential rental market, the Berlin Senate decided that the conversion of let residential units into private condominiums cannot take place without the permission of the individual district housing office if a residential building comprises more than five units. Until early August this regulation was valid only for specific areas, from now until the end of 2025 it applies to the whole city. At the same time, the Berlin Senate is still interested in purchasing a total of 20,000 residential apartments from their current owners Vonovia and Deutsche Wohnen. Vonovia meanwhile received clearance from Bafin (Federal Financial Supervisory Authority) to undertake a third attempt to take Deutsche Wohnen over.
As the vaccination programme has lost some momentum and the number of new COVID-19 infections is increasing, if at a low level, there are concerns that autumn might bring another lockdown. Therefore, major retail chains and major retail unions started a pro-vaccination campaign ‘Live instead of lockdown. Get yourself vaccinated’ in shops and via social media channels and by offering vaccinations in busy locations, as an adjunct to shopping.
Following surveys undertaken by ZEW, approximately 74% of firms in the information economy plan are to offer their employees the opportunity to work from home even post pandemic. Every second firm expects in the long term that more than 20% of their employees will work from home at least one day a week. German shipping company Hapag-Lloyd has announced it intends to implement a remote working proportion of 40%.
The German investment market for commercial real estate achieved a transaction volume of around €22.1 billion in the first half of 2021 of which the second quarter contributed €12.5 billion. The previous year's first-half result of just under €28.8 billion was thus missed by 23%. Compared to the H1 10-year average, however, the transaction volume is 13% higher. The largest deal so far was the sale of the ‘Fürst’, a mixed-use development on Berlin’s Kurfürstendamm to Aggregate Holdings for more than €1.2 billion. The three largest office transactions took place in Munich, including the trading of the Highlight Towers and the O2 Tower. Overall, new investment in office buildings and office developments totaled €9.4 billion and 43% of the total transaction volume.
In the top-5 German markets, Berlin, Dusseldorf, Frankfurt, Hamburg, Munich, more than 4 million m² of new office space is under construction with 70% (2.9 million m²) of this due for completion within the next 18 months, 48% of which is pre-let. As total completion figures for 2021 and 2022 will be higher than in recent years and take-up figures are expected to be lower, the overall vacancy rate in the top-5 markets is expected to increase to 5.5% by the end of 2022. Purely speculative development projects which are not yet under construction are currently being carefully reconsidered and may be postponed.
Since the end of June firms are no longer obliged to allow their office employees to work from home if they request it.
Offices are becoming more populated again and, in consequence, city centres as well.
Nevertheless, a law giving employees the right to work from home for a given number of days per annum is being considered by some political parties and Unions.
A few large employers plan to offer spaces in regionally spread-out satellite offices to reduce commuting times while also clustering people together.
In the first half of the year, occupiers signed new leases for a total of 1.1 million sq m of office space in the five major German markets.
The same total result was seen for the equivalent period last year, however, take-up figures in Düsseldorf and Munich are lower than 2020 while take-up increased in Frankfurt, Berlin and Hamburg.
Office vacancies increased in all five markets, most strongly in Berlin and Munich, nevertheless, vacancy rates in these markets are still below 4%, while Frankfurt’s vacancy rate is now 8.1%.
Prime rents range from €28.50 per sq m in Dusseldorf to €46.00 per sq m in Frankfurt.
Last week, the revised national climate protection law passed the Bundestag and Bundesrat and in addition the Government agreed the National Climate Protection Crash Programme 2022.
Germany has committed to being climate-change-neutral by 2045 with carbon emissions to be cut by 65% compared to their 1990 level by 2030.
This means decarbonisation of real estate stock and eco-friendly new construction will become more or less a must, as carbon emissions of buildings are not to exceed 67 million tonnes; compared to 210 million tonnes in 1990.
However, the law did not include measures to make photovoltaic roof arrays obligatory for new developments.
In addition, the extra carbon price paid for fossil fuel heating of dwellings remains 100% borne by the tenants, proposals to split the costs between landlord and tenant were rejected.
The elections for the German Bundestag will take place in three months, and in recent weeks the political parties have discussed and agreed their manifestos, almost all including carbon footprint reduction measures and measures to control residential rental growth rates.
Meanwhile, in Berlin a petition on holding a referendum on introducing compulsory acquisition of large residential property companies achieved the required number of signatures.
Over recent days, ever more COVID-19 driven restrictions on business and public life have been eased, as the nationwide 7-day incidence figure has fallen below 20 new infections per 100,000 people and almost half of the population have received at least one vaccination, partly as prioritisation was dropped and many firms established in-house vaccination centres.
Footfall in high streets is returning as shops, restaurants and hotels are permitted to welcome more customers and most cross-border travel no longer requires quarantine.
Delivery of food at ‘cyberspeed’ - within 10 to 15 minutes of ordering has become ever increasingly popular over the pandemic year and is forecast to grow further.
German food retailer Rewe therefore concluded a strategic partnership with speed delivery service Flink but will at the same time enlarge its own e-commerce channel and expand several of its own supermarkets into larger shops of at least 3,500 sq m of sales area.
Topics that had slipped from public consciousness for many months have returned - specifically sustainability and carbon reduction.
Driven by the EU and by national goals, demands to make real estate assets more sustainable are increasing.
Last week it was revealed that one of the discussion points for the national crash program for climate protection is to make photovoltaic roof arrays obligatory for new developments.
The 7-day incidence figures have fallen below the threshold of 50 new infections per 100,000 people in most cities and counties, allowing the return of more personal liberties and bringing business life closer to pre-pandemic normal. However, social distancing and the wearing of medical face masks remain obligatory, the numbers of people visiting shops, hospitality and leisure infrastructure facilities are restricted and office employees should still work from home wherever and whenever the business processes allow. The latter rule remains in force until the end of June.
Discussions continue regarding remote working in the future. The green party proposed giving employees the legal right to work remotely, the trade association regards this as a needless intervention into business processes. At the same time there is consensus that the traditional German culture of in-office working will move towards more location flexibility, including a change in the size of office spaces required by individual firms. For example, the German tourism company TUI Group announced that they plan to offer their 3,000 employees no more than 1,700 desks from 2022; a move supported by an employee attitude survey whose results clearly showed they wish to work from home more often.
25 MayIn many municipal areas, the 7-day incidence figures (the percentage of people testing positive for COVID-19) are now below the threshold of 100 new infections per 100,000 people, meaning that these cities and counties no longer fall under the rules of the national obligatory ‘emergency brake’ but those of the individual federal states, permitting specific easing regarding personal meetings and phased openings of retail, hospitality, personal services and sports facilities.
Every federal state has compiled transparent road maps for the easing of restrictions thus giving businesses more planning reliability than in previous months.
However, physical distancing and the wearing of medical face masks remain obligatory. In addition, employees should still work from home wherever and whenever the business processes allow this. If this is not appropriate the employer has to offer COVID-19 testing twice a week. Thus far, approximately 10% of the German population are fully vaccinated and in addition over 20% have received a first vaccination.
According to STR, the hotel room occupancy rate was 10.7% in the first quarter of 2021, a decline of almost 78% compared to the equivalent quarter in 2020. Footfall figures in the high streets are still at a very low level.
In Germany's commercial property market, the most immediately visible impact of the Government measures taken against the spread of COVID-19 can be seen in the retail sector.
Most non-food retail and all leisure retail is closed. Food & Beverage outlets are only open for take-away. Some retailers are trying to shift to alternatives like delivery services, especially restaurants, even though their turnover will not be as high as usual, it will at least help their chances of survival.
The longer the resulting loss in turnover continues, the more difficult it will be for retailers to pay rent. According to the German Retail Association (HDE), 3 months without turnover would result in many medium-sized retailers becoming insolvent. Besides the obvious problem on the supply side, the consumers’ willingness to buy is also low right now, because of the economic uncertainty - see GfK consumer index.
Restaurant chain Vapiano (230 restaurants in 33 countries; 55 in Germany) and steakhouse chain Maredo (37 restaurants in Germany and Austria) have already become insolvent, although Vapiano was known to be struggling long before this.
The German Government is now offering help to affected businesses in the form of:
- Tax deferrals; and
Only small businesses of up to 10 employees are eligible for benefits in the form of non-loan payments. The German Retail Association has criticised that medium-sized companies are not covered by this. Additionally, a new bill has passed - effective 1 April to 30 June disallowing landlords to terminate contracts where their tenants (commercial or private) can’t pay rent because of the effects of the COVID-19 pandemic.
Nevertheless, some companies with strong balance sheets, like Adidas, announced last week, they would cease rent payments, which has led to a public discussion about solidarity.
Other major retail tenants like Deichmann and H&M have done the same, others are talking to their landlords about possible solutions.