Property values in some cities in Germany are stagnating as the devaluation of the euro against the US dollar dampens the interest of some international property investors, market watchers say.
Property values in some cities in Germany are stagnating as the devaluation of the euro against the US dollar dampens the interest of some international property investors, market watchers say.
Günter Vornholz, professor of real estate economics at the EBZ Business School in Bochum, has spent several days crunching data on German office markets. The result is not so pretty for investors who acquired buildings in the top five cities in Europe's largest economy in the last 12 months and who had hoped that the price rally that started in 2010 would continue.
'The markets are near their peak in the current cycle,' Vornholz told PropertyEU. 'Since January, market values in Berlin, Frankfurt and Munich are stagnating.' The only exception is Hamburg where prices increased by another 5% in the last 10 months. However, at the same time market values in Düsseldorf dropped by 5.7%. 'The market is at a turning point,' Vornholz said. 'At this point, it seems more likely that prices will stagnate next year or come down rather than go up.'
Vornholz sees the recent yield compression as a catalyst for change in the market. Prime yields for core office buildings in Germany are already down to 4.5%. 'If you subtract acquisition costs and reserves for routine maintenance, net initial yields are below the 4% mark,' said Andreas Schulten, CEO of market research firm BulwienGesa AG in Berlin. That is less than insurance companies and pension funds need to fulfil their requirements to clients.
EURO DEVALUATION
There is another cloud hanging over the market, not only in Germany but across all countries in the eurozone. The ongoing devaluation of the euro against the US dollar is dampening the enthusiasm of international investors for real estate in the eurozone, steering them to North American markets instead.
According to data compiled by JLL, capital inflows into European markets shrank to €44.9 bn in the third quarter of this year, marking a 5% decline compared to the second quarter. At the same time, investment volume on the other side of the Atlantic rose by 16% to €62.5 bn. 'The American markets are growing strongly,' said Arthur de Haast, lead director of the international capital group at JLL.
There is good reason for international investors to place their money on the other side of the big pond at this point in time. The US economy is so well on its way to recovery that the Fed has not only ended its quantitative easing programme, but is also contemplating an increase in prime interest rates next year.
Meanwhile, the economy of the eurozone remains so weak that the ECB cut its key interest rate this autumn to a record low of 0.05% and is now stepping up its own quantitative easing. As a result, the euro has lost almost 9% against the greenback since July.
POSSIBLE PARITY
Currency experts at Deutsche Bank and Goldman Sachs predict this trend will continue until the euro-dollar exchange rate reaches parity, possibly in 2017. For US investors acquiring property in the eurozone today this would translate into a currency loss of 20%. Hardly surprising, then, that US funds have drastically cut their acquisitions in Germany. 'From the first quarter to the third quarter of this year inflows from US investors into the German market contracted from € 2.1 bn to €600 mln,' said Andreas Trumpp, head of research at Colliers International in Munich.
The brighter economic outlook for the US is not only drawing American investors back to their home markets. It is also luring German Investors. One example is Union Investment Real Estate. The property fund arm of Germany's Volksbanken with €24.9 bn assets under management plans 'to invest up to €1.6 bn in US real estate in the medium term,' Fabian Hellbusch, head of real estate marketing, told PropertyEU. The Hamburg-based investment company has hired Thomas Gniesser, a former transactions specialist at CBRE, for the newly created post of head of the Americas.
Meanwhile closed-ended fund providers Jamestown of Cologne and US Treuhand of Bad Homburg have just set up new funds with a combined volume of up to €800 mln to target US property.
However, not all market watchers believe that investment volume in Germany will drop significantly. 'For conservative investors from Europe and Asia, Germany with its stable economy will remain a key market in the years to come,' said Trumpp.
Thomas Beyerle, head of research at Catella Property, expects Asian funds to fill the gap created by the withdrawal of their American counterparts. 'Long-term investors from China, Singapore and South Korea see the devaluation of the euro as temporary and view the current situation as a chance to get their hands on prime German properties at bargain prices,' he said.
Richard Haimann
German correspondent