Germany has long reaped the dividends of its status as a safe haven for real estate investors but is now struggling to maintain that momentum as it strains beneath the intense demand for prime product. Brexit, development and new technologies offer ways to drive growth and find a new dynamic.
Can anything dent Germany's rock-solid reputation? The labels pinned on Europe's largest economy – safe haven, bastion of stability, boring but stable – are just as valid now as they were six years ago when property investors started concentrating on the country in earnest following the financial crisis. In fact, on the eve of the 20th edition of Expo Real, it seems Germany's appeal has only grown further as uncertainty over Brexit and other geopolitical issues has deepened.
The already potent mix of factors – strong economy, political stability, market liquidity – in its favour has recently been enriched with a new ingredient: rental growth. As Marcus Lemli of Savills put it at our recent investment briefing on Germany: 'The strong economy and safe haven aspect are appreciated by investors, but also the liquidity of the market. Now rental growth has been added to an already positive picture.'
Prospects could not be better, one would think. And the outcome of the recent elections, it seems, will do little to affect that narrative. But the intense – local and international – demand also has a downside. Prices have reached record levels and there is simply not enough product to go round. Investors are already looking beyond the Top 7 cities at non-prime assets in secondary locations. At this stage of the cycle, investors are balancing the risk of missing out and not buying with the risk that prices may turn, says Lemli.
How can investors stay in the market and still benefit from the strong fundamentals? Invest in office developments, say the experts. Brexit is spawning a need for office space in Frankfurt and Berlin in particular and other German cities are also expanding. Frankfurt is set to add 220,000 m2 to its office stock, while Berlin plans to add 400,000 m2 and Cologne an impressive 515,000 m2.
Some investors have already wised up to this opportunity and are buying office and mixed-use developments across German cities. Needless to say, all these new buildings will be green and smart, fitted from floor to ceiling with new technology to serve not only landlords’ reporting requirements and image but also the wellbeing of their tenants, or ‘guests’ as they are now called.
Proptech powers change
Proptech is revolutionising the real estate industry – both buildings and business models – and we had better get used to it. As Dutch tech expert Menno Lammers told our proptech briefing in Luxembourg: ‘Technological change is happening now, it is picking up speed and it will change our world. Believe me, it is not a hype.’
Technology which is really picking up speed and which - ultimately - may have a knock-on effect on real estate in Germany is the switch to electric cars, or battery-powered electric vehicles (BEVs) in the jargon. Experts predict the switch to electric vehicles will happen faster than many people expect. According to PwC Autofacts, by 2030 one in three cars will be electric, while a recent ING report predicts that by 2035 battery-powered electric vehicles (BEVs) will represent 100% of new passenger car sales in Europe.
And here comes the link to real estate: an electric engine has only 20 components, while an eight-cylinder combustion engine has 1,200 parts. The shift to simpler engines as electromobility increases means many suppliers of parts will also become obsolete.
Smart re-use
What will that mean for all those service stations, garages and manufacturing plants for car parts that are no longer needed? Smart re-use is the way forward, and could solve at least some of the problems linked to lack of supply in the market, says Peter Kunz, head of industrial & logistics at Colliers International in Germany. He sees a role for warehouses outside cities and last-mile fulfilment centres within them.
But things are not that simple. The transition to electric vehicles has sparked much debate in Germany as its automotive industry – which owes its success to combustion engine cars – is the country’s most important industrial sector. Following the emissions scandal at Volkswagen in 2015, the entire car industry, employing more than 800,000 people, has come under pressure to cut pollution levels.
At the same time, Germany's biggest union and its car industry association, fearing job losses, have urged politicians to help with the shift to electric vehicles and not force a phasing out of the combustion engine.
But with Opel and Tesla already showcasing their electric models in German shopping centres, it seems change is unstoppable. If Germany embraces innovation, both in its automotive and property industries, its real estate industry will just keep motoring on...
PHOTO: Smart electric cars (Daimler AG)
