German market not facing serious inflation threat - King Sturge

Property broker King Sturge says it sees no signs that the lively German real estate market is facing any serious threat of a rise in inflation, which is currently at about 1%. King Sturge expects inflation to increase slightly in the coming years, but is not aware of any signs suggesting a permanent or substantial transgression of the ECB’s stability target of 2%.

If inflation stays at around 2%, with interest rates at around the same level, the real estate economy will benefit from lower financing costs and a brisker debt clearance. ‘The attractiveness of real estate as an asset class vis-à-vis other types of investment will be enhanced by a relatively resilient income and additional appreciation, which is bound to stimulate the motivation to engage in real estate investments,’ said Sascha Hettrich, Managing Partner of King Sturge Deutschland.

'However, if inflation does rise to more than 3%, again with interest rates rising accordingly, this would drive up the costs of real estate finance and construction costs, and could possibly boost the value of existing buildings in the process,' Hettrich added. ‘Investors with high gearing ratios who exploit the currently low interest level for real estate commitments run the risk of having to refinance on far costlier terms. All types of investment stand to lose in value when exposed to such parameters. Yet real estate can at least to some extent compensate the losses through indexed leases,’ he said.