Germany's Grand Coalition told to get tough

German chancellor Angela Merkel's unwieldy coalition of Christian Democrats (CDU) and Social Democrats (SPD) has been urged to toughen up in order to prolong Germany's current property investment boom. Speaking at the start of the Expo Real trade fair in Munich on Monday, experts claimed the country's investment climate was better than it had been in 40 years, with higher returns and lower interest rates than many other countries in Europe.

'The whole world is going crazy about property, and it's going crazy about Germany in particular,' Dr. Klaus Trescher, managing director of property company TMW told a packed hall during a discussion on the German investment market one year after the election. 'But whereas 2006 has broken all records, we don't expect this to continue for long. It wouldn't be surprising if, next year, we saw transaction volumes fall.'

According to Arnold de Haan, ceo of Dutch developer Multi Development, fears for the property market stem from the German government's apparent inability to kickstart the economy. 'Despite much talk of reform, very little has actually been done over the last two years,' he said. 'Unless the Government manages to generate economic growth, the property market, offices in particular, will suffer.'

John van Oost, Managing Partner of IXIX Capital Partners in London, said doubts over the introduction of real estate investment trusts (REITs) and stockmarket reforms in Germany were unsettling investors. 'Angela Merkel needs to be a lot harder and a lot clearer about what she wants, in order to push key reforms through,' said David Pascall, managing director of private equity company Terra Firma. 'Its not easy with a coalition government, but she has a majority and she should make sure she uses it.'

Merkel, often likened to former British Conservative prime minister Margaret Thatcher, campaigned in the 2005 general election on a ticket of tough reforms to revitalise Germany's moribund economy. An indecisive election victory forced her to form a 'grand coalition' with the centre-left SPD. The CDU and SPD are the two main parties in Germany and are bitter rivals. The previous coalition government was headed by the SPD.

Many political commentators were very sceptical at the time that the combination of the two parties would work and the scepticism has grown in the last year as the leftwing of the SPD has sought to blunt some of the government’s more far-reaching reforms. SPD finance minister Peer Steinbrueck has insisted REITs are vital to ensure Germany remains attractive for property investors. However, the grassroots of his party is concerned REITs could buy residential properties and drive up rents, as well as cut tax revenues. The legislation for the trusts is to become law in the first quarter of next year.