GERMANY - Investors are increasingly reluctant to invest in German real estate as the Europe's largest economy is slipping into recession, independent European property consultants, King Sturge has warned.

The firm's latest monthly Real Estate Climate survey of the German market fell by 14.6% to 77.5 index points in August from 90.8 in July.

The survey, which King Sturge conducts each month among the 1,000 leading German property market players, coupled with macro-economic data, forms the basis of the firm's Real Estate Economy Index, which also fell in August from 169.2 to 158.9 points.

The most important indicator in the Climate survey is the willingness to invest but the mood in August was clearly more pessimistic than in July as this part of the index fell by over 10 points from 69.2 to 57.9.

The rental climate, the second most important indicator, fared worse, plummeting 13.5 points from 114.1 to 98.7.

King Sturge says this "massive decline" illustrated that portfolio holders no longer expect sales prices or rent rates to increase.

With its Real Estate Economy Index in decline, King Sturge said it was concerned about the pessimism among Germany's real estate investors.

"The mood in the real estate economy has cooled off further in August, and noticeably so," commented Sascha Hettrich, managing partner of King Sturge Deutschland.

The Index monitors and calculates the effects of key market indicators such as equity and other market movements, interest rates and inflation.

"Under the impression of the bleak economic parameters, the index is showing signs of major decline," warned Hettrich

"This comes as no surprise," he continued, adding the economy had yet to bottom out.

"There is the very real danger that Germany's economy, following a negative growth phase in the second quarter of 2008, may continue to shrink in the third. If so, you could say that Germany might slide into a recession."
However, Hettrich believes the German real estate market will remain resilient during a recession.

"Bad as it seems, there is no need to paint an unnecessarily bleak picture," he explained. "There are already a number of relieving factors suggesting that the German real estate market is facing nothing worse than a downturn."

Employment rates, a more stable inflationary outlook and optimism for a cut in interest rates are key among these factors.

"The number of jobs is increasing at a stable, though slower, rate and inflation has levelled out because oil and commodities prices are declining. This means there is reason to hope that the European Central Bank can reduce interest rates - which in turn would buoy the real estate economy," said Hettrich.