Corona crisis with consequences for the German real estate market?
There have been two major crises, which have significantly affected the German property market, according to Savills Research. 2020, Colliers International surveyed 60 top decision-makers, 92 percent of investors want to continue to buy real estate .
July 29, 2020
There have been two major crises in the recent past, which have significantly affected the German property market, according to Savills Research. First, the double shock from the collapse of the new market (“Internet bubble”) and the terrorist attacks on September 11, 2001 (“9/11”), and then the global financial crisis in 2008. Following the burst “New Economy Bubble” in March 2000 and the terrorist attacks of September 11, 2001, the yields on office space in the top 7 locations only dropped by around 0.5 percentage points between 2000 and 2004, while prime rents declined 25 percent between 2001–2004, according to surveys by Savills Research. As a reaction of the financial crisis in 2008, Savills Research observed an increase in prime office yields in the top 7 between 2007 and 2009 of around 0.5 percentage points, while prime rents only decreased 7 percent between 2008 and 2010.
In April 2020, Colliers International again surveyed 60 top decision-makers in the real estate industry. 92 percent of real estate investors want to continue to buy real estate in Germany despite the Corona crisis. In the previous month the value was only 68 percent and has increased noticeably. “The transactions are currently limited, but the decision-making processes of the market participants are already re-starting. Investors should therefore use the current opportunity to secure attractive investment opportunities. Due to the low transaction volumes in the second quarter and the transaction goals that have remained the same for most investors, the first transactions will confirm the direction of the market development”, said Matthias Leube, CEO of Colliers International.
Both of the last two recessions have led to an increase in vacancy rates in the top 7 office markets. Savills Research emphasizes that the extent of the two crises was completely different. While the vacancy rate almost quadrupled from around 3 percent to just under 11 percent between 2000 and 2004, it rose from nearly 9 percent to just over 10 percent between 2008 and 2010. The reason for the last two recessions differed significantly from the current one. However, since practically the entire economy, including the service sector that is important for the office markets, is affected, the demand for office space is likely to decline again this time and the vacancy rate will increase accordingly.
Hagen Ernst, Deputy Head of Research & Portfolio Management at DJE Kapital AG, points out that properties that can be compartmentalised offer a higher flexibility in use. A dependency on individual large tenants result in a high risk in times of increasing bankruptcies. Furthermore, larger areas are more difficult to rent, especially in times of crisis.
The status quo of the retail market is difficult. Although over-the-counter retail has grown steadily despite the increase of online retail, less frequented locations have already been under pressure in the past. COVID-19 significantly increases the crisis of classic retail, says Hagen Ernst. The contrasting development of inner-city prime locations in the metropolises and weaker locations should therefore gather speed. The existing trend towards online shopping is likely to become even stronger due to the corona pandemic. The food retailers, on the other hand, were only slightly affected by the exit restrictions and forced closings and are now even considered systemically important. As a result, local suppliers continue to be seen as opportunities, as the survey by Colliers International shows: 85 percent of investors see stable or rising rents here, and the same is true of the purchase prices, 68 percent.
Savills Research reports a strong increase in demand in the logistics sector for the recent time, but expects a temporary decline in demand. The long-term effects allow various scenarios, even though a further increase of space requirement seems to be most likely. In the short term, however, rent deferrals and incentives gain importance and the question arises as to how the rents react. A decline in logistics rents cannot be ruled out given the depth of the recession, but it should at least be comparatively small, according to Savills Research. The Colliers International survey concludes that logistics remains an anchor in the crisis due to high demand. 84 percent of those surveyed anticipate rising or constant rents and purchase prices.
Of the property market, the hotel sector is most affected by the pandemic and its consequences. Occupancy rates have globally collapsed, sometimes by more than 90 percent, according to the findings of Savills Research. Despite the boom in the industry for many years, the cash buffers are usually very thin and not only have many hotels closed, but have already dismissed a large proportion of their staff or sent them on short-time work. The high occupancy rates from before the Corona crisis are not likely to be reached in the near future. In addition, the number of lucrative business customers will stay on a lower level, as they keep on using online tools to maintain their business relationships worldwide, explains Hagen Ernst.
The boom in flexible workspaces was always accompanied by the question of how resilient the business models will be in the next economic downturn. Savills Research believes that the COVID-19 pandemic will function as a major stress test. Not all providers will have a sufficient liquidity cushion to survive this period without state aid. Basically, the following applies: the fewer large users with long-term contracts contribute to sales, the more immediate the effect on the sales of the provider.
Residential real estate
Savills Research believes that the rental housing markets will very likely prove to be quite resilient in the COVID 19 pandemic. As a result of the pandemic experience and the lockdown, the importance of the real estate might even rise among the population in the future. Even if only a part of the employees work regularly in home office, this could lead to an increase in the demand for living space. In view of current measures such as short-time work benefits and a high level of social security, a majority of tenants in Germany in particular will be able to continue paying their rent, according to Hagen Ernst's forecast. The Colliers International survey also confirms that housing continues to be crisis-proof - 70 percent of those surveyed expect it to increase or remain the same.