Current conditions on the German real estate market - No Bubble in the Broad German Real Estate Market

Questions & Answers

ZEW's International Finance and Financial Management department regularly investigates questions concerning international real estate markets. Past topics of investigation include the dynamic interactions between real estate and capital markets, as well as real estate investment trusts (REITs) as an independent investment class. An interview with Prof. Dr. Felix Schindler, who is an expert on such issues, provides us with a survey of current conditions in the German real estate market.

Prof. Dr. Felix Schindler received his doctorate degree in 2008 from the University of Freiburg with a dissertation on the subject of "Real estate markets: A global analysis of their capital market behaviour". Since 2009, he has been conducting research at the ZEW about diverse questions related to international real estate markets. His main research focus is on real estate investment and on real estate finance. In 2010, Schindler was additionally appointed Assistant Professor of Real Estate Finance and Economics at the Steinbeis University Berlin (SHB) in Berlin.

Why is German real estate in such favour among investors today?

We have recently seen a large demand for real estate investments, and especially for residential real estate, particularly among private investors and small investors in Germany. On the one hand, this strong demand may be ascribed to investors’ continuing low confidence in stock and bond markets as a result of the turbulent events of recent years. Furthermore, growing concerns about inflation, particularly on the part of private investors, have promoted a run on real estate assets, or “concrete gold” (Betongold), as one says in German. In addition, the volume of available investments is very high. On the other hand, interest rates are at historical lows. Consequently, households that could not afford real estate previously, when mortgage costs were higher, are now in a position to think about purchasing a home.

In view of rising demand, do you see any risk of a price bubble forming in the German residential real estate market?

Currently, there is no evidence of a price bubble at the national level. Overall, the German real estate market has experienced only moderate nominal price increases, if any, during the past 15 years, and in terms of real prices, we even witnessed price decreases. Over the long term, it is most important to take demographic changes into consideration, especially for residential real estate. Despite a shrinking population, the number of households in Germany has increased recently. However, we should expect a long-term reversal of this trend, which will in turn have an impact on the real estate market. Yet, we should not forget that the patterns of change are by no means universal throughout Germany. Rather, there are large regional differences. Southern German metropolitan areas and the greater Hamburg area are among the more expensive locations that have experienced some very steep price increases in recent years.

What is the outlook for the German office and commercial real estate market?

The steep fall in transaction volumes in the wake of the Lehman Brothers collapse in 2008 was followed by a rapid recovery, and international investors showed particular interest in finding attractive investment options in large German office centres. However, unlike before the financial markets crisis, we can see that investors are more risk-conscious, and demand is focused on premium properties in top locations. One reason for the high demand is the fact that the German real estate market experienced no major price increases and remained relatively stable even during the crisis, while prices increased considerably in many other countries,. However, it is important to point out that many investors have sufficient liquidity on hand, but have been holding back from larger commitments in stocks and bonds because of the uncertain situation in international capital markets. These investors continue to seek alternative investment opportunities.