The German real estate market will not recover until 2025 as banks have been lenient with their clients coming off ultra-low interest rates, according to investors and advisers at the Expo Real trade fair in Munich this week.
“It’s a question of refinancing,” said Marcus Lemli, chief executive of property consultant Savills Germany and head of investments for Europe. “It is building up.”
Lemli was speaking at the three-day global real estate conference Expo Real, which is held annually in October in Munich.
Peter Axmann, head of real estate finance at Hamburg Commercial Bank, agrees: “I think banks will get it slowly next year. For many banks, it’s not transparent what has been lying on the shelves from five years ago [when the loans were made]. Every second refinancing is a challenge. There will be more problems than people think.”
The mood was neatly summed up in a slogan that was doing the round at Expo: survive to ’25.
Until the banks start to act, transaction volumes will remain low. During the first three quarters of this year, only €16 billion to €17 billion of property changed hands, according to the major brokerage firms. That is two-thirds lower than during the same period last year and 55% below the 10-year average. Yields continue to move out, but they have not yet reached levels where they become attractive to buyers. Would-be buyers are also waiting to see if the European Central Bank is now done with hiking interest rates. The ECB hinted at a pause when it raised interest rates by 25 basis points to 4% at its meeting last month.
Of all the sectors, offices face the biggest repricing. The sector has fallen out of favour due to uncertainty about how much space will be needed when partly working from home becomes established. Much of the negative sentiment around offices comes from the US, where the sector has been hit harder by remote working than in Europe.
Jörn Stobbe, chief executive of Hamburg-based property developer and investor Becken, calls it the “the biggest buyers’ strike I have ever seen”.
Property professionals are eagerly following the sale of the Trianon office tower in Frankfurt. It was bought by two Korean investors, IGIS Asset Management and Hana Financial Investment, for €670 million in 2018. The price reflected a net initial yield of 4%, according to person familiar with the deal at the time.
It was financed by Dutch bank ING, which syndicated most of the €375 million debt to other banks. The loan was priced at 0.9% all-in, the person said. Today, the debt would price at 5.5%, the person said. After refinancing talks failed earlier this year, the 45-storey tower was put up for sale with a circa €300 million price tag. However, one person familiar with the building estimates it is worth about half of that.
The main tenant, German bank Deka, is leaving and it would cost a lot to upgrade the building to meet modern standards. Many are wondering whether a sale, if it goes ahead, should be seen as a new benchmark. But who would want to invest hundreds of millions in an office building in a city where the vacancy is rising?
The second flashpoint in the German market is project development. An increasing number of developers, including big names such as Gerch and Development Partners, have filed for insolvency as they have been hit by rising interest rates and construction costs. More projects are expected to get into trouble as lenders want to get out.
The Upside Berlin project, which comprises two residential towers, illustrates a wider problem. When Turkish developer Mikare started the project in 2017 it expected the circa €300-million project would take three years. The project was delayed several times.
In August, debt fund manager Barings filed for insolvency of the Upside Berlin project, which comprises two residential towers, after calling in the €240.3 million senior loan. Behind the senior loan ranks €35 million of junior debt from Tyrus Capital. Work on the project, which is 85% finished, has been halted, as Barings, Mikare and Tyrus cannot agree who should be paying the €35 million to €40 million needed to complete the project. They see more downside risk than upside potential.
Sectors that will fare better are logistics and operational real estate, such as care homes and data centres. Logistics properties have repriced already, and the sector continues to benefit from strong rental growth. Yields for operational real estate have never compressed as much as those for prime offices. Hence, prices have less far to fall.
As interest rates are stabilising, fresh uncertainty emerges about the health of the German economy. Last month, the Organisation for Economic Co-operation and Development predicted that the country would experience the worst economic slowdown as it trades a lot with China. Consumers and companies may tighten their belt, which, in turn, will have a negative impact on the real estate market.