The Pioneer Briefing by Gabor Steiningart – controversial, critical and entertaining. Know what is being discussed politically. Today with ten uncomfortable facts about the real estate market.
Hello dear readers,
If the stock market, with its endless cycle of booms and crashes, is reminiscent of the casino roulette table, then the real estate market is like a game of poker.
Bet without knowing what your opponent’s hand is. He is bluffing in hell or high water. The most important prerequisites for subsequent profits are a willingness to take risks and a strong nerve.
The real estate market in times of explosion in energy prices and rising interest rates shows itself to be opaque on this side. Potential buyers are hiding for opportunities with a poker face. They expect a minimum discount of ten to fifteen percent from the pre-war level.
“Nobody wants to be the one who starts buying in a declining market,” says Jacopo Mingazzini, CEO of project developer The Grounds Real Estate Development.
Available sellers, on the other hand, sit on their finished or semi-finished real estate projects and try to turn market watchers into market participants. The German tightening in the waiting position should be resolved by referring to foreign investors.
Due to the fall of the euro, the Federal Republic presents itself as a great buying opportunity from the perspective of US investors (and their Canadian and Australian colleagues).
Ten factors characterize the current situation. No seller or potential buyer should ignore them:
1. After ten good years of boom, prices are still high. According to Europace, which claims to be Germany’s largest real estate financing transaction platform, condo prices fell -0.86% to 228.65 index points in July. Over the past twelve months, however, prices have increased by 7.93%.
The prices of new single and semi-detached houses also fell slightly for the first time, with a drop of 0.26 percent. The index thus falls to 226.28 points. Compared to the previous year, the growth of 11.65 percent was still well above ten percent.
This means that owners and developers of residential real estate are not yet willing to make losses, as long as the banks do not force them to act. The market is crumbling but it is not slipping yet.
2. At the same time, there is a noticeable slowdown in market activity, a harbinger of a decline in prices. At the Expo Real estate fair in Munich, Peter Axmann, who manages business with real estate clients at the Hamburger Commercial Bank, talked about the halving of transactions over the past six months:
3. In many real estate sub-markets, a stalemate has occurred as expected returns and willingness to pay no longer match. Jörn Stobbe, managing director of Hamburg-based real estate and investment firm Becken, believes that a yield increase of at least one percentage point in the residential property portfolio is needed for investors to do what their name promises again: invest. But for this to happen, purchase prices would have to drop significantly or rents would have to rise significantly.
Neither is currently the case. The sellers don’t want it and the tenants don’t. You could also put it this way: Energy suppliers steal real estate earnings.
4. Many potential buyers have put their dreams of owning a house or apartment in the city on hold for now. According to property portal Immowelt, requests for real estate to buy across Germany fell by 17% in one year. At the same time, the number of inquiries about rental properties increased by 34%.
5. The economic crisis has left its most visible signs in the new construction sector. A third of the construction sites have been closed, says Arnaud Ahlborn, managing director of residential real estate investment specialist Industria:
“Since April we have seen a staggering number of projects being canceled,” agrees Ifo researcher Felix Leiss. The framework conditions for housing construction have deteriorated significantly in recent months. “Explosive construction costs, rising interest rates on financing and limited financing opportunities weigh heavily on potential builders’ calculations,” he says.
They are currently fourteen percent, but there will be cancellation rates of 20 to 25 percent.
Today’s cancellation rates are tomorrow’s pricing slides.
6. The reluctance of buyers can also be explained by the changed financing conditions. Mortgage interest rates for fixed-rate loans more than doubled from 1.4 to 3.87 percent in eight months. This means that real estate financing is again as expensive as it was about ten years ago.
The Check24 comparison portal calculates: With a construction loan of over 400,000 euros at an effective interest rate of around three percent, this means higher costs of 78,831 euros until the ten-year term expires.
7. At the same time, construction costs will increase on average by 17.6% in the second quarter of 2022 compared to the previous year for residential buildings and by 19% for office buildings. Stubbornly entrenched inflation is likely to lead to further increases in interest rates and construction costs. The construction sector already records a ten percent increase in total costs over the previous year.
8th. The policy is currently not a real help for the real estate market. It fails to simplify the approval process and thus significantly shorten construction time. The immediate freeze on KfW loans for low-energy construction and renovations, which Robert Habeck issued less than eight weeks after taking office in late January, irritated the markets and did not stimulate them.
So no wonder: 9.7 percent fewer construction projects were approved in July than in the previous year, and in June the number was as high as 14.9 percent. Many of the Greens – key word for sealing the landscape – were happy with these numbers, not bothered.
9. The SPD’s propagated goal of building 400,000 new homes a year is unrealistic given the figures so far. SPD construction minister Klara Geywitz, a political scientist from Potsdam, reiterated her goal at the Munich real estate fair and throws sand in the eyes of industry and herself. Even if the federal government creates half, or 200,000 new apartments, by the end of the year, the state can count itself lucky.
10 The roulette table and the poker room meet occasionally, in the form of listed real estate companies. Here you can read very precisely the state of mind of investors and their expectations for the future. The stock market has no poker face, it lives for the moment. Lo and behold: Vonovia shares, Germany’s largest real estate group, have lost nearly 50 percent of their value since the beginning of the year. This is the petrel that warns of the coming storm.
Conclusion: There are good reasons to suspect the optimism of the government and parts of the real estate sector. Homeowners looking to sell and renters looking to become buyers need a common virtue in this situation: strategic patience. It’s like at the poker table: whoever contracts now has lost.
I wish you a lively start to the new autumn day.
I greet you warmly,
Yours, Gabor Steinart
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