The German economy and the German real estate market

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1 The German economy and the German real estate market Jochen Möbert, Macroeconomist and Real Estate Analyst February 2014

2 Agenda Macro Residential Commercial 1

3 Purchasing managers indices are above medians in line with many PMI Manufacturing Index PMI Services Index Headline Backlog Export orders New orders Employment Headline Expectations Employment New Business Backlogs Median Max Min LATEST Sources: Markit, Median Max Min LATEST Sources: Markit, 2

4 other indicators which led us forecast a GDP growth of 1.5% in 2014,... ifo Indicators Industry Consumption Financial markets Index Index Index ZEW-Index Total Situation Expectation Median Max Min LATEST Sources: ifo, 7 6 ECFIN Composite ECFIN Industrial Median Max Min LATEST Sources: ECFIN, -3-4 ifo consumer confidence Gfk Median Max Min LATEST Sources: ifo, GfK, DB Situation Expectation Median Max Min LATEST Sources: ZEW, 3

5 strongly driven by domestic demand whereas net exports is forecast to grow only slightly Germany: Economic forecast % yoy Real GDP Private consumption Gov't expenditure Fixed investment Investment in M&E Construction Inventories, pp -0.5 Exports Imports Net exports, pp Consumer prices Budget balance, % GDP Unemployment rate, % Balance on current account % GDP DB forecast vs. previous years GDP Private consumption Investments M & E Residential Commercial Unemployment rate Inflation Sources: Federal Statistical Office, DB 4

6 Real GDP Consumer Prices* Current Account Fiscal Balance (% growth) (% growth) (% of GDP) (% of GDP) 2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015F Euroland Germany France Italy Spain Netherlands Belgium Austria Finland Greece Portugal Ireland UK Sweden Denmark Norway Switzerland Poland Hungary Czech Republic United States Japan World * Consumer price data for European countries based on harmonized price indices except for Germany. This can lead to discrepancies compared to other DB publications. Sources: National Authorities, 5

7 Agenda Macro Residential Commercial 6

8 In cycle permits strongly improved but history shows that real permits per capita are still low Monthly permits (estimated costs): Nominal and real per capita EUR bn (left), EUR per capita (right) Nominal Real - Actual EUR 10.9 per capita - Median ( ) EUR 15.9 per capita Sources: Bundesbank, 7

9 Can you spot the German residential property bubble? Nominal house prices 1990= US JP DE FR IT UK CA AU BE DK FI IE KO NL NO NZ PT ES SW CH EA Sources: OECD, DB 8

10 German house prices have increased less than disposable income until recently Affordability Ratio of house prices to income Long-run average= IT ES GR NL IE FR DE Fair value Source: OECD 9

11 Declining interest rates have increased affordability of mortgages Interest rates and interest charges % Mortgage rate Share of repayment and interest rates to disposable income Sources: Bundesbank, DB 10

12 and real credit growth has even been negative in recent years Germany: Credit growth % yoy Mortgage Total Inflation Sources: Bundesbank, DB 11

13 Large differences in affordability across regions Affordability of apartments (100 sqm) of 125 cities/towns Large range of affordability Green structurally rather weak areas Blue cities with global champions and broad diversified company profile 12

14 Residential yields started to decline, in particular for multi-family houses (Initial) yields of different asset classes % Apartment new Apartment existing Multi-family houses Bund yields DAX Dividend yields Sources: BulwienGesa, 13

15 Agenda Marco Residential Commercial 14

16 Nonresidential market less vibrant than residential market Monthly permits (estimated costs) EUR bn Nonresidential Residential Sources: Bundesbank, 15

17 but due to cointegration we forecast a more balanced development of both sectors Monthly permits (estimated costs) without dimension Long-term average of ratio Ratio ( Residential to Nonresidential) Sources: Bundesbank, 16

18 Cointegration of both sectors also show up in transaction volume, in particular in the cycle Transaction volume: Residential vs. Commercial EUR bn Residential (only portfolios) Commercial Sources: EY, 17

19 Retail and office are major German commercial markets 2013 share of asset classes % Office Retail Logistic Hotel Other Sources: CBRE,

20 Retail sector in A-cities benefits strongly from improvement of domestic economy in terms of top rents Retail: Top rents in top location EUR/sqm 30 Retail: Top rents in districts EUR/sqm A B C D Sources: BulwienGesa, A B C D Sources: BulwienGesa, 19

21 and in terms of average rents in top locations Retail: Average rents in top location EUR/sqm Retail: Average rents in districts EUR/sqm A B C D Sources: BulwienGesa, A B C D Sources: BulwienGesa, 20

22 The office market is less dynamic as relative high vacancy rates weigh on rents Office: Top rents top location EUR/sqm 35.0 Office: Average rents top location EUR/sqm A B C D Sources: BulwienGesa, DB A B C D Sources: BulwienGesa, DB 21

23 but they started to decline and declining vacancy ratios in the housing market may signal more price pressure for the office market in the years ahead Office: Vacancy ratio % 12.0 Residential vacancy ratios by region % A B C D Sources: BulwienGesa, DE HH NW BW BY BE Sources: CBRE, Empirica, 22

24 Until 2013 commercial yields moved sideways (Initial) yields of different asset classes % Retail (core) Retail (noncore) Office (core) Office (non-core) Bund yields DAX Dividend yields Sources: BulwienGesa, 23

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