German property market: more resilient than others

logo-ipdIs it the Rhineland model that is performing better than the Anglo Saxon one? Is it German thoroughness? Is it the German keen eye for quality? Or is it the difference in rental systems? It could be the difference in mentality or culture? Why is the German property market more resilient than others?

It may be all of the above. The IPD Germany Annual Property Index showed Germany’s property returns to be more resilient during the downturn than most European real estate markets. Last year, the German property market performed 3.5% overall, down only 1% from 2007 thanks to significantly lower rises in capital values during the years leading up to the economic downturn.

The difference in total performance between Germany and the Anglo Saxon markets like the UK and Ireland (-22.1% and -34.5%, respectively) is stunning.

Dr. Daniel Piazolo, managing director of IPD Germany, said:

Indeed, the total return achieved over a turbulent 2008 demonstrated the stability of the German property market’s rental income: the basis for a solid income return.

Total return of 3.5% consisted of 5.0% income return and -1.5% capital return.

As I see it, there are mainly two reasons for Germany’s property market being hardly affected by the crisis:

1. The rental values evolve more gradually (partly due to rent systems, partly mentality I presume);

2. Among investors, there has (always?) been more focus on rental income than on capital growth.

In other words: the higher the tower, the harder it collapses; the bigger the balloon, the noisier it bursts (you may create your own metaphor). The German property market has been less overheated in the first place, both in terms of rental values and in terms of yield shift.

Retail was the top-performing sector, returning 4.5%, followed by the residential sector and office sector, which returned 4.4% and 2.8% respectively. The industrial sector suffered the steepest decline in capital values and generated the weakest returns, at 1%.

According to Piazolo, Germany’s property market is likely to attract more attention from pension funds looking for stability and mid- to long-term returns:

Even with the financial crisis, the argument for international diversification will continue and, in that respect, I do believe that Germany will be in the eye of more and more international institutional investors. Pension funds from all over the world will be looking to see if now is a good time to enter the German market.

 I agree, as pension funds will be looking for stable returns in the middle and long term. However, time is of the essence and you will have to take a clear view on the German recession, which is still to bottom out, according to German Economy Minister zu Guttenberg today. Germany is this year facing its deepest economic contraction since World War Two. Zu Guttenberg:

The low point has by no means been reached this year.

So, there’s still time to fill your cart with stable German opportunities.

However, bear in mind that, according to a survey conducted by the organiser of Expo Real…

[] experts believe that the European countries, in particular Germany, will recover fastest from the crisis. In their view, office property and retail space will benefit soonest from a renewed upswing. They also forecast good development prospects for logistics and residential property.