Christoph Straube is CEO & member of the Management Board of W&L AG. The company is an innovative real estate project developer.
Even though the unprecedented real estate boom of the last decades in Germany appears to be cooling down, there is still a desire among many people to acquire and build residential property for personal and investment purposes. However, the current social, economic and geopolitical dynamics have led to many developers and investors becoming uncertain about building properties. But how justified are these concerns and what developments can be expected in the future?
A Tight Market Despite A Decrease In Demand
Currently, high inflation, the rise in construction and energy prices, and interest rate hikes are some of the main factors I see dampening demand. In this environment, we have seen slightly falling prices. In parallel, the supply of housing remains tight. This shortage means that prices are likely to rise again. Prospective buyers and investors are thus confronted with a contradictory situation and are rightly asking themselves how they should plan for the future.
The Development Of Property Prices Over The Last 10 Years
In recent years, property prices in Germany have continued to rise, and for a long time it was considered unthinkable that this would not continue for a long time. In addition, home ownership was nevertheless affordable for many people. This was mainly due to the fact that loan installments were often hardly higher than the usual monthly rent because of the low interest rates. This low interest level meant that property prices continued to rise even during much of the pandemic period. Apart from cheap financing, a shortage of building materials and the resulting increase in construction costs also contributed to this trend. At the beginning of last year, buyers had to pay an average of 12.5% more for a property than they did in 2021, existing properties included.
There were signs of a change in conditions in mid-2022, when the European Central Bank (ECB) raised interest rates. As a result, construction interest rates also rose from about 1% to 4% in a short period of time, and price increases have slowed. At the end of 2022, property prices even saw a slight decline between the third and fourth quarters of 1.4% for detached and semi-detached houses and 1.8% for condominiums.
In 2022 as a whole, prices for owner-occupied housing rose by a further 9%. In 2023, however, prices could now fall slightly for the first time, even on an annual basis.
What Developments Can We Expect In 2023?
Many industry experts are currently assuming that we will not see any major price corrections in the foreseeable future. There are several reasons for this.
On the one hand, there is an anticipated economic upswing, which could have a positive effect on collective bargaining and in turn will increase investments. Many analysts are also relaxed about the development of interest rates. Therefore, I wouldn’t expect major jumps in construction interest rates.
Furthermore, there were no notable price drops. Although purchase prices for residential property declined somewhat at the end of 2022, this development does not extend to all areas. For example, newly built apartments in several cities are still expensive. Prices for highly energy-efficient residential buildings might even rise further in sought-after locations.
Another development is the current reluctance to buy, I’ve observed, from both homebuyers and investors, which could be due to current financing conditions. Even if interest rates settle at a relatively low level in the medium to long term, they are currently unattractive, which could deter many prospective buyers. It will likely take some time for investors and developers to see the new residential construction and purchase property market to stabilize again.
Buying Vs. Waiting: The Outlook For Investors And Developers
For investors and project developers, the current situation raises the question of whether it is worth buying or building now or whether they should wait and see. As the current market radar from BF.Direkt shows, it is worth taking a differentiated view of the situation.
For the time being, I have seen no positive outlook for interest rates for project developers and property owners. The European Central Bank (ECB) announced that they will continue to rise slightly until the summer. There is talk of an increase to 4%.
As the report shows, construction interest rates were between 3.5% and 4.5% at the end of March 2023. Also, according to a recent survey by the Ifo Institute, 16% of construction companies complain about order cancellations. The reports mention that these figures are likely due, among other things, to high construction costs and difficulties with financing. As a result, many developers are trying to delay project start dates.
There was a slight decline in long-term interest rates in March 2023. According to BF.Direkt, the 10-year interest rate swap fell from 3.27% to 3.06% during the month. Short-term interest rates saw a slight increase. At the beginning of March, the three-month Euribor was still at 2.78%. By the end of the month, it had risen to 3.04%. The six-month Euribor rose from 3.31% to 3.34%.
Investors can ask themselves several questions to guide their decision-making in this environment:
• Is the project developer I am investing with experienced enough to deal with possible further interest rate increases?
• Is the project margin large enough to withstand further increases and ensure the project does not run into the negative?
• What is the worst-case scenario if I make this investment?
Depending on the project or investment, there are different approaches to counteract the slight crisis. The standard factors of recent years may no longer be applicable. The art lies in creating factors or added values in a project that offer the customer real essential added value. Project developers can also find new ways to create more favorable ancillary costs so that the monthly burden can be reduced or a part of the interest rate increase can be negated.
According to BF.Direkt, a long-term price correction in the housing sector is still not expected. At my company, we’ve chosen to keep an eye on the market and only reenter with new projects when we have the feeling that the market has stabilized and the first shock has been absorbed.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
Read the full article here