Cancellations of new construction projects, a recession and expensive financing all mean that the German real estate sector is looking to the future with concern. Most of the bad news is coming from the construction industry but the hotel sector is also a concern.
The many open construction sites across the country, not only affect the residential sector with its 700,000 missing apartments, but also the office market, the hotel sector and logistics.
According to the Munich-based Ifo Institute, there is currently a growing wave of cancellations for new builds. This is also confirmed by a survey conducted by bulwiengesa in cooperation with BF.direkt AG, which is specialized in financing residential and commercial real estate projects.
The crisis is now clearly visible among project developers, says Felix Embacher, head of research and data Science at bulwiengesa. The total project development volume of the seven German A-cities Berlin, Frankfurt, Hamburg, Munich, Düsseldorf, Cologne and Stuttgart has shrunk by 5.7 per cent compared to 2022. Residential project developments were significantly affected by the decline, with -7.4 per cent or 1.6 million square meters. The office segment, on the other hand, is "only" shrinking by 5.3 per cent compared with the previous year's analysis.
Every fourth new hotel construction in delayed
Worries are also growing in the hotel sector. Despite a recovery in the number of overnight stays in the cities, the industry has not yet completely emerged from the crisis triggered by the Covid-19-related lockdowns
“Significantly declining planning volumes dominate the development in the hotel segment”, says Embacher.
Since 2020, the curve for completions, planning and projects under construction has been continuously declining. The hotel segment has naturally been affected by these delays. Almost every fourth hotel project will be completed later than planned at the end of 2022. Taking a look at the overall market, there are currently 304 hotel projects with 2,277,000 square meters under development by 239 developers. The market is very fragmented. The biggest players are GBI, Bayerische Hausbau, Groß & Partner, B&L Group, Estrel Hotels, Zech Group, Motel One, Strabag, Immobilien-Experten-AG and Commerz Real. They account for just under 23 per cent of the market volume.
Financing: No all-clear yet for project developers
"Many project developers are currently in need of fresh equity capital, as they are no longer able to obtain additional debt capital from banks in the current situation," says Francesco Fedele, CEO of BF.direkt AG.
At the moment the potential routes to raising capital are the acquisition of so-called preferred equity or a joint venture partner. However, the prerequisite is always that the property has a chance of generating profits in the current market situation.
Fpr example, Maria Teresa Dreo-Tempsch, member of the Board of Management of Berlin Hyp AG, cannot yet give the all-clear for project developers, however, she says that they are trying to find viable solutions with their customers.
Less bureaucracy and costs by the government
Reconciling the complexity of the economy and the dynamics of the markets has never been an easy task. In the meantime, however, the problems facing project developers in particular can only be characterized by one word: catastrophic - across all asset classes.
This puts not only the industry but the whole of Germany to the test. The tenor of the 2,500 CEOs/executives at the Real Estate Day of the Zentraler Immobilien Ausschuss (ZIA)held in May was unusually critical.
The political prominence factor was high, with several ministers and state secretaries present. Kurt Zech, CEO of the Zech Group, who is also very active in the hotel sector, complained that there is too much talk in politics. “Now it is finally time to act and name concrete dates”, he said. What is needed for this? Simpler framework conditions and lower costs on the part of the state for construction.
ZIA President Andreas Mattner illustrated the actual extent of the problem with a simple figure: 37 per cent of construction costs in the residential sector come from governmental fees, taxes and costs. Commercial real estate also suffers from a high governmental cost policy. Federal Minister of Justice Marco Buschmann (FDP) promised the removal of red tape. “I’m always sceptical on small-part regulations”, he said. Regarding the currently most controversial government project, the Building Energy Act (GEG), which stipulates which energy requirements heated and air-conditioned buildings must meet, he said clearly: "The Building Energy Act, as it is now, will not come in this form.”
Time for 'business as usual' is over
For investors, the political behaviour in Germany starts to become a problem. Christian Ulbrich, Global CEO and President of JLL, therefore warned in his keynote that Germany could increasingly become a major construction site with its reforms.
“In many respects, the US real estate market is now more attractive than the German market”, he said. What matters now is the will to make Germany competitive, he appealed to politicians. The reason is simple: investors always look at a country's market liquidity, transparency, currency, legal certainty and political country risk in addition to its initial yield, rental growth potential and refinancing options.
One big problem in Germany is the inertia of real estate values - partly for regulatory reasons and partly for cultural reasons. People find it difficult to accept new prices and want to hold on to the old ones, even if rational thought makes it clear that prices will fall even further. Ulbrich was also critical of the potential for rent increases in Germany. This is not unfounded: Germany's economic development is not looking good at the moment. After slipping into recession in the first quarter, many economic researchers also expect the German economy to shrink overall in 2023. The economists at Deutsche Bank expect gross domestic product to fall by 0.3 per cent, having previously assumed stagnation.
On the point of legal certainty, Ulbrich notes that although investors still rate it highly, the discussions about the GEG and the trend to push back individual traffic in various places are going to worry investors a bit. The tendency of German politics to erratic regulations and irrational municipal decisions, which could lead to massive changes in the value of affected properties, also brings a political risk for Germany as a location, he said. "In return, investors want to see a higher return," Ulbrich concludes. This explicitly applies not only to the residential sector, but also to commercial real estate, he added.
As a solution, politicians are currently focusing strongly on construction over all asset classes. While this topic is already gaining a foothold in residential construction, it is not yet so common in the hotel sector. But it is certainly possible, as long as it meets the hotel's standard requirements, says Dreo-Tempsch.