“2019: Value-Added Potential the Key Determinant”
Looking back, the 2018 year in real estate presents a challenging picture, but for us as an active asset and investment manager it has also been reassuring. While the year’s score card shows new records in transaction volumes, excess demand and supply shortage intensified as the year progressed. As in previous years, political and economic parameters fuelled the run on real estate investments. Although certain signs suggest that we are approaching a trend reversal of the long ongoing real estate cycle, there is no way to say for sure in what way and when the boom cycle will come to an end.
In the persistent low interest rate environment, “brick-and-mortar” remains one of the few asset classes in which institutional investors above all can invest from their well-filled coffers. And while the yield gap between long-term government bonds and core properties in Germany’s “Big Seven” cities has admittedly narrowed in the course of the year: Without a significant interest rate shift that would drive investors back to bonds, the investor preference is unlikely to change within the foreseeable future. As far as we can tell, the first modest rise in interest rates is not to be expected until the second half of 2019 at the earliest. A significant hike—barring external shocks—is not likely to happen before 2020/2021.
Add to this that long-term trends such as digitisation and urbanisation will continue to trigger significant growth impulses. Together with the robust economic trend, they keep boosting demand for residential and office real estate, particularly in the German metro regions, and driving up prices. At the same time, these trends are increasingly relevant for future property valuations. The capital value of a property is increasingly determined by its rental upside potential, which in turn is subject to factors such as its digital building infrastructure.
In the medium term, it is generally safe to expect a price rally and a further yield compression. Investors will need to clearly position themselves within the increasingly complex environment and factor in the rental upside potential of a given property. Value-added potential will thus become a key determining factor.
The trend is bolstered by a robust economy that has caused the demand for space to stabilise on a high level. Due to Germany’s polycentric economic structure, even smaller cities and medium-sized towns outside the metro areas that are home to high-net-worth medium-sized enterprises benefit from the situation. They counted among the key drivers of demand for space, and the high number of rent requests suggests that this is not about to change in the year to come.