Our initial impressions are that the 2015 German real estate market will be very similar to the 2014 market. There has been little change in the overall economic situation, it seems unlikely that the ECB will raise interest rates any time soon, and there continues to be a distinct lack of economic dynamism in the eurozone.
The main reason why there has been such strong investment in the German real estate market is the fact that interest rates have stayed extremely low. Investors have found it difficult to achieve satisfactory positive yields on the money and bond markets, so we expect to see capital continuing to switch into property investment in 2015. Given its economic stability, Germany remains an attractive location for real estate investment and will continue, therefore, to attract foreign investors. The numbers for the German economy look very good, especially when compared to economic data from other European countries. Bank stress tests did not result in any reduction in funding activities. There continues to be a great deal of interest in residential real estate - especially in the city of Berlin.
In contrast to 2014, we expect to see a lot more foreign investors in 2015 - not least Asian investors who can be expected to increase the number of foreign transactions taking place in the German real estate market. By the same token, there is evidence to suggest a trend toward riskier investments.
Interest in residential real estate is not restricted to premium locations - there is an increasing tendency, in fact, for it to extend to more peripheral locations. More and more, investors are taking the view that prices in top locations are too high, and so they are turning their attention to secondary locations. We expect to see something similar in the office real estate market in 2015. Increasingly, start-up enterprises are looking to base themselves in secondary locations. Experts estimate that rent from office premises in premium locations will flatten out as a result of pressure from tenants, whilst office rents in secondary locations will trend upwards. That said, it is important to be aware of regional differences. Cities with high vacancy rates - Düsseldorf and Frankfurt, for instance - are less likely to be affected by this trend than cities such as Berlin which have experienced a reduction in the number of vacant office buildings. It should be noted that the trend toward secondary locations does not apply to buildings intended for the retail sector. Online competitors will continue to put pressure on the retail sector and this will lead to a concentration on premium locations. This means that some caution is also required when it comes to shopping malls (Ernst & Young Real Estate Investment Market Trend Barometer).
Berlin is a magnet for creative people from all over Europe and is also the top location in Germany for business start-ups. After London, Berlin is Europe's top location for venture capital investment, as demonstrated in an Ernst & Young survey. And this dynamic is also reflected in the real estate market.
Attractive new employment opportunities and relatively low rents (compared to those in other German cities) have contributed to a rise in Berlin's population. A report issued by Berlin-Brandenburg Housing Enterprises (BBU), revealed that the population grew by around 41,600 between 2013 and the middle of 2014. Not enough new housing units are being built to cope with rapidly increasing demand, meaning that real estate prices and rents continue to climb. According to calculations made by vdpresearch, residential real estate prices rose by 7.4% in 2014. However, as the year-on-year rate of increase had already fallen back somewhat in 2014, we do not expect to see any increase (or perhaps just a very marginal increase) in the growth rate in 2015. The fact that prices have failed to rise further, despite excess demand, is due to the fact that average incomes in Berlin are lower than those in other German cities, meaning that price increases are simply not achievable. Even in Berlin there is often an unbridgeable gap between investors' expectations and those of vendors. Investors complain that Berlin prices are too high. This is especially true of the Prenzlauer Berg and Berlin Mitte residential areas where demand is particularly strong. According to the Ernst & Young Real Estate Investment Market Trend Barometer, however, Berlin remains the most attractive city in Germany for residential real estate investment. 21% of those who participated in the survey placed Berlin right at the top of the list of most attractive cities. Second was Frankfurt with 14%. Foreign investors are focused on Berlin and on other German cities.
In summary, it can be seen that investors both inside and outside Germany will make use in 2015 of the country's favorable market environment and positive investment sentiment. Real estate, and especially residential real estate in Berlin, will continue to feature high up many a shopping list.