The Empira Group, an investment manager for institutional real estate investments in the DACH region, has completed its quarterly research report on the current macroeconomic situation and the real estate markets in various countries within and outside of the DACH region.
In the second quarter of 2023 the economic output in Germany shrank by 0.6 per cent in a year-on-year comparison. Many indicators point to a recession in 2023, something which is confirmed by the prolonged low level of the ifo Business Climate Index in September 2023 of 85.5 points. In contrast, the period of very high inflation phases seems to have passed.
Economic growth is set to decline by 0.5 per cent this year. For the coming year a recovery is expected, however. For Austria a decrease of 0.8 per cent is expected in 2023; Switzerland is to see an increase of 1.3 per cent. An increase of 1.3 per cent is predicted for the German economy for 2024, while Austria and Switzerland could each see economic growth of 1.2 per cent.
The development of inflation in the USA is put at 3.6 per cent for 2023 and is expected to decrease to 2.3 per cent in 2024. Among the drivers behind this positive economic development are solid economic growth of 2.2 per cent compared with the previous year and a stable unemployment level.
“The recovery phase following the coronavirus pandemic has now passed for the German economy. But we can see a consolidation of the economic downturn, meaning that the general macroeconomic parameters could improve again from the second half of 2024 onwards,” comments Prof. Dr. Steffen Metzner, Head of Research at Empira Group.
Investment volumes in residential portfolios declining
The development of the real estate markets is following the macroeconomic developments. In the second quarter of 2023 the approval rate for apartments in new-build residential properties was 33.2 per cent lower than in the same quarter of the previous year. The number of apartments approved in buildings with three or more residential units decreased by more than 28 per cent. The German government clearly fell short of its target of 400,000 new apartments in 2022, with only 258,764 new units being built.
The investment volume in residential portfolios in the first three quarters of 2023 amounted to a mere approx. 3.9 billion euros – the lowest figure since 2010 and significantly less than the figure of 10.2 billion euros in 2022.
Development of rents across all locations in the DACH region positive
Basic net rents in Germany increased across all the top 7 locations and also developed positively in Germany as a whole. In contrast, purchase prices in the top 7 locations decreased or stagnated. Only Cologne and Hamburg posted rising purchase prices. This fundamental trend towards falling purchase prices was observed throughout all of Germany, and was accompanied by negative value adjustments for the vast majority of properties. The house price index declined by 9.9 per cent in the second quarter of 2023 in a year-on-year comparison. In this respect the decrease of ca. 10.7 per cent for existing properties was significantly greater than for new buildings, where prices fell by ca. 4.8 per cent. This is the largest decrease in history for this indicator.
In the USA – which is regulated to a much lesser extent – there are locations at which not only the purchase prices but also rents are decreasing. The reason for this is mostly due to the previously high expectations in terms of immigration and the effects of the pandemic. Supply was in part increased although there was no stable demand, leading to a decline in prices in locations such as Boise in Idaho and Phoenix in Arizona.
Locations in the Sun Belt were able to profit from the exodus in large numbers of qualified employees and companies out of California and New England. This is true above all of the larger metropolitan areas in Texas, Florida, North Carolina, South Carolina and Tennessee.
“The Sun Belt in the USA has been seen to be resilient in the framework of this market analysis. The discernible trend towards the multi-family asset class and growing demand for rental properties also ensure interesting investment opportunities in this part of the USA,” says Prof. Dr. Steffen Metzner, Head of Research at Empira Group.
Stable interest rates expected in Europe
The ECB will maintain the current level of base rates until the inflation target of two per cent has been reached in the eurozone. In the USA there could be a lowering of the base rate in the near future due to lower inflation, as a consequence of the greater influence exerted on economic policy by the Fed, and as a result of political pressure in the run-up to the forthcoming election. The gloomy economic data for the United States will also contribute to a relaxation in interest rate policy.
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