11 November 2020

Germany emerges as "concrete gold" in Europe's real estate market

German real estate looks like "concrete gold" at the moment where the future of rents, whether it be for commercial, private or industrial leases, is in the balance across Europe, according to M&G.

Speaking at a media briefing, Richard Gwilliam, head of property research, said the current crisis had affected the different European real estate markets differently depending on local government responses to the COVID-19 pandemic.

In the Nordics, generally speaking, governments have adopted more "lockdown-light" measures which resulted in a 6% fall in GDP in Sweden - a dramatic figure - but only half of the 12% fall in GDP reported in other European countries, he argued.

"The difference in government policy approaches has manifested itself in different ways in terms of economic hits," he said. "German real estate looks like 'concrete gold' at the moment. It has held up remarkably well and the amount of investments going into Germany has actually grown this year compared to last year, with significant inflows into German open-ended funds."

This results should not come as much of a surprise for investors, as the real estate fundamentals in Germany have been pretty solid for years, Gwilliam said, with vacancy rates pretty low (2% to 3% in Munich and Berlin), rents growing, and a strong occupancy demand.

"Even if businesses had to think differently about how they use real estate, it hasn't really stopped them from showing they do want to occupy real estate in Germany," he said. "Rents have continued to grow."

Another reason for Germany's strong real estate performance during the pandemic was the country's economic back drop. Europe's largest economy went into the crisis with a much more solid fiscal position than any other country in the Eurozone.

This, Gwilliam said, has meant the government was able to inject a huge amount of stimulus in the economy without having big long-term repercussions on the government's finances.

"Furthermore, the policy by the German government has been to support businesses as far as possible giving a generous 24-month extension to its job support scheme," he said. "Which has enable occupancy to look through this crisis and provide confidence to businesses and investors."

M&G head of investment strategy Jose Pellicer added that the German economy is driven by the manufacturing sector unlike countries like Spain and France, which are more service economies dependent on tourism. Manufacturers were overall less affected by the pandemic than the services sector was.

"Equally, Germany was more prepared in the sense that they had [used] the Kurzarbeit scheme after the [2008] financial crisis, and they just had to reapply it," Pellicer said. "They had the system and the institutional preparedness to do this."