Global research spotlight: Germany and New Zealand

We have scaled the globe and crossed continents to get the viewpoint from two very different perspectives.

Germany and New Zealand, like many other countries are feeling the pressure from mounting global forces such as rising energy costs, inflation and interest rates. 

The current economic outlook in Germany is uncertain as the country relies heavily on Russian gas imports, yet from a property perspective, its office market has remained resilient.

In New Zealand, we take a look at how downward pressures continue to impact house prices despite record sales for prime properties in 2022.

Germany

Jutta Susanne Rehfeld, research director

Geopolitical conflicts and an ongoing pandemic are burdening the global economy. The Federal Republic of Germany is particularly hard hit by these developments.

The leading industrial nation - Germany ranked 4th in 2021 by GDP - has gradually become highly dependent on gas from Russia in recent years. Russian gas was supposed to supplement or bridge the gap to renewable energies, which could only cover about 19.7% of Germany's final energy consumption in 2021.

Energy supply risk

In return, 55% of gas supplies came from Russia. As of October 2022, no more gas comes through the three pipelines. Nuclear power is only available to a limited extent. The last three reactors are to help stretch the operation over the winter of 2022/2023.

Liquefied natural gas imports should replace gas at short notice. In recent months, the Federal Republic of Germany has made enormous efforts to fill gas storage facilities in a market that was already facing high energy prices, even independently of the Russia-Ukraine conflict.

A defence umbrella of €200 billion is intended to relieve the burden on companies and private consumers. On EU level, the countries agreed on joint gas purchases at the recent EU summit.

Inflation rising

The energy crisis additionally drives inflation. In September 2022, it reached a record level of 10%.

As a result of rising costs, the competitiveness of German companies is declining, despite the simultaneous fall of the euro against the dollar.

A short-term recovery is not expected, this is also reflected in the ifo Business Climate Index, which fell to the level of 84.3 points in October, a level last reached in May 2020.

Consumption, which carried Germany through the debt crisis, has slumped. Consumers are cautious, saving in anticipation of high instalment and back payments for their heating and electricity. The consumer climate index was at -42.5 points in October, a historic low.

Subdued economic development

Expectations of further economic developments are subdued worldwide, even if the energy issue is put into perspective.

According to IMF estimates, the impact in Germany will still be felt in 2023: while growth of 1% is expected for the EU, a decline of 0.3% is forecast for Germany.

At the same time, the German labour market is proving to be very robust. At the end of September, the unemployment rate was 5.4%. Labour shortages are seen as a challenge rather than high unemployment.

Office market adapting

Companies are currently investing further in personnel in order to be able to compete. This also includes providing attractive office space that can meet today's requirements for hybrid/new work models.

Starting with large corporations, companies are increasingly committing to ESG criteria when renting.

Despite the economic upheavals brisk demand for office space is further given. At the end of the year and in 2023, demand is still expected to continue, especially for high-quality space that meets the above requirements.

Risks result from contracts with index rent clauses, which already poses challenges for economically stressed companies, in addition to increasing ancillary costs as well as from planning uncertainty.

The vacancy rate, which has started to reverse in 2022 after many years of partly drastic reduction, is likely to continue to rise - also favoured by high construction completion figures.

However, the starting level is still low, especially by international comparison: in Munich the vacancy rate for Q3 2022 is at 5.0%, in Berlin it’s 3.0% for Q3 2022.

Upward pressure on rents

In contrast, no trend reversal is to be expected in the development of rents.

Both prime rents and average rents continue to be under upward pressure, given that price increases in general are also weighing on the construction and real estate industry and tenants are opting for high-quality products in prime locations.

Financing costs up

While the office letting markets are characterized by a wide range of market activity, the uncertainties associated with the rise in financing costs have had a greater impact on the investment markets.

In isolated cases, sales processes were put on hold, many are delayed. The actors have partly started to reorganize themselves in a changed financing environment, further price corrections need to take place.

After almost 15 years, the trend reversal has also set in for yields. Yields have already risen in all real estate segments. In view of the increased financing costs, a further increase in returns is assumed.

Market players will have to come to terms with a multi-crisis environment. During the rise of financing costs and prime yields, real estate is facing competition from other investment products. As indicated, the focus of the investors and the financing banks will be on security, which primarily supports the core product.

As in leasing, investors focus on high-quality product that is ESG-compliant and has good chances of being let or used by third parties. However, a rising rent level for prime property speaks clearly for the attractiveness of German real estate.

New Zealand

Chris Farhi – head of insights, data & consulting – Bayleys

The New Zealand housing market has calmed substantially after two years of big gains during the pandemic.

New Zealand’s median house price rose from NZD$635,000 immediately prior to the pandemic in February 2022 through to a short-lived peak of NZD$925,000 (+45%) in November 2021. It has subsequently reduced to NZD$811,000 (-12% from peak).

In hindsight, the gains were largely due to the emergency low interest rates during the pandemic, combined with a 'Fear Of Missing Out' amongst buyers as prices escalated. This was further compounded by regular media coverage about gains in house prices and associated issues like housing shortages and affordability.

Lending rules tighten

At the end of 2021 the situation changed. During December 2021 the New Zealand government imposed a new set of responsible lending rules on banks. This led to a mini credit crunch for home buyers with lower income and/or equity (particularly first home buyers).

Whilst some of the new rules were relaxed in March 2022, in parallel interest rates have also increased in response to inflation.

During the height of the pandemic a five year fixed rate on residential mortgages could be achieved for just over 3%. During October 2022 the same rate sits at nearly 6%.

In addition to financing headwinds, over the past few years the New Zealand government has also implemented several sets of controls and/or disincentives around property investment.

Owning a rental home is one of the most popular investments for New Zealanders. Steps by the government have included restricting foreign ownership of existing houses and removing tax deductibility for depreciation and interest costs on rental homes.

Sales volumes down

Alongside price movements, the most noticeable impact on the market has been a reduction in sales volumes. So far over 2022 the monthly number of sales for New Zealand has averaged around 19% lower than the same period in 2017 to 2019.

Despite the calmer market, there remain some bright spots. Overall prices remain elevated compared to the start of the pandemic.

Many of the regional cities have had resilient markets so far, perceived to be enabled by more affordable prices in those regions and a boost in people taking advantage of remote working arrangements to move to smaller centres.

The market for trophy properties also remains strong with 2022 seeing a number of properties achieve record prices in a wide range of locations (main cities, regional areas, and holiday home). These properties are characterised by waterfront locations, premium neighbourhoods and/or architecturally designed homes.