a German perspective
“Fundamentally an asset’s investment potential comes down to the local economic and market context. Improved market transparency will provide investors with the confidence to enter secondary markets.”
Penny Hacking
Principal, European Capital Markets
Avison Young
Discussions about Gross Domestic Product (GDP) as a reliable measure of economic strength are not new. Climate change, and now the pandemic, have given an impetus to the view that GDP is inadequate as a measure of economic strength. Indices such as the IDI (The Inclusive Development Index) 1 or the NWI (National Welfare Index) 2 claim to be an alternative to GDP by assessing the quality of growth or the quality of life. However, these have not yet found their way into the decision-making process of investors to any great extent, but that is due to change.
The decisive factor for market interest in a locality is economic and political stability. This is indicated by GDP, but also through low unemployment rates and economic diversity.
Germany is still very much viewed as the engine of Europe. It is characterized by a relatively strong national economy over a long period of time, a stable government and regulatory transparency.
Increasingly secondary regional centers are coming to the fore internationally. Until recently foreign investors mainly looked at the top 5 cities, but secondary and tertiary centres are growing in interest.
This diversity of opportunity in Germany gives investors more options. Thus, Germany could position itself 2019 as the 2nd largest investment market behind the USA.
This change can be illustrated by Leipzig, a market that no international investor wanted to enter 10 years ago. However over recent years the population has been growing, the university is growing in reputation and strength, and well-known companies seeking to set up there, creating new employment opportunities.
For investors, as German real estate in the primary cities is becoming expensive, these markets can offer better returns.
Although the pandemic has increased uncertainty in the German real estate investment market growing volatility has facilitated greater transparency and liquidity. This has had the effect of facilitating accessibility to the market and enabling ownership changes.
Furthermore, we are seeing changes in the valuation of real estate. Before the pandemic, sustainability/ ESG considerations and building certifications were secondary in due diligence, but now these matters have been moved to the forefront of core-product purchasing decisions.
Investors and occupiers are increasingly demanding very good or excellent Breeam certification. Germany is learning from its neighbours such as the Netherlands and Scandinavia and establishing clear standards and guidelines.
Businesses are increasingly recognising that they need to offer high quality, climate friendly and flexible workspace to their employees – to attract the best talent. Consequently, landlords recognise the need to respond to these requirements.
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Footnotes
1 https://www.aew.com/writable/documents/2020-February-Monthly-Report-DE-Final-v2.pdf
2 https://www.umweltbundesamt.de/indikator-nationaler-wohlfahrtsindex
