Will the German Property Market Sink or Swim during the COVID-19 Pandemic?
The COVID-19 crisis has come as a shock to global economies. In Germany, the pandemic has had a devastating impact on the economy, and no sector is left untouched. Even real estate, which is usually safe from market fluctuations, is experiencing instability due to the Coronavirus shockwaves. The uncertainty is causing anxiety among real estate investors and property owners. However, some investors are taking advantage of rising opportunities.
The Impact of COVID-19 on the German Real Estate Market
The German government introduced social distancing requirements and lockdowns to reduce the contagion and ensure the health system is not overrun. However, the restrictions increased the burden on the economy, and Germany is staring at the possibility of a deep recession. With the GDP expected to shrink by 12%, there will be severe consequences for the German office and residential property markets.
The demand for residential space is likely to decline, hence the house prices will fall. Uncertainty in the economy is forcing many households into crisis mode. Their sole concern is securing their jobs and livelihoods during the crisis. That means few people are willing to move or acquire new properties, and the demand for residential space will shrink in the short-term. The pullback from buyers will reduce market momentum and lead to price declines. Investors with wealth tied up in the share market will also have little disposable cash. Therefore, their ability to buy into the housing market is diminished.
The decline in new constructions and delays in the completion of properties will reduce supply in the market. The contact bans, shutdowns, and fear have led to the halting of many construction projects. Therefore, buyers who invested in new-builds will have to wait longer. Besides, bottlenecks at building authorities such as urban planning procedures, allocation of construction plots, and provision of building permits will lead to further delays. Also, the construction process could be complicated by supply chain disruptions.
The German property market has been booming for over a decade, with demand exceeding the supply. While rent and property prices have been rising steadily, the future looks bleak due to the unexpected economic downswing. The global flight to safety is likely to stabilise demand for office space in the short-run. However, fear and uncertainty will drive the prices down before the end of the year. Besides, the corona crisis is increasing work from home programs leading to a structural decline in the need for office space. The high vacancies will reduce rents and demand for commercial properties. However, experts such as E1 Investments still consider commercial properties as safe investments since they are bound to recover quickly. Besides, the decline is limited to specific cities and regions where the contagion is high.
Unfortunately, as the crisis continues, companies are adopting remote working permanently, which could be a significant blow to the office market cycle. Minimal industrial activity is also reducing the need for warehouses and storage spaces. The Ifo Institute predicts a 16% decrease in industrial production in 2020. While the demand for distribution centres may be low, the industries will recover fast after reassessing their dependency on foreign supply chain processes.
Rate Cuts and Stimulus Packages
The German government announced an economic stimulus plan of €130 billion in June and a reduction of VAT from 1st July to December. The provision of non-repayable grants to hard-hit businesses is also expected to speed up economic recovery. Despite the fiscal stimulus packages, buyers are still uncertain of their sources of income and could pull back from the market.
The banks began lowering interest rates soon after news broke of the looming crisis. The move provided more financial opportunities and a fiscal boost, which stabilised the property prices. Potential buyers can easily access mortgages and take advantage of the short-term momentum to find their dream homes. However, one should expect extended waiting periods since there is a lot of strain on the banking sector. The banks are overseeing logistical distribution of state aid while juggling day-to-day operations.
New-Builds Are Likely to Survive the Pandemic
Mobility restrictions are hampering the process of buying a new house, and most people are becoming wary of videos and online inspections. The impression of property viewing often fuels the desire to buy a home. Therefore, newly constructed homes are gaining more attention because they are less risky, and the decision to buy usually relies on location, demographic, price, and the apartment layout. A real estate broker dealing with new properties will not feel the impact of the pandemic. Due to the exclusion of newly built properties from the rent cap, E1 Holding investment brokers can negotiate for market-driven prices. While investment in real estates seems lucrative, if the project is still in the planning stages, it may experience delays.
New Regulations for Real Estate Brokers and Tenants’ Protection
Rental property rent will stabilise, but the new regulation on tenant protection could burden property owners. In the event of late payment, the property owner cannot give tenants a notice. Besides, large housing groups have given tenants concessions, and they are refraining from increasing rents. On the upside, people are not moving apartments, and landlords are retaining most of their tenants.
The new German regulation on splitting the brokerage fees between the buyer and seller will relieve the buyer from carrying the burden. In the new law approved by the federal council, the buyer will pay half of the estate agent fees when the seller has already paid their part. Investment brokers can also take advantage of attractive prices to find potential buyers.
While many people prefer saving money during this crisis, wise investors are putting their money to good use. If you are considering investment during the COVID-19 pandemic, tangible investments such as real estate are still a safe venture.