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Expo Real 2019: The economic climate, the residential sector, flex space – what factors are driving the property market?

Expo Real is approaching with giant steps and thus the big event of the real estate industry. Topics that drive the industry in 2019 already dominated the previous exhibition: the economy, the housing market, flex space.

October 01, 2019

Expo Real, a major event in the real estate industry, is drawing ever closer. Several major themes that dominated the trade fair last year have continued to concern the sector in 2019 – the economic climate, the residential market and flex space, to name a few key examples. Many trends have continued, while some questions still remain unanswered. So what can we expect from this year’s Expo Real? CEO of JLL Germany, Timo Tschammler, gave us a preview of some of the central themes of the trade fair.

Timo, last autumn’s fears about a possible economic slow-down have been realised, at least for the time being. How seriously has the real estate industry been affected by this?

Up to this point, the property market has remained remarkably stable. One of the main factors behind our unusual property cycle still applies: around the world, investors are looking for opportunities to invest vast sums of money securely and with high rates of return. Christine Lagarde’s nomination as the president of the ECB seems to be clear confirmation that there will not be any radical changes to the interest policy in the eurozone. At the same time, German state bonds amounting to over 150 billion euros are set to expire by 2021, if we include the current year. For the sake of comparison, this is almost twice as much as the amount invested in commercial real estate (including residential properties) in Germany in 2018.

The low interest rate policy, which is likely to be in place for years, makes renewing investments in state bonds an unattractive prospect. Institutional investors are reacting by increasing their target allocation for property investments. We predict that this will grow by 0.2 percentage points in 2019, which might sound insignificant, but will actually bring several billions' worth of new money into the real estate market. Much smaller, but still not to be underestimated, are the investments made by private households. The amount of money saved by Germans continues to grow, with an increase of 16 billion euros between 2017 and 2018 alone. This money also needs secure returns.

However, we must not ignore the signals from the economy as a whole. The current economic slow-down has so far mainly affected the manufacturing industry. But in the long term, other sectors are unlikely to remain immune, including the service industries that are the cornerstone of the office space business. Various economic indicators can be linked with office leasing turnover, for example – on the basis of historical data. If the DAX falls by around 10 percent, floor space turnover decreases by 12 percent, albeit after a delay of around three quarterly periods. We can also look at the ifo Institute’s Employment Barometer: if this falls by 5 percent, floor space turnover will decrease by 10 percent, again after three quarterly periods. The pent-up demand for floor space in many asset classes functions as a buffer here, particularly as demand for new developments far outstrips the supply. That’s why we are remaining optimistic, while being aware that our industry will have to keep a very close eye on economic developments.

When people talk about the 2019 real estate year, it’s apparent that residential property is a more important topic in public debate than ever before. What do you make of the development of this market segment?

First and foremost, it is a positive thing that the residential property sector has gained a considerable percentage of overall real estate investments. In 2018, the residential property transaction volume for institutional investors in the European market grew by over 40 percent to around 56 billion euros. Around a third of that was attributable to Germany, with Berlin the location with the highest volume, reaching 3.11 billion euros. But that also brings us on to the less positive developments in the residential market. Apart from the fact that the transaction volume has already lost momentum in 2019 because of a shortage of products, there are also already indications of the damage that is likely to be caused by the excessively drawn-out debate about regulation, largely initiated in Berlin. Whether transaction patterns will be permanently affected by the debate in the capital is yet to be seen. The falling value of the shares of commercial residential housing owners suggests an early trend. In any case, there is a discernible pattern that can be linked to various stages of the political debate. Unless there is a rethink here, it will ultimately affect not only the real estate industry, but also residents themselves. The reason for high rent prices is essentially the lack of development and supply, and this situation will only get worse if investors are driven away from the residential real estate market. We can only hope that politicians will soon look at the real estate industry as a partner again, instead of staging a new kind of class war that will ultimately only hurt members of the public.

These are turbulent times for residential property, it seems. Another topic that has seen a similar level of debate in the industry, though on more positive terms, is the phenomenon of flex space. What do you expect to see in this area?

Flex space is still the dominant phenomenon in the market for office real estate. Operators have already leased out well over 1 million m² of space in the “big 7” German cities so far in 2019. Although co-working is the aspect of the flex sector that the public are most familiar with, it is actually the hybrid models that are driving the market most strongly. That shows that the concept of flex space is gaining more and more traction with established businesses which tend to rely on traditional workspaces, but also want the benefits offered by flex spaces in terms of service and contractual flexibility.

And the market continues to expand: we expect further large-scale leasings from operators for the last quarter. The industry is also tapping into new locations. Smaller cities, known as “secondary cities”, are attracting the attention of the big players in the flex sector. Germany, with its polycentric economic structure, offers the ideal setting for this kind of location strategy. Local operators are also increasingly entering regional markets.

However, the current economic developments might prove to be the litmus test for the industry. We have only experienced the phenomenal expansion of flex space in the context of a long period of economic boom. What will happen now with the economic slow-down? Will companies move teams out of the spaces again? Or will they rely on flex space even more, so that they can be flexible in uncertain times? In any case, a consolidation of the market cannot be ruled out.

Timo Tschammler
CEO Germany