Overall Economic Conditions

PROPERTY AND PROPERTY FINANCING MARKETS

Residential Property – Germany

The dynamic pace of the upswing in the German residential property market increased further in the previous year. Purchase prices paid for houses and apartments rose faster than in 2015. According to the Association of German Pfandbrief Banks’ (vdp) index for residential property prices rose by 6.6 percent in 2016 in comparison to the same year-ago figure.





This development was again primarily driven by significantly higher demand for housing than the available supply. Just the number of newly-built housing units alone reveals that the needed volume of housing per annum still has not been reached despite a substantial expansion of construction activities. Although 340,000 building permits for housing units (plus 23 percent) had been issued by the end of November 2016 – a level last seen in the year 2000 – it is estimated that only about 240,000 housing units were actually completed in full-year 2016, or about 10 percent more than in 2015. Nevertheless, this number remains considerably below the estimated demand, which is seen as at least 350,000 housing units per year.





In contrast to normal practice, the rise in prices for residential property in many locations was not accompanied by a noticeable increase in transactions. The German market for housing investments was particularly affected by this as the volume of transactions fell significantly despite greater demand shown by institutional investors. The volume of sales recorded in 2016 was about € 13 billion, a decline of roughly 50 percent from the previous year’s figure of € 23.5 billion.

Prices for multi-family houses rose sharply as the supply of available properties fell notably. According to the vdp Property Price Index, prices paid in this segment increased by 7.1 percent in 2016 making multi-family houses once again the asset class with the strongest rise in prices in the housing market.

This led to a further intensification of the situation in the rental housing market in 2016 – with clear regional differences: markets in rural regions tended to remain stable in the face of declining population numbers, while shifts in settlement structures and rising population led to significant housing shortages in major metropolitan areas. Despite higher construction activity, the availability of low-cost housing and affordable family housing tightened further.

Buyers’ demand for houses and condominiums also reached a new record high due to a further decline in mortgage rates, which hit new historic lows towards the end of the year. Other factors driving demand were the unbroken lack of attractive investment alternatives in the capital markets and the solid economic upswing. As a result, the limited supply of properties led to a notably stronger rise of 5.8 percent in prices for houses and 6.5 percent for condominiums according to figures in the vdp Property Price Index.

Voices were again heard in the previous year warning that rapidly rising prices could be creating a bubble in the property market with potentially serious consequences for the financial sector. The German Bundesbank addressed this issue in their current Financial Stability Review and concluded that the German housing market currently does not pose direct threats to the financial stability. This conclusion was based on the facts that the volume of lending was rising very moderately and that the total debt level of private households was tendentially shrinking. In addition, the volume of new property loans with an initial fixed-interest period of over ten years rose further. According to the Bundesbank, this means that risks facing private households over a long period of time are calculable.

The implementation of the Directive for residential property loans in March 2016 resulted in controversy and discussions. Against the background of the last property crisis in the USA and parts of Europe, the stated objective of the Directive was to better protect borrowers with new standards for counselling, information and creditworthiness assessment associated with financing residential property. Numerous banks complained soon after the Directive was put into practice that it made it excessively difficult for them to finance residential property. This position, however, was only partially confirmed by Bundesbank figures. Although there was a distinct decline in new property lending business activities in the months following the implementation of the Directive for residential property loans, the volume of new lending commitments had already been declining since the fall of 2015. In addition, the banks’ new residential property lending business in 2015 had risen at an unusually strong rate in comparison to previous years. The Directive primarily affected young families and seniors as the new rules regarding creditworthiness assessment made it more difficult for them to obtain property loans. This was recognised by policymakers. Towards the end of the year a new law aimed at eliminating some of the negative effects of the Directive was submitted for approval.



Residential Property – International

House prices in the EU have been rising nearly continuously since 2012. According to Eurostat, this trend accelerated further in 2016. Eurostat recorded a 4.3 percent year-over-year increase in EU-wide prices in the third quarter of 2016 following the 2.9 percent increase recorded in the same quarter of 2015. The rates of increase varied widely with above-average gains reported in Great Britain, Austria and Portugal, while the strongest increases were reported in Hungary and Latvia. Prices declined only in Italy and Cyprus.

The development of prices noted in the British housing market changed notably due to Great Britain’s decision to leave the EU. The rise of house prices slowed substantially within the last months of 2016. When viewed on an annual basis purchase prices rose by 5.7 percent over the previous year. It is, however, notable that purchase prices outside London posted significantly stronger growth than residential property prices in London. The rental housing market, which is markedly less volatile than the house buyers’ market, also posted a gain, but the increase of 3.1 percent was lower than in previous years. London and the southwest of England were particularly affected by the lukewarm development of prices.

The French housing market left its downward path in 2016 due to solid economic growth and extremely low lending rates. Rising demand by private investors, which appeared in 2015, remained intact. This notably encouraged new construction of houses, as well as sales of existing properties. Greater buying interest was also apparent in the investment market. This meant that prices for apartments and privately-owned houses increasingly stabilised or even trended slightly higher in certain segments. For example: the average increase in prices paid for apartments in Paris rose by 2.7 percent in the first two quarters of 2016. Rents paid for residential housing also increased slightly.

The Dutch housing market is on an upswing. House prices rose by 5.6 percent over the same year-ago period in the third quarter of 2016. A strong, above-average development of prices is particularly visible in major cities and driven by solid economic growth and low mortgage rates. Thus, price levels seen in the record-setting year of 2008 have already been exceeded in Amsterdam and Utrecht. This led to growing demand on the part of investors, which was reflected by the newly set record volume of about € 2 billion in property investments recorded by the end of third quarter. High demand and rising prices pushed the net initial yield generated by multi-family houses down to 3.75 percent. Investors were focused on properties located in Amsterdam, Rotterdam and Utrecht.

The Swiss housing market developed unevenly in 2016. The market for condominiums was driven by low interest rates and demand for property as a capital investment. However, the number of newly completed condominiums declined and the supply of existing apartments was very tight. These factors led to a 3.9 percent increase in prices in 2016 over the same year-ago period. There was a noticeable increase in new building activity for investment properties in the rental apartment market, which led to an increase in the supply of rental apartments. At the same time, population growth has slowed which in turn has increasingly changed the rental apartment market into a tenants market with slightly declining rents. On an overall basis, the pace of growth in the Swiss housing market weakened.

Overall favourable economic conditions, including a high rate of employment and rising incomes, once again propelled the housing market higher in the USA. Demand for owner-occupied houses rose and prices paid for residential property also increased further. The S&P/Case-Shiller Index figures for October 2016 showed a 5.6 percent year-over-year increase in house prices for the entire country, although with notable regional differences. As in the previous year the fastest growth rates among the metropolitan areas were recorded in Seattle and Portland with over 10 percent. The lowest rates were noted for Chicago, Cleveland and Washington with less than 4 percent. Nevertheless, prices in these three cities rose at a faster pace than in the previous year. Rental prices continued to climb and were 4.1 percent higher than the same year-ago figure. This was not lastly due to a tighter supply of available units in the rental housing market. As a result, institutional investors increased the flow of their capital into multi-family houses. More than US dollar 100 billion was invested in multi-family houses in the first three quarters, which indicated that 2016 would become a new record year.



COMMERCIAL PROPERTY – GERMANY

Development seen in the German commercial investment market since the end of the financial crisis has been marked by high, and rising, demand noted for all domestic and foreign institutional investor groups. However, the supply of suitable properties in the preferred investment segments is limited and becoming increasingly rare. This was also reflected for the first time by the volume of transactions last year, which declined by € 3 billion to € 52.5 billion. However, numerous market players had expected a bigger decline. More than half of all transactions involved the top 7 cities in Germany.






High demand was reflected by further rising prices for commercial property in the previous year. The vdp index for commercial property posted a 6.0 percent increase in 2016, or three times stronger than the gain recorded in the previous year.

Office properties remained the most important sector of the commercial property market with a share of about 45 percent as prices in this sector rose at an above-average rate of 7.7 percent. High demand further increased pressure on returns, which in the interim have reached a historic low. Strong buyer interest in office properties was driven by solid economic development. Demand for office space, and thus turnover of office space, increased notably. Turnover of office space in the top 7 cities rose by 9 percent. Despite increased new construction activity, vacancy rates reported for office properties declined further. This was mainly due to the fact that more than 80 percent of newly built office space was no longer available upon completion. The increasing shortage of modern office space in city centres has led to a renewed rise in demand for office space in less central office locations.

The limited supply of office properties and the very high purchase prices that have been paid in the meantime prompted institutional investors to increasingly shift their investment plans to include retail and specialty properties, such as logistics properties, nursing homes and retirement homes, as well as hotels. Returns on investments in these segments have also fallen slightly due to high demand.



COMMERCIAL PROPERTY – INTERNATIONAL

The global volume of investments in commercial property declined in 2016 for the first time since 2012. However, strong above-average growth in the fourth quarter noted in some European countries slowed the decline in Europe to a level that was better than had been widely expected. Total investments in commercial property in Europe amounted to about € 251 billion, or 10 percent less than in 2015 with most of the money again invested in Great Britain, Germany and France. Spain and the Netherlands were ranked four and five, respectively. The investment markets in these two countries recorded strong above-average growth in the previous year of 8 percent in Spain and 17 percent in the Netherlands.

Demand for office space by renters and owner-occupiers declined slightly in the previous year. Total turnover in Europe fell by 2 percent year-over-year to nearly 12 million square meters. Despite this performance, the pan-European vacancy rate fell again, and at the end of the year stood at 8 percent, which was the lowest rate since the end of 2008. Against the overall background of solid key figures, rents paid rose on average in Europe by nearly 3 percent. In light of the different cycle phases noted for the countries, development reported in individual nations varied very strongly.

Market developments in Great Britain have been influenced by the Brexit vote since the middle of 2016. Rising uncertainty was felt in the investment market and reflected by the volume of transactions, which amounted to € 60 billion, or the lowest figure since 2012 and a drop of 37 percent from the same year-ago figure. About one-third of the total volume of transactions were generated by London property deals, which mainly involved office properties. The user market developed similarly. The London rental market notably lost momentum in the second half of the year to the extent that turnover of office space was one-quarter less than in the previous year. Furthermore, the vacancy rate for office space again increased notably again for the first time. As a result of this development, rents paid for office space came under pressure in certain areas. Top rents paid recorded a particularly strong decline and fell by 4.3 percent just in the fourth quarter alone.

Investments made in French commercial property declined by 4 percent in 2016 to about € 26 billion, with the majority – about 80 percent – invested in the greater Paris area. Office properties were the most important investment segment and represented 60 percent of the total volume of investments. Demand noted in this market segment was high in nearly all locations. This situation resulted in a further decline in net initial returns. Demand on the part of users of office properties was also very strong. Turnover of office space rose by 6 percent to 2.4 million square metres pushing the vacancy rate down to 6.4 percent, the lowest rate seen since 2009. Rents rose again slightly.

The sharp 17 percent increase in investments made in the Netherlands to € 13 billion was driven by good overall economic conditions. The upswing in the commercial property market was primarily fuelled by the office properties market – with rising turnover of office space and declining vacancy rates. In some locations, like the centre of Amsterdam and the Zuidas urban district, both peak rents and average rents rose again slightly for the first time.

Following the record-setting 2015, current estimates expect the volume of transactions declining by about 15 percent in 2016 to US dollar 466 billion, with a generally stable office property market. New York easily defended its lead as the top location for office investments far ahead of Boston and Los Angeles. The user market was marked by an expanded supply of newly built properties, as well as a decline in demand for space. Net absorption fell by almost 40 percent to about 50 million square feet. As a result, the vacancy rate only fell slightly to 14.5 percent and ranged from 6.2 percent in Nashville to 24.9 percent in Westchester County. Rental prices, which had risen since 2011, generally continued to climb. However, the upward movement almost came to a complete stop in the fourth quarter. This could indicate that this phase of the cycle is slowly coming to an end.