Is the real estate market gearing down?

The one question José Pellicer fields wherever he goes is, “Where exactly are we in the property cycle?” As Head of Research at PATRIZIA, José has a prompt response.

“We’re at the end of the financial cycle,” he comments. “There are historically low interest rates, so we’re also still clearly in the middle of the real estate cycle with economic growth continuing.”

Pellicer is well aware that there are divergent opinions on how the property cycle is likely to develop. Some experts anticipate that low interest rates, high real estate prices, and low yields will continue for some time. This means years could pass before prices peak in most German metropolises, albeit with sinking growth rates. Property cycles, he notes, can often last much longer than expected.

In contrast, a sharp decline in economic growth could indicate that the end of the property cycle is approaching more quickly than anticipated. Forecasting institutes, such as the Federation of German Industries, expect Germany’s economy to grow 1.5 per cent or less in 2019. Some economists worry about a possible recession.

Risks for the real estate market

House and apartment prices, as well as rents, have risen sharply in the current cycle, which began in 2009 in Germany. Population and employment growth is driving demand in many cities. A significant economic downturn could weaken the upsurge in real estate prices and rising initial real estate yields would be within reach.

Political risks also remain unpredictable – with Italy and Turkey potentially approaching recession, for example – and Brexit causing further political and economic uncertainty. In addition, increasing protectionism coupled with trade conflicts could slow down the development of the real estate market significantly.

Higher interest rates foreseeable

Interest rates will rise in Europe. When that occurs, it will affect the real estate markets. Higher interest rates make financing more expensive, and an increase in interest rates would restore some of the appeal of other investment options, potentially leading to flow of some institutional investors away from the real estate market.

However, says José, market research data gathered over the past 15 years provides insights into that the extent investment volume will decline in some regions, and which locations will be especially hard-hit.

The ECB intends to maintain its key lending rate – which has been at a record-low of 0.0 per cent since March 2016 – at least until the summer of 2019. The situation in the United States is different: At the end of 2018, key lending rates there ranged from 2.25% to 2.5%. According to U.S. Federal Reserve chief, Jerome Powell, further rate increases are conceivable due to the continuing strength of the economy.

Exciting investment opportunities

Even after interest rates turn around, European real estate markets will still offer ample growth potential, especially because their increasing sectorial and regional differentiation affords a large measure of investment security.

"Europe still has numerous attractive investment opportunities."

José Pellicer, Head of Research, PATRIZIA Immobilien AG

Charles Tarrière, Manager of the PATRIZIA TransEuropean Fund, advises investors to prepare early for rising interest rates. “What’s of key importance to investors is to diversify throughout Europe, keep an eye on market liquidity. Also pay attention to the basics of real estate, such as location and long-term use options for land and buildings.”

The Spanish logistics sector, for example, offers above-average growth potential. In November 2018, PATRIZIA acquired a fully tenanted Class A logistics property in Madrid for its TEP VII value-add fund portfolio. PATRIZIA currently manages four logistics properties in Madrid and Barcelona, with more than 200,000 square metres of usable floor space.


Photo: Westend 61