Germany is the world’s third-largest exporter, the Eurozone’s largest economy and currently has one of the lowest unemployment rates in the world. Unfortunately, due to tensions in international trade and structural changes in the economy, the growth pace of the economy is below 1% and this is not expected to change in the coming years. Unemployment has remained at low levels throughout the last years (3,4% in 2019). In light of the shortage of skills in the labour force and programmes to support flexible working hours, worsening conditions in the labour market are not expected.
Even though weak world trade growth has contributed to further reduction of industrial production and a slowdown in the German economy, the expansionary monetary and fiscal policy will continue to support the growth. At the same time, the weaker external demands are supported by domestic forces. Private consumption is supported by the growth of household disposable income due to fiscal policy measures and growth in wages. Therefore, despite the slowdown in the economy, German Consumer confidence remained high throughout 2019. The construction sector has remained robust and business confidence in the sector is strong. The slowing housing investment in the second quarter of 2019 was largely temporary and mild weather conditions enabled more construction during the winter months and real estate development companies are well stocked with upcoming projects.
According to the OECD economic forecast from 2019, global demand is expected to stay low in 2020, before picking up gradually in 2021. Unemployment will increase only slightly as flexible, government-supported, short-term work programmes will stimulate the labour market as long as the slowdown remains temporary. Also, employers will be reluctant to lose skilled employees, as the number of companies seeing a shortage of skilled workers as a risk to business development has risen sharply over the past decade. The strong labour market and modest fiscal measures will support domestic consumption, while housing construction is set to expand to meet unfilled orders as capacity constraints will be easier. Inflation will remain comfortably below 2%.
The German industrial and logistics real estate markets were stable in 2019 despite the volatility in industrial production. Total investment volumes were over €6,5 billion, which was comparable to 2018. The German industrial and logistics market is currently defined by a scarcity of supply and, consequently, the volumes could be even higher. Over 60% of buyers are non-domestic, which makes the demand healthy.
The average gross yield has been slightly over 4% for prime A-class logistics properties and there is downward pressure on this number. Due to strong demand, we are expecting sale and leaseback transactions to increase in the coming year.
The industrial and logistics market comprises over 10% of Germany’s commercial real estate market and there are no signs of a decrease in this number. The positive side is that e-commerce rates and high consumer spending in Germany point to continued growth in demand for logistics space. This demand is peaking and even investors with less experience in this market segment have shown a willingness to invest.
Stuttgart, with its 635 thousand citizens and an unemployment rate below 4%, offers a healthy demand for industrial and logistics properties. However, the situation is the same as in other areas of Germany – insufficient supply. Average prime rent is ca €6,5/sqm/month and average rent is ca €5,2/sqm/month. There is upward pressure on rental costs as a pipeline for new constructions is non-existent. Sindelfingen’s (location of the collateral of EstateGuru’s first project in Germany) average rent levels are the same, and gross yields range between 5% and 9%.
In conclusion, as the financial markets and therefore the investment market, continues to enjoy favourable overall conditions, we expect the industrial and logistics real estate market in Germany to remain stable. The potential negative effects of the economic slowdown in the manufacturing sector will not have a significant impact on the real estate market. Furthermore, manufacturing accounts for a two times larger share of German economic activity (ca 20%) than it does for most other developed economies (e.g. United States, United Kingdom). Also, e-commerce and high consumer spending support the industrial and logistics real estate market.