King Sturge Real Estate Economy Index: Near Stalemate between Optimists and Pessimists

As the April poll among roughly 1,000 market players revealed, the monthly King Sturge Real Estate Economy Index has continued its growth course with considerable momentum over the month past. The survey-based Real Estate Climate documents the clear rise in the industry sentiments as it increased by 9.1 percent from 90.0 to 98.3 index points. The sentiment therefore approaches the threshold of 100 index points, which would indicate an equilibrium between optimistic and pessimistic estimates. The growth is explained above all by the development of the Rental Income, a sub-indicator of the Real Estate Climate. User demand and rent development are up by 11.6 percent in April, rising from 77.2 index points the previous month to 86.2 index points now. That said, the majority of respondents retain a rather sceptical attitude. The Investment Climate, second sub-indicator of the Real Estate Climate which maps the purchase price development and the investment demand, has returned a majority of positive votes for the second time in a row. The Investment Climate grew by 7.1 percent, climbing to its highest level at 110.8 points (up from 103.4 the previous month) since the survey started in January 2008. The Real Estate Economic Situation that is based on macroeconomic data of the month also reported a stable increase by 5.7 percent.

“The sentiment in the real estate industry is now nearly as good as it was ahead of the Lehman crash," said Sascha Hettrich, Managing Partner of King Sturge Deutschland. “And the hard data representing the real estate economic situation are currently on a level that has compensated for the worst losses caused by the financial crisis. And yet: The situation remains extremely fragile then as now, with setbacks being almost unavoidable. The acute risks apparent in some of the national economies in Europe tell the same story. These risks might keep putting pressure not just on the common European currency, but also on other areas of the international financial markets.”

Retail Segment Jumps 100-Point Threshold for First Time in almost Two Years

Among the segment climates, the majority of market players rated the retail segment positive at 102.9 (a 6.5 percent increase from last month’s 96.6 points), this being the first time in almost two years. The fastest growth at 14.7 percent was reported by the Office Climate, which stands at 79.3 points in April (compared to 69.2 percent the month before), and which has yet to fully compensate the repercussions of the financial crisis. The Residential Climate rose by 4.8 percent to an all-time peak of 138.3 points (up from 131.9 points last month). This suggests that the polarisation between residential segment and office segment persists, showing a gap of nearly 60 index points.

The Real Estate Economic Situation, this index being generated on the basis of macroeconomic parameters of DAX, Dimax, ifo Business Climate and interest rates, stands at 182.5 index points (previous month: 172.7) and thus almost matches the level at the end of 2005, which marked the onset of the previous boom phase. The dips experienced since the collapse of Lehman Brothers appear to have been largely compensated, and chances are that a new market cycle is getting under way – assuming no setbacks will occur.

“To be sure, the fear of the financial and real estate markets collapsing has been overcome, and it is nice to find the situation in Germany so stable,“ commented Hettrich. “Yet it is not the whole story. Many investments that were transacted during the premium-price cycle will be coming up for refinancing in the next twelve to eighteen months,” Hettrich went on to say. “Their prospects will depend on the ongoing market development, on the one hand, and on the specific situation of a given portfolio or single investment, on the other hand. That those individual portfolios which made the headlines in recent days will set the pace for Germany as a location is rather doubtful.”