Real estate in Corona times: “Crises also offer bargains”

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Frankfurt Michael Hüther is in demand these weeks. In the public discussion about ways out of the corona shutdown and the economic consequences of the crisis, the director of the Cologne Institute for Economic Research regularly speaks up – most recently in cautionary terms, for example, about the risk to the existence of some industries.

The institute also monitors and analyzes developments in the real estate market. In an interview with the Handelsblatt, the expert says that he does not expect a sharp drop in prices on the private housing market. One should not forget: “Today, more people are employed in Germany than during the financial crisis.”

Hüther is more skeptical about the commercial real estate sector, “because industrial investment behavior has been cautious for a year and a half”. The corona crisis is now on top of it. In an interview, the IW chief explains why there shouldn’t be a major crash in Germany.

Read the full interview here:

Mr. Hüther, would you buy a house at the moment?
If I were looking for it, I wouldn’t be active right now because I think prices will go down. I don’t think they will collapse massively. But as with any crisis, there is a certain attitude, that is, a wait-and-see behavior – even for private households. So I would wait to see how the situation develops in the second half of the year. Crises always offer bargains.

Does that sound like the boom in the domestic real estate market is over for now?
One has to differentiate between sectors. Residential property prices have risen steadily since the middle of the last decade. There are structural reasons behind this: there is a movement towards the cities, including the medium-sized university cities. And there is a differentiation of prices between city and country. People want the infrastructure, the supply and the culture.

All of this is not fundamentally questioned by the corona crisis. There is no change in the trends: energetic renovation stabilizes the market, interest rates are likely to fall further as a result of the pandemic, rents will not plummet.

But I do believe that certain borderline phenomena are being reviewed. In other words, cases in which 8,000 euros per square meter or more were called up for a normal multi-story apartment building.

So a healthy correction?
Yes, within limits, because we have not identified a speculative bubble for the housing market. There is also a limit that is clearly defined below. Apartment building in Germany costs around 3000 euros per square meter. The standards are not much cheaper. So prices will just normalize a bit, peaks will decrease; our scenario calculations show a setback potential of up to a good ten percent. We still have potential for new construction. The demand is there.

The fall in prices could come from another corner. In the private housing market, banks have been quite generous in recent years.
We had a special situation: Interest rates were attractive, but prices weren’t really, because they continued to rise, albeit not as sharply as interest rates fell.

Do you see major failures when more people run into financial constraints because of the corona crisis – maybe have to sell their home?
Not necessarily. To protect themselves, the banks have agreed to higher repayment rates for loans with less equity. Now, in a difficult phase, as a consumer, you can lower or suspend the repayment to remain liquid. The banks should also have an interest in this.

You must not forget that more people are employed in Germany today than during the financial crisis. Employment integration is over 80 percent. It is important that we manage to keep unemployment within limits in the current crisis.

Are you just as positive about the commercial real estate sector?
I’m rather skeptical because the investment behavior of the industry has been cautious for a year and a half, the corona crisis is now on top of it. In the case of office properties, the lesson that is currently being learned about the home office may lead to a re-evaluation of rental space. Companies rent less space because more and more people work at home. The topic of compaction – area efficiency – could get a new dynamic. In general, commercial real estate tends to be more volatile than residential real estate.

Many property developers are currently not aware of any corona effects.
At the moment, the construction industry is hardly affected by the crisis.

But many fear that the pipeline will run empty later. The construction industry would then be a pillar of the German economy. Are you worried?
It can work wonderfully in the current weather, the distance rules can be easily observed. But of course you have to ask what about the order perspective. I also have concerns. I think it runs a bit. My hope is that, when the time comes, we will have seen some stabilization in industry and consumption. For example, we see how industry in China is currently picking up again, which has an impact on our exports.

I think the slump in construction will come, but we can handle it. There is also a risk that the permits will not be issued – the lack of digitization of the building authorities could get on our feet here.

In general, I would no longer set up industry programs, but would consider whether I can help companies more generally and systematically through tax.

Are the first demands for political support coming from the real estate industry? What do you make of it?
Corona’s response to the symmetrical shock was first of all to provide help for everyone. The further the crisis progresses, the more it is necessary to differentiate according to the actual situation. We will see where there are still problems. The entire retail sector, the service providers, were massively affected by the lockdown.

So far, I see no comparable burdens for the real estate industry. One may be more likely to ask how the real estate industry can participate in solving the problems, for example through rent deferrals or rent discounts for retailers and restaurateurs.

If the expected bankruptcy wave arrives in retail, it will probably be of no use. Then the commercial landlords are at the very end of the chain and also have losses.
There have always been many tenant changes in this area. You can see that everywhere in the big shopping streets. Real estate investors must be able to deal with vacancies. You just have to look very closely at what the actual corona effects are. In general, I would no longer set up industry programs, but would consider whether I can help companies more generally and systematically through tax.

For example with a negative tax?
Yes, in the sense of a tax refund as loss carry-back on the previously paid profit taxes. This has an effect wherever companies are now making losses but have previously been profitable. If the problem goes away, the negative tax will go away. We need instruments that are sustainable for such situations.

Mr. Hüther, thank you for the interview.

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