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Property Market Briefs: Part 1 - UK & Germany

The UK and Germany are two of the largest economies in Europe and how they - and their property markets - fair over the next few years will be is of great importance to property investors.


The UK economy was one of the first to show the signs of the credit crunch and the global slowdown that followed. The economy is now in recession and is forecasted by The Economists that it will contract 3.8% this year and fall 1.1% in 2010.

The UK economy has been at the forefront of taking emergency measures that have been widely copied, either directly or partially. As a result of the recession and anti-crisis measurements, British debt has been growing quickly.

Despite the high levels of sovereign debt now building, we see the UK as emerging quite strongly within two years or so from the slump. It has the advantage of being able to devalue its currency and it also has a flexible labour market.

This is not to underestimate its serious problems - fundamentally it needs to rebalance its economy more heavily towards exports, which will hurt many of its trading partners as UK imports shrink.

However, we see that much of the negativity surrounding the UK economy has been overplayed. Consequently, its much devalued property market is now beginning to look very attractive, with yield being the main factor to consider.

We cannot call the bottom of the property market, but believe it will be sometime in early 2010, after which we will see ultra-low growth, followed by more sedate, but consistent growth in single digits. The key will be how much credit re-enters the system; and there are some early signs that mortgage lending is now recovering.

It is noteworthy that big institutional investors are now eyeing UK commercial property as representing excellent value.

Recently, we have been also observing increasing activity from buy-to-let investors looking for heavily discounted properties and companies selling them. There is also evidence of growing interest from foreign investors focused in London as a result of the weakening pound.

It is worth bearing in mind that so-called bargains often advertised as 'Below Market Value' (BMV) deals often do not equate to good buys.

In the current market and with a very low number of transactions, BMV is practically meaningless and in addition often is based on comparable sales data that is long out of date.

Instead we focus on investments with strong Intrinsic Property Value (IPV), which can generate decent returns long-term.

The best locations are those with a strong economic background, where jobs growth is most likely as recovery comes - centres of knowledge-based manufacturing in particular and those locations around outstanding, world class (and therefore strong exporting) companies.


The German economy is in deep recession with GDP growth collapsing as a result of the country's highly imbalanced economy, basically its over-reliance on exports and industrial production.

Domestic consumption has been and is likely to remain of the economy's weaknesses.

The German government has not employed fiscal stimuli on a scale seen in the US or in the UK, but, even so, declining revenues and additional spending on anti-crisis management will result in a deficit reaching around 6% of GDP.

The economy shrank by more than 2% in Q4 2008 and latest forecast from the government is a dramatic contraction of 6% in 2009. We can expect some very modest growth starting in mid 2010 and slow recovery after that.

The property market in Germany has developed in different ways to most other European markets over the last decade, i.e. when other property markets were booming, the German market remained flat.

Even the strong economic performance between 2006 and 2007, positive trends in the labour market and rising wages didn't stimulate the housing market.

There are several reasons for this, including a highly developed culture of renting and a highly regulated rental market, oversupply in some locations or supply-demand balance and unfriendly conditions for non-resident investors.

Demographics in general also don't support the housing market in Germany in the long-term, although they vary greatly between the regions. In some parts of the country, mainly in the western and southern cities, demographic trends may boost the property market in the medium term.

We see property prices being fairly static in 2009 and the next two years, despite the recession.

Investing in German property has to be based on rental yields rather than expectation of capital growth. However, we have seen little evidence of exceptional yields in this market.

In addition, the high costs associated with investing in Germany, combined with generally poor finance available for non-residents (low LTVs) and a rental market weighted in favour of tenants, all make the market an unattractive property investment option at this time.

TAGS: UK Property, Property Investment, Germany Property


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