German Real Estate Industry as Stabiliser and Growth Engine

ZEW together with the University of Mannheim and Institut der deutschen Wirtschaft publishes Report on the German Real Estate Economy from Macroeconomic Perspective. The report is the first to show the markets and their actors in a detailed and standardised manner.

With over 707,000 firms and about 3.8 million employees, the real estate industry not only is one of the largest economy sectors in Germany, but also one of the most dynamic ones. The sector comprises 22 percent of firms and ten percent of employees. In 2006, the real estate industry contributed almost Euro 390 billion to Economic Added Value (in comparison to Euro 242 billion in 1991). This is equivalent to 18.6 percent. Euro 150 billion fell upon the real estate industry in the narrow sense of the word, i.e. landlords, real estate agencies, with almost the same share on apartment and commercial property. Another Euro 100 billion fell upon owner-occupiers of an apartment property. The real estate industry is considerably larger than the sectors vehicle construction and mechanical engineering combined, whose Economic Added Value was about Euro 155 billion.

These are the most important findings of a study on the economic significance of the real estate industry, which was made on behalf of Gesellschaft für Immobilienwirtschaftliche Forschung (gif), Deutscher Verband für Wohnungswesen, Städtebau und Raumordnung (DV), Bundesvereinigung Spitzenverbände der Immobilienwirtschaft (BSI), German Property Federation (ZIA) and other associations as well as the Federal Ministry for Transprot, Building and Urban Development.

Real estate economy administers balances of Euro nine trillion

The value of the apartment and commercial property at recovery costs was € 6.6 trillion at the beginning of 2008. 59 percent made up apartment property and 41 percent commercial property. Together with the land property (Euro 2.4 trillion), the whole real estate capital adds up to almost Euro nine billion. Germany’s Gross Domestic Product was around Euro 2.5 trillion in 2008. The considerable significance of the real estate economy and its cooperation with the finance economy is proved by the fact that about 55 percent of loans are collateralised with real estate property.

The significance of real estate for private accumulation of capital derives from the fact that half of private capital consists of real estate. Moreover, apartment property is more important for the current retirement generation than for previous ones. Almost one third of home owners in West Germany today are older than 65 years. In the age group of 65-80 years, the apartment property rate has increased between 1991 and 2007 by about 10 percent points, and 17 percent points for the over 80-year-olds.

Stabilising function in times of crisis

What is special about the German real estate market is that is it very stable in international comparison. Of all OECD-countries, Germany has the fewest fluctuations in real estate prices. The study indicates that there was no price boom in apartment or commercial real estate. Considering the huge cooperation with the whole economy, the real estate economy’s stabilisation has an extraordinary significance in times of crisis.

One reason for this is the system of financing real estate in Germany. Fixed interest rates and high private capital rates are responsible that real estate prices do not react towards short-term changes in interest rates in the same way as they do in other countries. German home owners finance their property with 27 percent private capital on average. The German system for financing real estate is characterised by the so called Pfandbrief, a covered bond. About one fifth of all mortgages are re-financed by this. The Pfandbrief is an extremely safe bond and an important basis for long-term financing.

Moreover, Germany has a large and efficient market for renting apartments. In contrast to Great Britain and the USA, Germany does not have a subprime-market because household with financial difficulties do not have to take on loans to make their wishes on their living situation come true. They find good alternatives to their own property when renting.

Market transparency as challenge

However, the report indicates the sector's weaknesses. The official statistics only record the portfolio and structure of real estate partially. This is criticised by the experts. Only apartments and apartment buildings have largely detailed information. Other properties only have the building permission and the date of completion, but not the currentportfolio. Industrial and commercial property as well as the most special and infrastructure real estate is not recorded properly or at all in the official statistics. Researchers want these gaps to be filled. Real estate prices were not recorded well either. The official price statistic is only a price measurement for customers and does not yet provide detailed price indicators for the real estate market. A new official indicator for price of land and portfolio property is a huge improvement in the real estate sector in the director of general market indicators. "This development is to be continued. Particularly a Germany-wide standardisation for data from committees of experts and their detailed consideration in the statistics has huge potential", says unisono, client and provider of the report.

The report is a available in a special edition of the magazine Immobilienökonomie, German only: "Wirtschaftsfaktor Immobilien – Die Immobilienmärkte aus gesamtwirtschaftlicher Sicht" (Economic factor real estate – the real estate market from the macroeconomic point of view). It costs Euro 49,- and can be ordered directly at Gesellschaft für Immobilienwirtschaftliche Forschung e.V..