German Homebuilding Permits Soar as Investors Seek Hedge Against Inflation
German homebuilding permits soared to records this year as investors sought real estate as a hedge against inflation and a refuge from the sovereign debt crisis.
Permits rose 22 percent in the first nine months, while privately owned apartments gained 43 percent, the most in more than two decades, according to data compiled by the Wiesbaden, Germany-based Federal Statistics Office.
“It’s fear of inflation,” Heiko Stiepelmann, deputy chief executive officer for Germany’s Construction Industry Association, said in an interview. “The strong rise is explained by a lack of profitable, and especially safe, alternatives for investing.”
Inflation in the 17 countries using the euro remained at a three-year high in October as consumer prices climbed by an annual 3 percent, the European Union’s statistics office said Nov. 16. That compares with the 1.9 percent yield investors get for owning German government bonds maturing in 10 years. Most equity indexes in Europe have fallen by more than 10 percent this year.
The increase of 27 percent in building permits for units in multi-family houses in the first three quarters is the highest rate since that data became available on a quarterly basis in 1997, Stiepelmann said. The European debt crisis may prompt more funds from outside Germany to invest in a market segment that’s perceived as less risky than others, he said.
“In southern Europe, investors are currently searching for new regions to spend their money,” said Hermann Wuestefeld, a manager of closed-end real estate funds at DWS, the mutual fund unit of Deutsch Bank AG. “The German residential property estate market is the poster boy” and returns in the past decade have beaten those in other market segments, he said.
Stiepelmann said there are signs that investors from countries including Greece and Spain are targeting the German market amid concern that the European currency may fail.
Rising investment in housing is unlikely to fuel a real- estate bubble in Germany because the market has suffered from a lack of supply over the last several years, Wuestefeld said.
“Residential real estate suffered from years of weak construction activity, so the base is extremely low,” he said. “The market can easily absorb some extra money.”
Prices for new homes climbed 4.1 percent in the first 11 months, according to an index compiled by Hypoport. That’s more than twice the average annual increase of 1.9 percent since 2005.
“The growth rates we are seeing now are a logical consequence of strong returns, and increased demand meeting weak supply,” Wuestefeld said.
The increases mean that Germany’s battered construction industry is headed for the best year in at least a decade, according to Stiepelmann. The value of the country’s construction output declined by 23 percent from 1995 through 2005. In the following five years, output grew by an average of 1.4 percent a year.
Construction growth may add resilience to Europe’s largest economy as the region slides toward recession. Munich and Hamburg came in second and third among 82 European cities in a study published by Patrizia Immobilien AG (P1Z) in December that ranked residential rental property markets by attractiveness for investors.
“The residential market is probably the most underrated segment in Germany, and possibly in the world,” Wuestefeld said. “This is just the beginning of a new cycle. We’ve only seen growth for two or three years and the last cycle lasted about 10 years.”