Helaba Research
REAL ESTATE REPORT
24 February 2015
Onwards and upwards
AUTHORS
Dr. Stefan Mitropoulos
Dr. Stefan Mütze
research@helaba.de

Higher sales, rising prices, a growing appetite for risk: the real estate investment
market is booming and an end is not yet in sight (p. 2)
The Quantitative Easing by the ECB solidifies the low interest-rate level and creates
sustained pressure on property yields (p. 3)
German housing construction continues to grow, though at a weaker pace than in
2014 (p. 4)

EDITOR
Dr. Gertrud R. Traud

PUBLISHER
Dr. Gertrud R. Traud
Chief Economist/
Head of Research
1 At a glance .................................................................................................................................. 1
Helaba
Landesbank
Hessen-Thüringen
MAIN TOWER
Neue Mainzer Str. 52-58
60311 Frankfurt am Main
phone: +49 69/91 32-20 24
fax: +49 69/91 32-22 44
2 Selected real estate analyses .................................................................................................... 2
2.1 Investment market: new records ............................................................................................ 2
2.2 Quantitative Easing, or how low can rental returns go? ......................................................... 3
2.3 Normalization in the German housing market 2015 ............................................................... 4
1
Dr. Stefan Mitropoulos
phone: +49 69/91 32-46
19
This publication was very
carefully researched and
prepared. However, it contains analyses and forecasts
regarding current and future
market conditions that are for
informational purposes only.
The data are based on
sources that we consider
reliable, though we cannot
assume any responsibility for
the sources being accurate,
complete, and up-to-date. All
statements in this publication
are for informational purposes. They must not be taken
as an offer or recommendation for investment
decisions.
At a glance
A look back at 2014: a bond year, not a stock year
Annual performance by asset classes*, %
2008
2009
2010
2011
2012
2013
2014
Bonds
RE Equities
Commodities
Bonds
RE Equities
Equities
RE Equities
Germany
12,2%
Eurozone
43,1%
27,4%
Germany
9,8%
Eurozone
30,3%
Germany
25,5%
Eurozone
23,8%
Bonds
Commodities
Equities
Bonds
Equities
Equities
Bonds
Eurozone
9,2%
38,0%
Germany
16,1%
Eurozone
3,4%
Germany
29,1%
Eurozone
18,0%
Eurozone
13,0%
Open-ended
Equities
RE Equities
Open-ended
Equities
RE Equities
Bonds
RE Funds
4,6%
Germany
23,8%
Eurozone
15,5%
RE Funds
1,5%
Eurozone
13,4%
Eurozone
4,8%
Germany
10,3%
Commodities
Equities
Bonds
Commodities
Bonds
Bonds
Equities
-25,9%
Eurozone
21,0%
Germany
6,3%
-9,1%
Eurozone
11,0%
Eurozone
2,2%
Germany
2,7%
Equities
Bonds
Bonds
RE Equities
Bonds
Open-ended
Open-ended
Germany
-40,4%
Eurozone
4,3%
Eurozone
1,1%
Eurozone
-14,2%
Germany
4,4%
RE Funds
1,2%
RE Funds
1,6%
RE Equities
Open-ended
Open-ended
Equities
Open-ended
Bonds
Equities
Eurozone
-43,4%
RE Funds
2,5%
RE Funds
-1,3%
Germany
-14,7%
RE Funds
-0,7%
Germany
-2,2%
Eurozone
1,1%
Equities
Bonds
Equities
Equities
Commodities
Commodities
Commodities
Eurozone
-44,3%
Germany
1,9%
Eurozone
-5,4%
Eurozone
-17,5%
-1,0%
-8,3%
-11,1%
* CRB commodity index, iBoxx bond indexes, DAX, EuroSTOXX50, EPRA real estate equities index Eurozone, average performance by German
open-ended real estate funds according to BVI
Sources: Datastream, BVI, Helaba Research
Once again, the performance of the different assets classes varied a great deal in 2014. Thanks to
lower interest rates, government bonds saw strong price gains and an above-average performance. By contrast, stocks struggled to eke out gains. The collapse in commodity prices led to
significant losses, as a result of which this asset class brought up the rear for the third time in succession. At 1.6 %, the performance of German open-ended real estate funds was modest. Here
the low interest rates on liquid funds and write-offs on properties continued to depress returns. Still,
those funds that were not in liquidation did better at 2.5 %. Real estate stocks made it to the top
this time – not least because many publicly traded real estate companies are profiting from favourable refinancing. The change year by year in the performance ranking of the various asset classes
confirms just how important diversification is within a portfolio.
HELABA RESEARCH ·24 FEBRUARY 2015 · © HELABA
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REAL EST AT E REPORT
2
Dr. Stefan Mitropoulos
phone: +49 69/91 32-46
19
Additional impulses from
the weaker euro?
Selected real estate analyses
2.1 Investment market: new records
Last year a transaction volume of nearly 40 billion euro was reported for commercial real estate in
Germany – a robust growth of around 30 % over the already respectable level in 2013. Most market observers expect another notable rise this year.
The transaction volumes of German (as well as European) commercial real estate have reached a
level that was last seen during the boom before the financial crisis. Persistently low interest rates,
the lack of investment alternatives, and now the ECB’s asset purchase program are creating dynamism in the investment market. Especially foreign actors have driven the transaction volumes
up: in 2014 they invested far more money in German properties than they did in the year before,
boosting their share of total turnover to nearly half. In the current year the weaker euro could provide additional impulses. Still, the effect of the exchange rate on investment turnover should not be
overestimated. While it is true that a dollar investor can make more favourable investments in real
estate in the Eurozone at this time, a real estate transaction usually has a lead time of several
months, which means that the exchange rate would have to remain at the lower level for some
time. However, we expect a counter-movement from about the middle of this year, once the US
central bank carries out its turnaround on interest rates. Advantages based on the exchange rate
should then at least be smaller. In addition, one must bear in mind that a potentially more favourable acquisition of properties in the euro zone would be offset by correspondingly lower rental income if the euro continues to be weak for an extended period.
Commercial real estate turnover have rebounded
Transaction volumes of commercial properties in Germany, billion euro
20
20
16
16
12
12
8
8
4
4
0
0
06
07
08
09
10
11
12
13
14
Sources: CBRE, Helaba Research
Rising appetite
for risk
The scarcity of core properties favoured by many investors has now by force of necessity led to a
growing appetite for risk. Thus, the results for last year show a higher ratio of transactions involving
the Core Plus and Value Add segments. Even properties with “flaws,” those outside of prime locations and major conurbations, as well as niche segments are also experiencing greater demand –
a trend that will continue in 2015. In addition, there are once again more portfolio deals. This suggests that some investors can take advantage of the favourable situation to exit, something that
was difficult to do in the previous years, especially with problematic properties. The extremely low
interest rates are also favouring a higher leverage and are attracting more private equity investors,
for example. All of these things are actually signs of an advanced phase in the real estate cycle.
However, aggressive financing and risky financial constructs are not yet playing a major role, as
they did before the financial crisis. The liquidity provided by the central banks will ensure that the
upward movement will likely be sustained beyond 2015. Given the continuing favourable background conditions, the biggest risk may therefore lie in the fact that the cyclical nature of real estate
markets is all too readily forgotten.
HELABA RESEARCH 24 F EBRUARY 2015· © HEL ABA
2
REAL EST AT E REPORT
Dr. Stefan Mitropoulos
phone: +49 69/91 32-46
19
2.2 Quantitative Easing, or how low can rental returns go?
On 22 January, the ECB decided on an extensive asset purchase program. The plan calls for the
purchase of 60 billion euro worth of government and corporate bonds between March and presumably the end of September 2016. Should the program live up to expectations, this should also
have noticeable repercussions for the real estate markets.
The announced Quantitative Easing (QE) does not represent a new direction, but an expansion of
the ECB’s already very expansionary monetary policy. This instrument is not new to the financial
markets, with the US central bank already having carried out three such programs, which have
now ended. Opinions diverge a great deal about the success of QE. Of primary importance to the
real estate markets are the possible repercussions for interest rates. The most important effect for
real estate should thus not lie with an additional cut in interest rates, but rather in a low-interest
environment that will persist for a longer time. A turnaround on interest rates by the ECB can now
be expected in 2017/2018, at the earliest. The extremely low interest rates tend to lead to rising
real estate values, declining initial yields, higher transaction volumes, and an expansion of real
estate loans. These developments were already visible in the previous low-interest environment,
and they will presumable persist in 2016 as a result of the additional impulses from the QE program in 2015.
QE extends
low-interest phase
Investors accept low interest rates in bond market...
… why not for real estate?
Yield on 10-year government bonds, %
Top initial yields in the office market, Q4 in each year, %
10
10
8
8
5,0
5,0
2012
4,5
2011
2014
4,0
6
4,5
2013
4,0
6
Germany
4
3,5
3,5
3,0
3,0
2,5
2,5
4
2
2
Japan
0
0
90
92
94
96
98
00
02
04
06
08
Sources: Datastream, Helaba Research
10
12
14
2,0
2,0
Frankfurt
London
Paris
New York Singapore
Tokyo
Hong Kong
Sources: Jones Lang LaSalle, Helaba Research
The persistence of very low interest rates is exacerbating the investment pressure. Since positive
returns can hardly still be achieved in the bond market, the real estate asset class is becoming
more and more attractive. However, it is difficult to quantify the effect on initial yields. In principle,
because of the extremely expansionary monetary policy the purchase prices for real estate will rise
more strongly and more quickly than rental incomes against a backdrop of rather modest economic
growth. Only if QE, in combination with structural reforms in the euro zone, ends up being successful and growth is in fact noticeably invigorated, would rents – e.g., in the European office markets –
move up more clearly, with a time lag. Since that cannot be expected for 2015, the development in
the investment market will likely continue to outpace the development in rental markets. This argues for a further decline in initial yields in the real estate market.
Why should it
stop at 4 %?
We do not share the argument put forth by some market observers, namely, that prime yields in
the office market cannot fall any further, since for many investors the lower limit is reached at
around 4 % and lower rates will not be accepted. By now investors are forced to accept much
lower returns on other assets, especially in the bond market. The announcement of QE, in particular, does not suggest that current initial yields reflect merely an exceptional short-term situation, but
that actors in the real estate market must adjust to lower interest rates for an extended period of
time. The result will be that European real estate investors, too, will become more “flexible” in this
regard (like their Asian counterparts). In general, however, it can be assumed that these developments in the real estate markets will unfold much more slowly than in the case of other (publicly
traded) assets.
HELABA RESEARCH 24 F EBRUARY 2015· © HEL ABA
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REAL EST AT E REPORT
Dr. Stefan Mütze
phone: 49 69/91 32-38 50
2.3 Normalization in the German housing market 2015
German housing construction will slow its pace this year. But since the need for new housing and
expansion measures remains, the outlook is positive over the medium term. Record-low mortgage
interest rates and rising incomes make financing easier.
Stimulus from low
mortgage interest rates
and rising incomes
German housing construction has been benefiting for years from an excellent environment. For
example, mortgage interest rates keep falling to new lows. And because of the even more expansionary ECB policy, no significant change is to be expected in this regard over the short term. At
the same time, the real incomes of households are on the rise, which makes residential property
more affordable than ever before, in spite of higher construction costs. Still, the dynamism in housing construction weakened most recently. Even though permits recorded another increase of
around 5 % in 2014, they have weakened in recent months. The construction of multi-storey buildings continued to be the main pillar. Incoming orders also declined in the second half of 2014. Most
recently, however, there have been signs of stabilization. The need for new construction remains
high. For that reason, the latest weakening should be seen as a temporary phenomenon.
Politicians would be well advised, however, to refrain from measures inimical to growth. For example, rent control (“Mietpreisbremse”) is slowing the level of activity, since it interferes with the function of price as a sign of scarcity and leads to declining expectations on returns. More dynamism
could also be achieved by a less restrictive allocation of building land. The continuous tightening of
environmental standards achieves declining ecological returns with a disproportional rise in costs.
In 2015, investment in housing construction, at price-adjusted 1.7 %, should grow at half the rate
as in the previous year (3.7 %). In addition to the reasons already mentioned, the weather-related
base effect plays a role: since in 2014 winter essentially failed to materialize, the starting level for
the first quarter of 2015 is very high.
Housing construction permits: loss of dynamism
Above-average housing construction
Thousands per month and moving average
Index, seasonally adjusted, Q1 2010 = 100
Sources: Macrobond, Helaba Research
Sources: Federal Statistical Office, Helaba Research
Uncertainty about energyoriented refurbishment
Over the medium term the demand for new housing should remain lively. The German population
has been growing since 2011. Because of strong immigration, the growth of 270,000 in 2014 was
above the 200,000 mark for the second time in a row. Immigration should decline in the coming
years, since the labour market situation in the important Eurozone countries with economic problems (like Spain) is improving. Still, the continuous rise in employment and Germany’s good economic situation function like a kind of magnet. This stimulates demand for housing. Add to this that
the internal migration from rural areas into the cities and their surrounding regions will continue.
This, too, is boosting the need for housing in the conurbations. Expansion and renovation, which
account for the largest part of housing construction activity at 70 %, should also increase. For
example, 67 % of the nearly 39 million German housing units were built before 1978. Many of
those no longer meet today’s standards. Uncertainty continues to be created by the on-going discussion about the planned tax breaks for energy-oriented refurbishments. It is causing investors to
hold off until decisions have been made. 
HELABA RESEARCH 24 F EBRUARY 2015· © HEL ABA
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