Anyone looking to rent office space in many German cities today is familiar with the problem: choice is very limited, rents are high and supply is scarce. The only real long-term solution is to create new space – but this is precisely where there is a massive shortfall in many places. Far too few new buildings are being constructed even now, and if central banks do indeed raise interest rates next year, as many economic experts fear, new-build projects in the commercial property sector are likely to decline even further – because higher borrowing costs can act as a brake on investment in construction financing within the industry.
Even now: far too few new construction projects
Customers would, of course, be the ones to lose out. The European Central Bank’s key interest rate currently stands at 0.0 per cent – unchanged since 10 March 2016, when it was lowered once again from 0.05 per cent at the time. Despite this stability in cheap capital, new-build projects have failed to effectively alleviate the shortage of commercial property in Germany’s major cities, particularly in Munich, Stuttgart, Hamburg, Cologne, Düsseldorf and Frankfurt. Vacancy rates have fallen steadily. Dr André Helf, CEO of the COLLECTION Business Centre Group, assesses the situation: “It is extremely difficult to find new space and make it available to our clients. We are constantly on the lookout for suitable properties in various markets, as we would like to expand and offer our business centres in further locations. Naturally, we also keep an eye on new-build projects in the commercial property sector, but unfortunately we have to conclude that far too little is being built. If interest rates continue to rise, the situation will certainly not improve. After all, investors have to secure construction financing. If they have to pay more for capital, this reduces the return on investment and thus the incentive for new construction projects.”
Interest rate trends: the trend is upwards
Interest rates are already on the rise in various G20 countries, including the US, where the Federal Reserve’s base rate has already reached 2.25 per cent; the last increase took place on 26 September 2018 – from 2.0 per cent at that time. Interest rates were also raised in Canada, from 1.5% to 1.75% on 24 October 2018.
“We must not forget that there are, of course, foreign investors in the German commercial property market who raise their construction financing capital in their home countries – these naturally include the US and Canada, but also Asian countries where interest rates are currently trending upwards,” explains Dr Helf, “in the long term, rising interest rates are poison not only for commercial property but for the entire property market.”
ECB: Low-interest-rate policy continues under Draghi
In Europe, the ECB has announced its intention to curb the “flood of money”. Many critics of the zero-interest-rate policy have long been calling for an end to cheap money, as the inflation rate in the eurozone is already rising. However, at its interest rate meeting on 13 December 2018, the ECB decided not to make the flow of money more expensive abruptly, but initially to ‘merely’ limit its bond purchases. Pressure from many EU capitals, however, continues to mount, including from Germany: here, Wolfgang Schäuble in particular is regarded as a critic of Draghi and the low-interest-rate policy. The President of the German Bundestag had already called for interest rates to be raised whilst serving as Finance Minister. Andreas Bley, chief economist at the German Banking Association (BVR), was also quoted in the media as saying: “The ECB’s current key interest rate is far too low.”
Mario Draghi, still President of the ECB, is known for his cautious interest rate policy. However, he is due to step down from office in October 2019 at the end of his term. Numerous economists expect a noticeable rise in interest rates by the time his successor takes office at the latest. This will mark the start of more difficult times for new-build projects and construction financing in the commercial property sector – a rather bad sign for tenants and, above all, for founders of start-ups, whose capital reserves are likely to be significantly eroded by high office rents.
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