King Sturge Real Estate Economy Index: Downturn has yet to hit rock bottom

The deterioration of the mood on the German real estate market continues unchecked. Admittedly, the November survey of the King Sturge Real Estate Economy index – being based on a monthly poll – suggests that the downward trend has slowed. Thus, the equally poll-based Real Estate Climate dropped from 55.4 index points the previous month down to the current low of 48.2 points.
However, what is surprising when taking the annual development into account is the breakneck pace of the downturn. In just five months, the mood among the 1000 industry players regularly interviewed by the independent market research company BulwienGesa AG dropped by 50 index points. The most pessimistic market assessment reflects the downturn of the Real Estate Economy that is based on macroeconomic data, and that stood at 136.7 points in November (compared to 150.7 points the previous month).

“You hardly need a crystal ball to divine that the year 2008 is over, as far as business goes. Major deals are probably not to be expected anymore, to say nothing of large-scale transactions. What is more, many real estate projects have been put on the back burner or shelved altogether,“ observed Sascha Hettrich, Managing Partner of King Sturge Deutschland.

The all-time low of the Real Estate Climate, which dropped from 55.4 down to 48.2 index points in November, reflects the present state of paralysis the German real estate industry is in. The sombre mood can be traced back to the low Invest Climate most of all. The indicator for investment and purchase decisions hit a new record low at 35.7 points (compared to 41.3 the month before). This means that no major transactions are conducted these days. The Rental Climate, the second sub-indicator of the Real Estate Climate, remained relatively stable at 61.4 index points, down from 70.4 points in October. Then again, market players are expecting the rent and income development to deteriorate even in this area.

As in the month before, a steady cash flow and favorable refinancing options caused the residential real estate to remain the most stable segment even in November. Rising vacancy rates precipitated by the present economic development and the regressive consumer spending are reflected in a reticent ratings of the commercial, office, and retail sectors.

The Real Estate Economy, which is based on statistical ratios such as DAX, ifo, DIMAX, and interest rates, experienced a drastic downturn in November. It plummeted down to 136.7 points, which translates into a 9.3% decrease. In face of so serious a decline, business in 2009 is expected to start out slow.

“At the same time, there are indeed some bright prospects,” argued Hettrich. “For instance, the economic aid program launched in early November has earmarked funds for additional investments in infrastructure and building redevelopments. It is definitely a positive signal for the construction and real estate industry,” Hettrich added. “Naturally, there is always the chance that the program’s impact may turn out to be just a drop in a bucket.”

Source: King Sturge