Germany picture

A touch of housing crisis in Germany.

Financial Times Deutschland:

SEB Immoinvest close down.

First of all a technical note:

A German open real estate fund sell certificates that both institutional investors and private persons – the investor then receives interest. The fund buys real estate – typically rental blocks – and rent out the apartments, provide maintenance as any other landlord.

The investor can in normal circumstances get his deposit (certificate) on demand – though in a run on the fund, they can freeze payouts up to a year. If the liquidity cannot meet the sale back demand, then property must be sold off. In the case of SEB the fund must be dissolved and all property sold off.

That can be a problem for depositors as that may entail selling real estate in a depressed market – thus resulting in a loss to certificate owners. Housing prices (measured on privately owned houses) have risen 25% the since 2003 – which is microscopic compared to housing markets elsewhere. In fact a number of banks in Denmark have financed real estate development in Germany, as the housing prices seem to have endless bubble potential – without realizing that there might be a reason for that.

In fact real estate prices grew post-reunification until about 1990 – and then leveled off. The reunification brought a demand for new housing as the entire East-Germany was one big “fixer-upper”. As there is no rent control rents went up and according to Tobins-Q  real estate development started to exploit the unsatisfied demand and – as always – overshot. Totally predictable.

The trick about rentals is that people can move just like that if they find something more interesting. The threat to open real estate funds is – apart from depositors needing cash NOW – the rent loss associated with vacancies. Only one thing to do: Lower rent.

With a mass of property in the hands of banks acting as a potential squeeze we could see a drop in real estate prices in Germany of about 20% – rents somewhat less. Some banks will suffer, but the price correction will probably be reasonable.

Does anybody (aka unions) understand that salary hikes are not likely to happen in Germany?