City Survey
Q2 2024
Macroeconomic environment
The German economy has hit a rough patch
The German economy continues to tread water. For 2024, the current consensus forecast expects minimal growth of 0.2 percent. The ifo business climate index also does not indicate an imminent revival in recent months. Since April, the overall index has fallen slightly again, but also remains at a significantly higher level than in large parts of 2022 and 2023. In the second half of the year, a slight improvement in the economic environment seems possible, which will continue in 2025. For the coming year, the consensus forecast expects economic growth of 1.1 percent for Germany.
The subdued economic development will thus slow down the demand for space on the commercial markets in the coming months. The labour market, which remains very stable, is to be viewed positively. The unemployment rate is expected to rise only slightly in 2024. The current wage agreements are leading to a positive real wage development with falling inflation rates, which will support private consumption and also have positive effects on the housing market.
Economic growth and inflation (in percent y-o-y)
Sources: Oxford Economics (June 2024), Colliers
Forecast from Q2 2024
Inflation rates in both Germany and the eurozone have recently continued to move towards the 2 percent target, even if this has not yet been reached. The ECB reacted to this development with a first interest rate cut of 25 basis points in June 2024, but left the further path open. The consensus forecast expects an average of three further interest rate cuts in the course of the year and an interest rate level of 3.55% by the end of 2024.
Interest rate trend (in percent)
Sources: Oxford Economics (June 2024)
Colliers forecast from Q2 2024
The ECB’s interest rate cut in the first half of the year has no impact on long-term interest rates. These have even risen slightly since the beginning of the year. The 10-year SWAP rates in the second quarter moved in a narrow corridor between 2.70 percent and 2.90 percent and the 10-year German government bonds recently fluctuated between 2.35 percent and 2.70 percent. In its forecast, Oxford Economics expects a stable level in the area of the current corridors. Although this situation does not result in any positive impetus for the real estate market due to significantly lower financing conditions, it does result in better predictability with lower volatility than in the course of 2023.
The upward pressure on initial yields remains in this environment, but has recently eased somewhat. The risk premium for prime office properties in the top 7 (unweighted gross prime yield of just under 4.88 percent) was around 240 basis points at the end of Q2 2024. This means that real estate investments currently appear more attractive than in the previous year (spread: 200 basis points). A further slight adjustment of initial yields with increases towards 5.00 to 5.25 percent seems possible in the current environment by the end of 2024.
Bond and real estate yields (in percent)
Sources: Oxford Economics (June 2024)
Colliers forecast from Q2 2024
ESG – EU Taxonomy’s Standards are completed, defining the real estate sector’s “circular economy”
The European Union already adopted the EU Taxonomy in 2020, together with the Technical Screening Criteria (TSC) for the first two environmental objectives “Climate adaptation” and “Climate mitigation”.
Now, on 21.11.2023, the Technical Standards of the remaining four objectives, “Sustainable use and protection of water and marine resources”, “Transition to a circular economy”, “Pollution” and “Protection and restoration of biodiversity and ecosystems”, have been adopted. These standards will apply to all EU member states on the 1st of January 2024.
While the first two objectives affect all industries equally, the remaining four are not equally relevant for all industries. For the construction of new buildings and the renovation of existing buildings, the primary objective “transition to a circular economy” has been defined. Nevertheless, the other environmental objectives must also be considered within the framework of “Do-Not-Significant-Harm” (DNSH).
As a primary objective, the environmental objective “Transition to a Circular Economy” includes the following six TSC:
- At least 90 % (new construction) / 70 % (renovations) of the non-hazardous construction and demolition waste generated on the construction site shall be prepared for reuse or recycling, except for backfilling.
- The life-cycle global warming potential of the building (new construction & renovation) has been calculated for each phase of the life cycle and will be disclosed to investors and customers upon request.
- Construction designs and techniques support circularity by integrating design concepts for adaptability and dismantling.
- In the case of renovations, at least 50% of the original building must be preserved.
- The use of primary raw materials is minimized by the use of secondary raw materials. The following maximum quantities of the primary raw material used must be complied with:
- Concrete, natural stone or agglomerate stone: < 70 % (new construction) / < 85 % (renovation)
- Bricks, tiles, and ceramics: < 70% (new construction) / < 85% (renovation)
- bio-based plastics: < 80 % (new construction) / < 90 % (renovation)
- Mineral wool glass and insulation materials: < 70 % (new construction) / < 85 % (renovation)
- non-bio-based plastic: < 50 % (new construction) / < 75 % (renovation)
- Metal: < 30% (new construction) / < 65% (renovation)
- Plaster: < 65% (new construction) / < 83% (renovation)
If no information is available on the recycled content of a construction product, it can be assumed that it consists of 100% primary raw materials.
- The operator of the activity shall use electronic tools to describe the characteristics of the building in its constructed form, including the materials and components used, for the purposes of future maintenance, recovery, and reuse. The information is stored in digital form and made available to investors and customers upon request.
This environmental objective also focuses on information transparency, which is why any findings must be written down and published on request.
The DNSH criteria for the primary objective “Transition to a circular economy” are similar to the existing criteria for the first two objectives and will therefore not be discussed further here.
These high requirements can have a deterrent effect on investors and owners, which is why the primary target may be “climate change” or “adaptation to climate change”. However, even then, the DNSH criteria must be considered, which includes the obligation to prepare at least 70% of the general construction and demolition waste for reuse, recycling, or other recovery.
With this new appreciation of building materials, a reconsideration of the construction industry is to be expected in the medium term. The increasing demand, and thus value, of recyclable building materials as well as the already noticeable shortage of primary raw materials will permanently change the question “Demolition or renovation?”. Today’s construction standards, for example due to the use of composite materials, which make recycling more difficult, are unlikely to be able to meet the increasing demand for these materials. In the medium to long term, this will push the industry to set new building standards and make recycling a matter of course.