Market Report 2011 GerMany - Europe Real Estate

6
Leading economic indicators such as the BA-X labour market index issued by the Federal
Employment Agency and the Ifo Institute’s Employment Barometer suggest that
the upturn in the labour market in Germany is likely to continue this year. This is due
not least to the increasing number of service companies seeking to employ new staff.
The most recent forecasts by various economic research institutes – e.g. the Kiel
Institute for the World Economy the RWI – indicate that employment will increase
by over 1% during the current year. As a result, the labour market offers favourable
conditions for an expansion in office employment. This will lead to additional demand
for office space and a recovery in the rental markets in Germany.
Inflation rate currently above the target level of the ECB
The past few months have seen a noticeable acceleration in prices during the course
of the economic recovery. The general cost of living index in Germany in March 2011
was up 2.1% on the previous year’s figure. A central reason for this development are
higher prices for energy and foodstuffs.
Second-round effects of high wage demands or the passing on of higher costs to consumers
cannot be excluded. This applies all the more in Germany given that capacity
utilisation during the course of the vigorous economic recovery has once again
exceeded the long-term average value. Based on the most recent forecasts, Germany
can therefore expect an inflation rate of around 2.5% for the current year.
The European Central Bank’s price target of “close to, but just under 2%” was also
exceeded most recently in the Eurozone. Compared with the previous year, inflation
reached 2.4% in February. The European Central Bank has expressed its alarm over
the past few months at the higher expected inflation and has already announced an
initial increase of its key interest rate for April.
Most analysts assume that the key interest rate will be increased in a series of steps
from the current rate of 1.0% to 1.75% by the end of the year – even if the downside
risks to the global economy have increased again recently as a result of recent events
in Japan.
First increase of key interest rates by the ECB on the horizon
Against this background and given the favourable economic trends, interest rates on
European money and capital markets have increased significantly since September
2010. Most recently, the 3-month Euribor hovered around the 1.2% level, while the
rate for ten-year, fixed-interest German government bonds was roughly 3.3%. In this
context, interest rates trends remain extremely volatile due to the greater sensitivity
of investors, as reflected most recently by the impact of the serious natural catastrophe
in Japan.
Looking ahead to the end of 2011, a moderate rise of interest rates to 2.0% in the
case of the 3-month Euribor and around 3.5% for ten-year German government bonds
appears plausible against the backdrop of higher inflation expectations and the most
likely economic scenario.
The opportunity and financing costs of property investments are therefore likely
to increase during the coming months.
in %
Inflation rate
3
2
1
0
'0 0 '02 '0 4 '06 '0 8 '10 '1 2e
Source: Bundesbank, forecast by IVG Research
Interest in %
in %
Interest structure curve
4
3
2
1
10-year bonds
6
5
4
3
2
1 2 3 4 5 6 7 8 9 10
Duration in years
Mar 10 Sep 10 Mar 11
Source: Daily press, average interest rate swap
'01 '03 '05 '07 '09 '11
Eurozone UK USA
Source: Oppenheim Research