While German domestic demand continued to grow in the first half of 2019, slumping exports has driven real GDP growth into a modest growth rate of 0.4% in Q2 (y/y). Weak global trade due to the US-China trade conflict as well as the Brexit uncertainty continue to weigh notably on manufacturing and the automotive sector. Consequently, we expect weaker economic growth in 2019/2020, although we predict domestic demand to partially compensate due to sound labour market fundamentals, stable wage growth and low inflation. Despite current economic challenges, occupier markets should remain resilient. Key cities are driven by supply constraints and structural demand drivers, while capital values still appear attractive relative to their European peers.
Given the U-turn of the ECB’s monetary policy, we expect interest rates to remain lower for longer and capital to continue chasing real estate. This should put further downward pressure on market yields. Despite the already low yields in Germany, the spread to alternative assets will remain substantial in the current environment. Due to structural drivers, office, logistics and residential yields should compress moderately in the short term, backed by sound rental uplift projections. Market yields for offices and retail high street stand at sub 3% in key markets. Prime logistics yields have shifted below the 4% hurdle and fallen below shopping centres, where investors have become selective and the investment market has become dry in the current consolidation phase.