Germany becomes third-largest economy after Japan slip

With the news of Japan unexpectedly entering a recession at the end of 2023, Germany has taken its place as the third largest economy in the world. Japan’s GDP declined by an annualised 0.4% in the October-December period, following a 3.3% slump in the previous quarter.?

• This unforeseen downturn challenges expectations of an early Bank of Japan (BOJ) rate hike, casting doubt on the central bank's signals of policy tightening. The decline in private consumption, sluggish business spending, and concerns about inflation impact the BOJ's ability to justify a hike.

But the situation in Germany is far from optimistic, with the country’s housing market facing a substantial downturn, marked by a 10.23% decline in the nationwide house price index in Q3 2023 - the weakest performance in recent history. Higher mortgage interest rates, inflation, and a housing shortage contribute to reduced purchasing power, leading potential homebuyers to shift towards the rental market.?

• Both primary and secondary housing markets are affected, with new and existing dwelling prices dropping. Residential construction activity has plummeted, exacerbating the housing shortage, and various regions across Germany are experiencing declines in property prices.

Germany and Japan are not the only countries struggling, with results from the Office for National Statistics showing that the UK officially entered a recession after a 0.3% contraction in GDP for Q4 of 2023, following a 0.1% decline in the previous three months. Despite economists predicting a potentially short-lived recession, the setback for Prime Minister Rishi Sunak is significant as the Conservative party trails in polls ahead of an anticipated general election.?

To stay up to date on this developing situation, join us at GRI UK & Europe Reunion 2024 on February 21-22 at Four Seasons London.

Find out more and register HERE.

Bondstone’s António Pereira Dias - “We expect a large inflow of capital into Spain and Portugal”

Despite a seemingly endless flow of pessimistic forecasts, it must be remembered that many opportunities still exist.?

António Pereira Dias, Partner & CIO at Bondstone, justifies his optimism for Portugal and Spain considering their service-based economies with high exposure to tourism, leading to a reduced impact from supply driven inflation.

• Despite a recent lack of liquidity in the markets, once reactivation of deal flow is witnessed, a large inflow of capital into these locations is expected, explained António during a discussion with Gustavo Favaron, GRI Club’s CEO & Managing Partner, at the recent GRI Global Chairmen’s Retreat 2024 in St. Moritz.

Discussions also touched on Bondstone’s recently launched debt platform in Western Europe, focused on value-add, and even opportunistic deals, with knowledgeable and senior sponsors.

• But this is not just a short term strategy, António explains. They see a huge trend coming: the shift from real estate investment in core and core+ assets, to value-add. “Providing financing and facilitating deals that are all about creating value will continue, regardless of what happens to interest rates.”

Watch the full interview with António HERE.

Continuing Commercial Crash

European banks are confronting a significant challenge as they grapple with approximately EUR 1.4 trillion in loans linked to the troubled commercial property sector. Germany continues to be the focus as the country’s CRE market undergoes its most severe crisis in decades, with prices falling by 10.2% in 2023, record-low share prices, and warnings of ongoing challenges in 2024.?

• This downturn is affecting banks across Europe, particularly German banks, including Deutsche Bank, which has substantial exposure with 285 billion euros in commercial property loans, and Deutsche Pfandbriefbank (PBB) which is also facing concerns and credit rating downgrades, as 15% of its loans are tied to the U.S. commercial market.

The situation has led to retail investors withdrawing over €1 billion monthly from real estate funds in Europe, raising apprehensions about commercial property valuations. Data from Morningstar reveals that total net assets in European open-ended and exchange-traded property funds have dropped over 10% to €180.7 billion from December 2022 through the end of 2023, marking 11 consecutive months of outflows.?

• Concurrently, banking ETFs on both sides of the Atlantic are encountering challenges due to mounting pressure on the U.S. commercial real estate sector, with concerns about a potential regional banking crisis persisting.

The global real estate market is also beginning to witness the fallout of the Evergrande Crisis as Chinese investors and creditors sell assets to raise cash amidst a deepening property crisis in China, leading to concerns about unrealized losses globally.

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