From War Bunker to Penthouse to Market Flop

In the heyday of Germany’s property boom, it was commonplace for real estate investors to purchase dilapidated bunkers, ripe for conversion into luxury apartments. One such investor, Stefan Hoeglmaier, built a three-story penthouse atop a Nazi-era air raid shelter in a posh Munich neighborhood and used it as his hideaway. Local hairdressers and hotels sought permission to display their ads on its bullet-riddled facade. But now Hoeglmaiers hopes to sell his property for just a fraction of its original price: about 11 million euros. The flop mirrors the travails of the broader property sector across Europe’s largest economy as it struggles with its worst slump in decades.

For years, low-interest rates fueled a global boom, igniting interest in German property, seen as safe and stable. But now, as interest rates rise and lenders rein in lending, the property market feels a growing pinch.

The housing sector’s health is critical for Germany, Europe’s biggest economy outside Britain, and accounts for a fifth of its output and one in 10 jobs. But the new building has nearly halved this year.

Germany’s property boom owes its roots in the early 1990s when generous tax breaks encouraged West Germans to invest in property and build big apartment blocks. The resulting frenzy attracted investors worldwide, including US private equity firm Fortress Investment Group, which snapped up 82,000 Berlin apartments.

At the time, Germany was a rare star among developed nations regarding homeownership: only 43 percent of the population owned their own homes, far below the two-thirds who owned in the United States. The upshot is that most Germans didn’t benefit from the boom, which lifted house prices by around 70 percent between 1990 and 1998 versus just 30 percent in Britain and 20 percent in France.

As the property market soared, the Bundesbank began to sound warnings. In 2020, it said that real estate was overvalued and urged the country’s banks to be cautious. Yet many developers and investors, aided by the low-interest rates, were undeterred.

Today, Germany’s significant property holding companies need help with falling profits and the prospect of lower rental revenues. And the number of apartments being built is shrinking as developers slow construction and the cost of materials increases. The Munich-based Ifo Economic Institute forecasts just 200,000 homes will be completed this year, well below the federal government target.

Some experts say the downturn has been triggered by the end of record-low interest rates, which have helped propel Germany’s economy and buoyed property prices. Others say that the market is simply maturing. Either way, the property bubble is starting to deflate, with investors choosing between buying at bargain-basement prices or waiting for a better deal. The choice is a challenging one for many. Traders should act fast, says an analyst at Knight Frank in London. The best opportunities may be found in cities such as Frankfurt, where investors can still buy properties for a reasonable price in the face of rising interest rates and stagnant rents.

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