Development of the Economic Environment

After a prolonged phase of stagnation, the European Commission reported a comeback for the EU economy at the beginning of the year. At 0.3%, economic growth lagged behind its estimated potential in the first quarter of 2024, but nevertheless surpassed expectations. The conditions are still looking good for a gradual acceleration in economic activity both this and next year. According to the Federal Statistical Office (Destatis), the German economy started 2024 with slight GDP growth (GDP in first quarter of 2024 +0.2% compared with the previous quarter) after still reporting negative growth at the end of 2023. Exports and investment delivered positive impetus for economic output, but private consumer spending failed to mount a recovery. According to the Kiel Institute for the World Economy (IfW Kiel), the economic recovery is making only sluggish progress. Despite the upward trajectory, the business and consumer sentiment remain lackluster. According to Statistics Sweden (SCB), GDP there rose by 0.7% during the same period. The upswing can be attributed primarily to changes in inventories. The Austrian statistical office, Statistik Austria, is reporting predicted GDP growth in Austria of 0.2% in a quarter-on-quarter comparison, with private consumption propping up the economy. For 2024, GDP growth of 0.2% is forecast for Germany (IfW Kiel), 1.0% for Sweden (National Institute of Economic Research, NIER) and 0.0% for Austria (Institute of Economic Research, WIFO).

The labor market is unable to escape the combination of a sluggish economic recovery in Germany, for example, and restrained consumption. Consequently, the German Federal Employment Agency reported yet another increase in unemployment and underemployment in Germany in June 2024. The reported demand for new employees also slowed further. The unemployment rate based on the total civilian labor force rose by 0.3 percentage points year-on-year in June 2024 to 5.8%. According to Statistics Sweden, the unemployment rate in Sweden rose by 0.8 percentage points as against May 2023 to 8.7% in May 2024 (not seasonally adjusted). According to national calculations by the Austrian Public Employment Service (AMS), the unemployment rate in Austria in June 2024 was 6.2% and thus 0.5 percentage points higher than in the previous year. Based on respective national definitions, the average unemployment rate expected in 2024 is 5.9% for Germany (IfW Kiel), 8.4% in Sweden (NIER) and 6.9% in Austria (WIFO).

Measured based on the consumer price index (CPI), inflation in Germany came in at 2.2% year-on-year in June 2024, according to Destatis. This signals a drop in the inflation rate compared with the beginning of the year. DB Research reports that inflation has hit the current cyclical low point. Base effects were the main factor responsible for the drop in inflation in the first half of 2024. Core inflation, however, is still sitting at around the 3% mark year-on-year in both Germany and the eurozone, above the 2% target. In Sweden and Austria, year-on-year inflation rates came to 2.6% (SCB) and an estimated 3.0% (Statistics Austria) in June 2024, and were also down on the rates witnessed at the beginning of the year. Based on respective national definitions, a CPI increase of 2.2% is expected for Germany (IfW Kiel), 2.8% for Sweden (NIER) and 3.4% for Austria (WIFO) for 2024 on average.

In a quest to make a timely return to its 2% medium-term inflation target, the European Central Bank (ECB) raised key rates in several steps in 2023 to 4.50%. June 2024 saw the ECB begin to loosen the monetary reins somewhat, when it lowered its key interest rate by 25 basis points to the current level of 4.25%. According to IfW Kiel, further interest rate moves could follow as the year progresses. High inflation also prompted the Swedish Riksbank to take further steps to lift its policy rate to 4.00% in the course of 2023. After the inflation rate started to move closer to the inflation target again, the policy rate was lowered for the first time in May 2024 by 25 basis points to 3.75%. Further interest rate cuts could well follow in the second half of the year. In this overall environment, interest rates for construction in Germany, Sweden and Austria remained considerably higher at the start of 2024 than before the interest rate turnaround of 2022.

The real estate market is painting a mixed picture: On the residential property market, price expectations on both the seller and buyer side are slowly converging, and prices are on the rise again in some places. The real estate investment market initially remained subdued, with transaction volumes in the residential segment rising of late in some cases. The situation for project developers remains a challenging one. At the same time, according to Savills, the underlying conditions on the rental housing market in Germany are very good from the perspective of owners and investors alike. In many locations, there is a considerable need to catch up, and need for additional apartments, in the residential construction sector, and the demand for housing looks set to continue to rise. A further drop in vacancy rates and an increase in market rents is expected. Quoted rents continued to increase across Germany; empirica reports that they were 5.6% higher on average over all years of construction in the second quarter of 2024 (new construction 5.8%) than in the same quarter of the previous year. According to DB Research, new contract rents are expected to grow by around 5% in the current year, and rents for existing contracts by around 2.2%. According to “Hem & Hyra,” the member magazine published by the Swedish tenants’ association (“Hyresgästföreningen”), almost all rents for 2024 had been negotiated as of May. The average rent increase until that point was a good 5%. Measured against the index for actual rental payments for primary residences as part of the consumer price index, rents in Austria also rose further from the beginning of the year and were approx. 7% higher in May 2024 than in the comparable previous-year month.

Since house prices peaked in 2022, they have cooled down considerably in Germany, Sweden and Austria. The price drop in Germany had come to a virtual standstill by the end of the first six months of the year. The empirica price index for condominiums (all years of construction) was 3.6% lower in the second quarter of 2024 compared to the same period of the previous year. In a quarter-on-quarter comparison, however, the decline only came in at 0.4%. Other market observers are reporting that prices for existing apartments (Immowelt) and condominiums (Europace) are already up slightly on the prior-year levels on average at the midpoint of the year. In the new construction segment, the empirica price index for condominiums was up by 1.9% year-on-year in the second quarter of 2024. According to specialists from Helaba, prices are likely to stabilize in 2024, whereas Immowelt experts predict that prices will rise over the remainder of the year. According to Svensk Mäklarstatistik, prices for tenant-owned apartments (Bostadsrätter) in Sweden were already 2.4% higher in June 2024 compared with the same month of the previous year. Prices have clearly bounced back since the beginning of the year after still being on a slight downward trajectory at the end of 2023. Experts from Swedbank expect house prices to have bottomed out and predict that they will rise slightly, by 2% to 3%, this year. The values of the current residential real estate price index of the Austrian central bank (OeNB) on the basis of new and used condominiums and single-family residences show another decrease in Austria in the first quarter of 2024, namely by 2.6% compared with the previous year and by 0.6% as against the previous quarter. This year’s trend is not, however, a uniform one. Compared to the previous quarter, prices in Vienna continued to drop in the first three months of 2024, but they rose on average in the rest of Austria (excluding Vienna). According to the RE/MAX report released at the start of the year, the price trend for residential property in Austria was headed on a downward trajectory to begin with in 2024.

The size of the population in Germany, Sweden and Austria rose again in 2023 and is expected to increase further. There is still a shortage of apartments in many large cities and urban areas. Construction activity, however, is expected to drop. Residential construction is in a difficult phase in all three countries due to the combination of higher interest rates, less favorable financing conditions and increased construction costs. In the current circumstances, new construction developments are barely viable in commercial terms. According to Destatis, 294,400 apartments were completed in Germany in 2023, a figure that was down by 0.3% as against the previous year. An updated estimate released by DB Research suggests that the figure could drop back to 260,000 in 2024. The German federal government had set itself the goal of building 400,000 new apartments per year in Germany. According to JLL, the declining volume of new construction will further increase the excess demand on the rental apartment markets in particular. Boverket estimates that 67,300 apartments will have to be built per year in Sweden by 2030. While just shy of 69,000 apartments were completed last year, the pace of completions will slow significantly in 2024. Construction only started on 32,000 apartments in 2023, and this figure is expected to fall to 27,000 in the current year. Residential construction activity in Austria had addressed the marked increase in the demand for homes in recent years. Following a drastic decline in building permits issued, the number of residential buildings completed slowed significantly in 2023, according to Bank Austria. Much lower completion figures are expected for 2024, too. As the demand for housing continues to grow, CBRE expects to see a bottleneck in large metropolitan areas in the medium term.

In terms of transaction volume, the German residential investment market was still subdued overall in the first half of 2024. CBRE put the volume at € 2.8 billion, 10% lower than in the same period of the previous year. It attributes the decline to the general drop in the capital values realized and the quality of properties traded. Meanwhile, the second quarter brought a marked revival compared with the first quarter of 2024. The biggest net buyer was the public sector, followed by asset and fund managers. CBRE reports that the lion’s share of transaction activity was in Berlin. Average prime yields for the country’s top 7 cities remained stable at 3.4% in the second quarter. As far as 2024 as a whole is concerned, CBRE expects a transaction volume of at least € 5 billion. The volume is being increasingly determined by sales through funds and listed residential real estate companies due to a need for refinancing. According to Colliers, properties worth € 4.7 billion were traded across all segments on the Swedish transaction market in the first half of 2024, representing a year-on-year increase of approx. 16%. In terms of transaction volume, residential properties were the third-largest asset class after logistics properties and offices with a share of 23%. According to CBRE Austria, the Austrian real estate investment market saw a transaction volume in the first half of 2024 of approximately € 1 billion, down only slightly on the first half of 2023 (€ 1.08 billion). The share of the residential segment stood at around 30%. An EHL analysis reveals that residential properties in Vienna remain particularly sought-after.

Housing policy developments in Germany in the first half of 2024 included more changes to the German Buildings Energy Act (GEG) and to the Federal Funding for Efficient Buildings (BEG). On January 1, 2024, for example, a GEG amendment came into force aimed at increasing the proportion of renewable energies in heating systems and at reducing emissions. At the same time, a new directive on the Federal Funding for Efficient Buildings (BEG) came into force to support the replacement of old fossil-fuel heating systems with environmentally-friendly systems by subsidizing the associated investment costs. After the “Climate-friendly new construction” promotional program had been closed to applicants at the end of 2023, the German state-owned development bank KfW started accepting applications for subsidized loans again in February 2024. At the beginning of July 2024, part of the funds were also released for the planned promotional program “Climate-friendly new construction in the low-price segment”, a move that is designed to create incentives for the construction of apartments in the lower and middle price segments. In March of this year, declining balance depreciation was also adopted for newly constructed apartments in the context of the German Growth Opportunities Act (Wachstumschancengesetz). This applies for a limited period to newly constructed residential buildings and apartments, or those acquired in the year of completion provided that construction work starts between October 1, 2023, and September 30, 2029. The KfW “Jung kauft alt” (Young buys old) promotional program will come into force in the summer of 2024, the aim being to promote the purchase of old buildings in need of renovation. In April 2024, the government coalition partners agreed to extend the rent cap by a period of three years. They explain that they currently still need to consult on the corresponding draft legislation. The German government is implementing the introduction of a new non-profit housing structure with the Cabinet decision on the 2024 Annual Tax Act in June of this year. Companies that make a commitment to affordable rents in the long run will benefit from tax incentives. An agreement reached in December on the reform of the EU Buildings Directive provides for, among other things, the reduction of energy consumption in residential buildings. The EU is waiving the obligation to refurbish poorly insulated private residential buildings. The new version of the Directive came into force at the end of May 2024. The introduction of new building regulations planned in Sweden for the turn of the year 2024/2025 has been postponed to July 1, 2025. In Austria, a rent cap has applied since 2024 that limits the increase in indicative rents, category-based rents and rents for non-profit apartments. This does not include unrestricted rental agreements. A residential construction package adopted in Austria in the spring in a quest to revive the construction industry is to provide more favorable conditions for residential construction loans, among other measures.