Venturing a forecast has never been harder than in these times of enormous upheavals and latent tensions. Nonetheless, I am willing to share some thoughts with you on the likely developments in 2013.
International affairs remain fraught with extreme uncertainty. What do the latest developments in North Korea imply? It will be one of the most suspenseful issues of the year. Is there a chance that the Communist country will modernise and open itself to economic reforms, as did China? And what would this mean? What about the nuclear program of Iran? Will there be another war in the Middle East? Will the revolutions of the Arab Spring bring new Islamist regimes to power? All of these geopolitical issues will factor in the development on the financial markets, too.
The key issue in Europe then as now is the Euro debt crisis with all its ramifications. Although things have calmed down a bit for the time being, there is no reason whatsoever to sound the all-clear signal. The current state of affairs resembles the tranquillity of a full-blown alcoholic who stopped shaking because he has laid hold on another bottle of liquor.
The liquor in the parable represents, of course, the ECB’s monetary policy measures. They did nothing to resolve the issues. On the contrary, they just glossed them over. The heavily indebted countries in Southern Europe have not tackled any serious reform. Why would they? If you are under the impression that the ECB will rectify the situation through unlimited bond buy-ups (= fiat money), why should you take on labour market reforms that are sure to cost you the next elections?
The situation has been exacerbated, because France has lately been headed by a dyed-in-the-wool ideologist whose anti-business policy will deepen the problems of our next-door neighbours. France will gradually turn into another one of Europe’s troubled children, even if many have chosen to ignore the signs so far.
Many of my readers have criticised me for my pinpoint warnings of Hollande and suggested that the wealth tax and other things like this only represented populist campaign rhetoric that would hardly find its way into actual legislation following the elections. This has proven to be erroneous, because Hollande indeed signed the wealth tax into law. And it does not ruffle his feathers in the least that entrepreneurs are leaving the country in droves, nor that the French Constitutional Court has declared the tax unconstitutional. He intends, as he said in the New Year address, to see the bill through nonetheless, no matter what legal misgivings may stand in its way, and regardless of how many entrepreneurs it will send running for the border.
What worries me is that Holland has also met with approval among many of Germany’s Social Democrats and Greens (to say nothing of the leftists of “Die Linke”). Since it is safe to assume that Social Democrats and/or Greens will be part of the next coalition government (be it as coalition partner of the Christian Democrats or in a coalition of their own), taxes will predictably rise for “the rich” in Germany, too. The real estate industry will also be affected by the change. Here is the scary agenda I believe is likely to be implemented either by a Grand Coalition of Christian Democrats and Social Democrats or by a coalition of Social Democrats and Greens:
- The top tax rate will be raised substantially, pushing it beyond the 50% mark if the wealth tax and the Solidarity Surcharge are taken into account.
- The net worth tax will be reintroduced.
- The inheritance and gift tax will be raised.
- Both the rent level and the rental growth for new leases will be capped.
- The speculation period for real estate pursuant to Art. 23, German Income Tax Act, will be rescinded.
If the country was to be governed by Social Democrats and Greens, a general social security is likely to be introduced that will burden landlords even further, among others.
Which way forward with the various investment vehicles? The trend on the stock market is hard to gauge. The argument that low interest rates will drive investors to buy equities is not a foregone conclusion. In Japan, in any case, it failed to happen even though interest rates have been low for decades.
I assume that the run on property, especially German residential property, will continue. Unlike in other countries, Germany did not experience a real estate bubble, nor are there signs of one now. This is not to suggest that we will never be faced with a bubble, as the real estate frenzy among Germans is just getting started.
A fear of inflation, a paucity of investment alternatives, low interest rates, and the worry that rents might surge will prompt a lot of people to buy real estate. A recently published survey which suggests that the share of those who intend to invest in real estate has nearly tripled within a single year (rising from 17% to 46%) is, from my point of view, a danger signal as much as it is a windfall for the real estate industry. The run could be checked, though, if the incoming government was to sow seeds of doubt among investors by passing legislation inimical to property ownership or announced its intention to do so.
What about bullion? This past year, I ceased to recommend – the way I used to – to my readers to buy gold bullions. Then again, I haven’t recommended selling it either. I seem to have been quite right in my assessment. The gold price has remained virtually level year on year, at least against the Euro. As long as the Euro crisis remains virulent, and especially if people lose their faith in the paper currency, the chances of the gold price to soften in the long term are slim, I believe.
Here is my investment recommendation: Buy US real estate, and investments in international REITs, especially in REIT funds that invest in Asia among other destinations. This is where you still find growth, even in the real estate segment. Moreover, residential real estate in Germany’s Grade B cities, and listed companies investing in this property type, are likely to remain or become interesting, as the case may be. How long it will remain possible to shop for real estate at attractive prices here is hard to say. But for the time being, the major institutional investors have not yet become aware of these locations, as they remain focused on the “Big Seven” cities.
I have absolutely no concerns about a rise in interest rates, because it would sound the death knell for the heavily indebted countries in Southern Europe. Rather, we will continue to have a situation where interest rates will undercut inflation, driving up demand for tangible assets as a logical result.
Speaking of “tangibles”, here is what I think of closed-end funds: I expect to see the market shake-out to continue, fuelled in particular by the AIFM Directive. While the Directive was softened on the product side (!), its regulatory requirements are so exorbitantly high as to cause small-scale initiators to throw in the towel.
It will be interesting to see what the future will bring for the open-ended real estate funds. Will they succeed in selling their properties at the fair market values most recently appraised? I don’t think they will, and brace myself for further valuation impairments.
So much for my outlook on 2013. Let me seize the opportunity to wish you, dear reader, all the best for the year to come: good health and, above all, joy in your work!