DIX Index at All-time High

Published on 2015/04/14

Six percent – it is the finest result shown by the DIX German Property Index during the past 15 years. What surprises me, though, is that the average capital growth (across property types) was so modest at just 0.7 percent. Even the capital growth for residential real estate came to 2.9 percent only.

Nonetheless, the subject of a looming real estate bubble keeps being raised. Compare this, for instance, to the rate of return for fixed-interest securities, which was close to 13 percent (!) in 2014. You have to bear in mind, however, that the performance of bonds resulted almost entirely from changes in value (meaning price gains due to regressive yield rates), with virtually no gains on cash flow. With real estate it was just the other way around. The income return in 2014 equalled no less than 5.3 percent.

Why then is so little being said about the threat of a bond bubble? Go ahead and run a Google search on the terms “stock bubble,” “bond bubble,” and “real estate bubble,” and this is what you will find:

about 168,000 hits for “bond bubble,”
about 167,000 hits for “stock bubble,”
about 447,000 hits for “real estate bubble”.

To me, these counts read like contrary indicators. Everybody is talking about a real estate bubble, and nobody about a bond bubble. So there is reason to conclude: The biggest threat is arguably that of a bond bubble, whereas the real estate bubble constitutes the smallest threat.

To be sure, prices have soared everywhere – prices for property, bond prices, stock prices, all. For stocks, 2014 was admittedly a bad year, but the German stock market index DAX grew by 25 percent in 2013 and by more than 20 percent this year.

If you take a more differentiated look at the real estate returns, you will realise that offices are making a slow recovery. While the total return for offices averaged a rather modest 2.4 percent (!) over the past ten years, it ascended to a respectable 4.2 percent in 2014. Nonetheless, the capital growth for offices remained negative at -0.6 percent, which makes actually no sense.

I believe that it is explained not least by the relatively large share that the portfolios of open-ended property funds have in the DIX index constituency. Since the portfolios of open-ended funds consist to two thirds of office real estate that were systematically overvalued for many years, we are now seeing the final throes of a long-term process of successive devaluations.

However, the net cashflow yield for offices is actually but 0.1 percent lower than that for residential real estate. My feeling is that office property is being underestimated at the moment because of its poor historic performance. The other day, one of Germany’s biggest institutional investors told me that he would not invest in office property at all for a few years (!) because he has yet to get on top of past issues. For the time being, he will limit his commitments to residential and retail real estate. If this is the way many market players feel, it will soon be a good time to enter the market for office investments.

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