Incorporating the Real Estate Cycle into Management Decisions-Evidence from Germany
Wernecke, Martin, Rottke, Nico, Holzmann, Christoph, Journal of Real Estate Portfolio Management
Executive Summary. As in many industrialized countries, German real estate markets have been subject to cyclical fluctuations. Rottke and Wernecke (2002) made an attempt to estimate the extent to which cycle knowledge might be implemented in practice. This paper presents the results of a survey of German real estate practitioners. It identifies rent and price fluctuations as the two most important cycle variables. In addition, the general business cycle is perceived as the most important influence on the real estate cycle. Still, German market participants think of the real estate cycle more in terms of opportunities than of risks. Finally, the study finds that cycle strategy is important especially in project development, portfolio management and real estate finance.
Academics in the United States and the United Kingdom have published a great variety of research papers and articles on real estate cycles. This does not hold for Germany, although the term real estate cycle is relatively well known. So far, no common definition similar to the one for the general business cycle has been agreed on either in theory or in practice. Nevertheless, the term "real estate cycle" ("Immobilienzyklus") is broadly used in real estate journals and in market reports. Alternatively, the expression "hog cycle" ("Schweinezyklus") that refers to the agricultural pork production cycle is frequently employed as a synonym for the real estate cycle in Germany.1 In the light of such terminological inexactness, the respective meaning has to be concluded from the context that may range from "housing shortage" over "construction crisis" to "property boom" and include a wide variety of real or monetary variables at different levels of aggregation.
This ambiguity of cycle definitions in Germany is unsatisfying. But as the term is frequently used, it has to be investigated whether the participants in the market share a common view of it and it has to be evaluated to which degree they perceive real estate cycles as an important area of interest. To find answers to these questions was the first aim of this study.
Cycles partly can be attributed to the behavior of individuals who act as agents in the real estate markets. That behavior in turn depends on expectations that are based on assumptions about the functioning of the market. Therefore, a second goal is to find out about the interrelations that are observed in practice.
Still, the third and most important goal of this paper is the evaluation of a hypothesis that appeared in an analysis of property cycles in Germany and the implications for real estate management (Rottke and Wernecke, 2001-2002; and Rottke and Wernecke, 2002). There, the authors have given a subjective estimate of the extent to which the different aspects of the "house of real estate studies"2 (see Exhibit 1) are influenced by cycles and to which cycle knowledge is sufficiently integrated into different areas of real estate (see Exhibit 2).
They emphasized the so called management aspects; whereas phase-oriented aspects stand for the temporal determinant in the life cycle of real estate (project development, construction and facilities management), the function-specific category examines the real estate-related particularities of business administrative functions (real estate analysis, appraisal, marketing, finance and investment). Strategy-related aspects, on the other hand, are concerned with the portfolio management of investors and corporate and public real estate management.
The estimate showed that real estate finance, development, portfolio management, investment and appraisal, marketing and corporate real estate management, were deemed to have a high potential use for cycle-oriented strategies. In this paper, special attention is paid to these six management aspects and to market participants active in these fields.
This study first provides a comprehensive literature review of the area of real estate cycle research. …