Germany Housing Market Analysis

Economic Analysis & Core Competencies Economic Analysis Germany is an industrialized economy, and one of the wealthiest countries in the world. It's GDP ranks 5th in the world, and is the largest in the European Union. The Germany economy is highly-diversified, and there is a strong manufacturing sector. As part of the European Union, Germany trades within the world's largest economy. This also means that all European companies have access to the German market, which makes this market highly competitive.

The growth rate of the German economy is relatively slow, at just 1.6%, following two years of very slow growth (CIA World Factbook, 2015). The per capita GDP is $46,200. This figure is growing slowly. Germany presently ranks 27th in the world in this category, in line with Australia, Taiwan, Canada and Sweden. Most of the world's biggest GDP per capita figures come from city states or from oil nations.

The United States, at 19th, has a per capita GDP of $54,400 for comparison, but Germany's figure is in line with other leading economies (CIA World Factbook, 2015). Germany's currency in the euro. This is a common currency for most of the EU countries, and means that monetary policy is run by the European Central Bank. Germany, however, has the greatest influence over this because it is the biggest economy within the group of countries that use the euro.

Despite its dominance over monetary policy, being a part of the Eurozone has been one of the contributing factors to Germany's recent economic weakness. It is a dominant exporter in Europe, which is good for the German economy, but the Eurozone has been a problem. The issue with Greece has been a drag on the German economy as the country has not only been forced to bail out Greece but has also had to deal with the negative effects that the ongoing uncertainty has created.

Germany has done its best under the circumstances to minimize the damage created by Greece (Irwin, 2015). Another threat to the German economy is with the Volkswagen scandal. This scandal relates to falsifying data that led to Europe supporting diesel vehicles over gasoline ones. This scandal is likely going to cost the German auto industry significantly. Volkswagen will definitely suffer, and it is one of Germany's biggest employers. The fallout could spread to BMW and Daimler as well.

This threat to a major industry represents a substantial threat to the German economy as a whole, because automobiles are worth $225 billion in exports for Germany (Nienaber, 2015). The strength of the German economy is important because the housing construction business typically requires an underpinning of economic growth, combined with population growth. Germany's population growth is relatively slow -- it is actually shrinking (CIA World Factbook, 2015). Thus, the growth of the construction sector is entirely dependent on growth in the German economy.

Growth rates in construction, however are faster than the rate of growth in the economy as a whole. The construction growth rate was 3.3% in 2014 and 2.1% in 2015. Volume is growing even faster, which indicates that the industry is healthy, but that price growth is being constrained either by competition or by the general struggles of the German economy. Nevertheless, there is reason for optimism that Germany's housing market is stronger than the economy overall, something that should encourage Toll Brothers (Gorning & Micholson, 2015).

There is also the choice of where to start the business in Germany. It is a big country, and there are some significant differences between the different states. The states with the strongest economies are the industrial heartland of Nordrhein-Westfalen, Bavaria and Baden-Wurttemberg. These three states account for over half of the German economy. Further, there are three other states with high GDP per capita figures -- the city states of Hamburg and Bremen, and the state of Hesse, where the financial capital Frankfurt is located.

States in the former East are significantly poorer - while their housing stock needs updating, they may not be strong markets on account of their lack of wealth. Core Competencies Toll Brothers has been around since 1967, which means that it has a lot of experience. As one of the largest construction companies, it has a lot of experience developing housing that meets 21st-century needs.

This is important for the company because one of the main competitive advantages that it will have in Germany is the ability to build modern American-style homes, which are quite different from the traditional German model, which is either an apartment or a small home. Toll Brothers, by virtue of its leading position in the world's largest real estate market, the U.S., is a technology leader. Succeeding in the ultra-competitive American market has emphasized to Toll Brothers management the value of maintaining a high level of technological management.

There are many aspects where the company's technological superiority helps -- in design, in planning, in marketing, and beyond. The construction process itself is streamlined through use of technology. Cutting edge technology may be beyond what German companies have, or not, but either way Toll Brothers is equipped with a baseline of technological excellence from which it can enter the German market and compete right away. So construction experience is one core competency, and expert design is another.

The size of Toll Brothers means that it can perform a lot of its functions in-house, something that will allow the designers to work closely with the construction staff, and ensure that the homes are built according to spec, on time and to budget. These competencies are likely in common with those of German manufacturers, but they are necessary in order to compete effectively with the existing Germany homebuilding industry A further core competency comes in finance. Building out residential developments incurs heavy capital requirements.

As a publicly-traded company, Toll Brothers has access to a substantial amount of capital on American capital markets. The cost of capital is very low in the U.S. right now, with interest rates at rock bottom levels. Thus, Toll Brothers can easily finance this expansion into Germany by either using cash on hand, or tapping the debt or equity markets for more financing.

Bringing this money into Germany is easy as there are no meaningful restrictions to doing so, and the many can be repatriated back to the U.S. if need be as well. Toll Brothers is also a vertically-integrated operation, as the Realty Trust branch of the company typically sells the real estate once.