ECB rate rises set scene as volumes fall 64% in Germany

The German real estate investment market recorded a transaction volume of €13 billion in the first half of 2023, down 64% compared to the previous year, according to analysis by CBRE.

The second quarter recorded just under €6 billion, 16% less than the previous quarter and a 51% year-on-year reduction.

Investment transactions by property type (excluding share deals)

Large-scale transactions particularly suffered: only 21 deals above €100 million were completed in the first half of 2023, as opposed to 67 in 2022.

Commercial properties accounted for about three quarters of the first half of 2023 investment volume, with the remainder attributed to institutional housing.

Yields have continued to rise across all sectors. Net initial yields for prime office buildings on average in the top seven cities rose 0.17 percentage points compared to the start of the year. The average for high streets in the top seven increased by another 0.15 percentage points to 4.24% compared to the first quarter. Prme yields on warehouse and logistics properties stabilised at 4% and hotels rose by 0.25 percentage points to 4.90%.

Berlin attracted the most investment with €2.8 billion, more than double second-placed Munich, which attracted €1.2 billion in investment.

Investors also favoured less risky investments, with €9 billion, 67% of the total volume, invested into the core and core plus segment. This represented an increase of 5 percentage points while opportunistic and value-add investments fell from 38% of the volume to 27%.

The retail real estate investment market was no exception to other markets, with a decline of 37% in the first half of 2023 compared to the same period the previous year. However, this €2.3 billion invested represented the lowest percentage decline of all asset classes.

High street properties captured 56% of the retail real estate investment market, a considerable increase from 2022 and 2021, when the category captured less than 20%. Retail warehouses and retail parks lost a considerable market share, representing 33% in 2023 compared to 50% in 2022 and 60% in 2021.

Looking forward to the rest of the year, head of investment at CBRE Germany Fabian Klein said: “It’s probably going to take a while until interest rates really come down and there is liquidity across the board again.

“Right now, we are expecting another ECB interest rate hike of a quarter of a percentage point at the end of July. Other interest rate measures to combat the intransigent high inflation rates cannot be excluded, and the recent signals from the ECB indicate that its restrictive monetary policy could be with us for a while longer.

“What this also means is that the financing conditions offered by banks for commercial real estate investments in Germany are set to become more expensive in the form of higher loan interest rates and margins. Consequently, the pressure on real estate yields will remain commensurately high.”