Smaller deals are likely to be the norm in the current market, delegates heard at Real Asset Media’s European Outlook 2024: Focus on Germany briefing, which took place yesterday and was hosted by CMS at their offices in Frankfurt.
“There have been very few major transactions in Germany this year, because the larger the deal, the more difficult it is to find buyers,” said Marcus Cieleback, chief urban economist, Patrizia. “We’ll see strong activity returning for deals below €100 million, but over that threshold it will be tricky.”
Transaction volumes have gone down across the board and they are unlikely to recover to levels seen in the ‘lower for longer’ phase.
“You can be sure that transaction activity will not go back to previous levels because a big part of the investor community will not return,” said Cieleback. “But adding real estate to your portfolio still makes sense if you want to diversify.”
The market has to adjust to the new normal, which is actually a return to an old normal.
“The rise in interest rates has been steep, but interest rates remain at historically low levels,” he said. “Only people who have been in the market for 10 years or less would see current rates as high.”
Current expectations are that the ‘higher for longer’ scenario will persist. Even if the ECB cuts interest rates sometime in 2024, as widely predicted, it will not affect real estate in the short term because of the 12-18 months lag before the effect is felt in the real economy.
Looking at sectors, offices are in a better position than they were during the GFC, when vacancy rates were high and rental growth very limited.
“This time round good quality real estate is in short supply and that supports prime rents in the office sector,” Cieleback said.
Retail has long been in crisis, and secondary high streets, particularly department stores, are still struggling. Overexpanded online retail is also in a challenging position.
“It is a complex sector that is undergoing structural change,” he said. “But there are some bright spots: food, especially discount food, some outlets with a clear focus and luxury retail seem to be winners.”
According to Patrizia, a long-term view shows that the extremely low interest rate period of recent years was not normal, and therefore should not be the best guide for determining an appropriate premium.
The yield gap with government bonds is likely to settle at 100-150 bps, as it was in the noughties.
“We can expect much less yield decompression in 2024 than many people think,” Cieleback said. “We may be close to a stabilising level, so there is less to fear than some may believe.”