Germany briefing: recovery is driven by domestic investors

Germany is in recovery mode and domestic investors are driving the bounce back, delegates heard at Real Asset Media’s Invest in German Real Estate briefing, which took place yesterday in London, hosted by BGY at their Shoreditch headquarters.

“The transaction market has turned the corner and German investors are driving the turnaround,” said Marcus Cieleback, chief urban economist, Patrizia. “It is a positive signal that people have confidence in their home market, but it also shows a sense of insecurity, given global uncertainty.”

Domestic investors are dominant in the residential and office sectors, while international capital is investing in industrial and logistics and in retail.

“Resi is becoming a German play again, but US, Asia-Pacific and Swiss investors are dominating the I&L sector,” said Cieleback.

Transaction activity had already started to pick up last year, but Q1 2025 figures confirm the upward trend.

“We’ll definitely see increasing volumes this year, albeit from a very low base,” he said. “We are not going back to 2019/20 volumes when we had negative interest rates.”

The same can be said about the office market, where Germany’s top seven cities account for 60% of transaction volumes because they have big ticket assets. Transaction volumes have picked up this year, but progress is slow.

“The office market has been impacted by the changed interest rate environment,” Cieleback said. “The good news is that the average deal size is now increasing again, but it remains low in historical comparison. Because of the cost of capital, we are still far from the €100 million average deal size of a few years ago.”

Another issue for the office market is that German stock was largely built before 1980 and is the third-oldest in Europe after Italy and Sweden, while building activity has slowed down significantly because of the economic crisis and high construction costs.

“Older office buildings are a challenge because retrofitting is expensive,” Cieleback said. “And now tenant demand is heavily focused on good locations and sustainable buildings. Asset quality is becoming ever more important and this makes the prime office segment a winner.”

It is significant that prime office rents are increasing because there is demand, but overall office vacancy rates are also increasing because of the polarisation in the market: occupiers only want ESG-compliant, grade A offices.

The scarcity of high quality office space offers opportunities to investors with the means to develop, or the capital and the expertise to retrofit and upgrade existing buildings, but choosing the right location is key.

Germany is waking up from a long slumber, after the economic underperformance post-2017, which was due to cyclical and temporary factors such as the global manufacturing downturn and the recent energy shock, but also to structural factors such as industrial competition, weak demographics, public underinvestment and red tape. There is a renewed determination to get back to its role as the economic engine of Europe. “Germany has its challenges, but investors are realising that it is working to address them and solve them,” Cieleback said. “We are doing our homework.”