Key takeaways for 2025

• Interest rate cuts have brought improved sentiment
• European Central Bank to cut interest rates to 1.75%
• Restructuring continues as managers rebalance portfolios

How would you describe the 2024 real estate year?

The real estate markets did not navigate easy waters in 2024. However, the tense situation was not triggered by properties themselves, or a decline in the importance of the asset class. The highest rise in interest rates for 60 years, combined with the consequences of the war against Ukraine and high inflation, halted the long-term upward trend on the property market. Since then, the transaction and rental markets have been moving in different directions: cautious, unsettled investors and falling prices contrast with stable user demand and rising rents in many segments.

Starting in July 2022, the ECB raised its key interest rate in 10 steps to 4.5%. In the US and the UK, the first key interest rate hikes took place even earlier. It was not until June 2024 that the key interest rate was lowered again to 4.25% and then in three further steps to the current 3.15%.

As a result of these cuts to interest rates, the property markets showed the first signs of recovery last year and are moving into a new cycle. In our opinion, the interest rate ceiling has been priced into the proclaimed initial yields. Sentiment among institutional investors improved slowly but steadily, while sentiment in the private client segment is likely to follow with a time lag.

What are the main challenges facing the sector in general and your company in particular in 2025?

Challenges this year include the US real estate market. The office property market in particular is currently not recovering as quickly as originally expected. The historically higher letting costs are therefore causing temporary pressure on the earnings side for expired rental agreements.

At the same time, rent increases are more difficult to implement, especially as the momentum slowed over the course of 2024 due to lower inflation, among other things. In addition, the requirements of prospective tenants for office space have increased. Real estate funds with exposure to the US cannot free themselves from this.

In Europe, we expect central bank interest rates to fall further to 1.75% in 2025. If there are no further geopolitical challenges, we therefore expect real estate markets to stabilise this year.

The transaction market is likely to gain further momentum in 2025. The price correction for commercial property is largely over: the bottom has been reached. This is not yet the case everywhere, but undoubtedly it is for the core segment – for top properties in good locations.

‘Sentiment among institutional investors improved slowly but steadily last year, while sentiment in the private client segment is likely to follow with a time lag.’

Michael Bütter, Union Investment

The rental markets are still stable. Prime rents are continuing to rise in many sectors. Vacancy rates have also reached their maximum in most markets. The market turnaround is therefore within reach.

In addition, new construction activity has declined noticeably due to the significant rise in construction costs and interest rates on borrowed capital, meaning that we will see very little new space added to the markets in the coming years. Conversely, this means rising rents and better letting opportunities for existing space.

What are the main elements of your strategy for the year ahead?

2025 is a kind of transition year to the new cycle, in which the effects of the rise in interest rates will become visible and need to be worked through.

Real estate markets’ performance is likely to be increasingly influenced by negative valuation results in the coming months, as property prices have fallen in many markets due to the turnaround in interest rates. In particular, the market values of properties that have been purchased at sharply higher prices in recent years are likely to come under a certain amount of valuation pressure. At the same time, this can be offset by fewer positive valuation adjustments than in previous years.

Our strategy in this year of restructuring focuses less on acquisitions and more on active liquidity management, investments in our high-quality property portfolio and the consistent realisation of potential for rent increases. We are also systematically continuing our digitalisation strategy and the expansion of our property platform.

Michael Bütter is CEO of Union Investment