German real estate market: on the cusp of a new cycle
The German real estate market is showing the first signs of recovery. Attractive investment opportunities already await the early birds, says Alejandro Obermeyer.
The price-discovery phase in Germany’s real estate markets is largely over in many locations. Interest rate rises have now been fully priced into initial yields and the mood among real estate investors is improving noticeably, with the Global Commercial Property Sentiment Index, compiled by the Royal Institution of Chartered Surveyors (RICS), the industry association, climbing from -26 to -18 in Germany in the second quarter of this year.
Approximately 59 per cent of respondents in Germany believe that the cycle has now reached its lowest point.
Market turnaround within reach
The market may not exactly be bursting with optimism yet, but investment is slowly picking up again.
Analysis by property consultants JLL shows that transaction volumes in the German commercial property market rose to €15.7 billion in the first half of 2024, an increase of around 10 per cent over the first half of 2023. Falling inflation and the first interest rate moves by the European Central Bank (ECB) are having an impact.
At the end of August, the inflation rate was 1.9 per cent in Germany and 2.2 per cent in the Eurozone. The ECB lowered the base rate by 0.25 per cent in June. A further rate cut of 0.25 percentage points is expected in September.
Accordingly, demand for commercial property is likely to continue to rise during the second half of 2024, which should start to have a positive effect on prices by next year. Importantly, the rental markets are also stable, with prime rents actually increasing in many sectors. A market turnaround is therefore within reach.
That makes now a good time for new investments that offer attractive initial yields.
Where investments make sense
Where can investors who want to benefit from the price correction find the best opportunities? Generally speaking, in the logistics, residential, grocery and office segments.
In the office segment, many companies are establishing hybrid-work models that are designed to achieve the best combination of working from home and the office. The necessary high-quality, flexible office space in good locations will remain scarce in German cities, going forward. Continuing excess demand therefore means that rising prime rents can be expected in the coming years.
‘Where can investors who want to benefit from the price correction find the best opportunities? Generally speaking, in the logistics, residential, grocery and office segments.’
Alejandro Obermeyer, Union Investment
Repositioning of office space is also likely to offer opportunities, so properties with corresponding potential are likewise attractive. Demand for offices is slowly picking up again: in the five German property hotspots of Berlin, Düsseldorf, Frankfurt, Hamburg and Munich, about 1.1 million square metres of office space was let in the first six months of 2024, 8.3 per cent more than in the same period the year before. Initial yields remained stable almost everywhere in the second quarter of this year.
Confidence in retail returning
In retail, a noticeable improvement in consumer confidence is expected over the course of 2024 after a long period of challenges. As a result, prime rents in major German cities are likely to move sideways, with a return to moderate rent growth possible in 2025 and 2026.
In particular, grocery and daily-needs retail are performing well at the moment. Investors also now have an opportunity to acquire well-positioned shopping centres that provide attractive initial yields.
The market outlook for high-quality logistics properties also remains good. Since most forecasts assume that the economic situation will gradually get better over the course of the year, with the consumer climate improving simultaneously in line with possible further ECB interest rate cuts, demand for space – particularly from retailers – is likely to accelerate again. Accordingly, the rent prospects remain positive, albeit with little chance of a return to the strong momentum of previous years.
Supply shortage will boost rents
Although many investors in residential real estate markets are still adopting a wait-and-see approach and transaction volumes remain below average, initial yields barely moved in the second quarter. An end to the correction phase is therefore in sight here as well.
In addition, further rent increases are expected this year. While demand for residential space in cities continues to rise, partly due to migration and the increasing number of households, the supply gap in terms of new builds is growing significantly.
Many developers are postponing their projects because of markedly higher construction and finance costs. The number of building permits issued in Germany is at the lowest level since 2012. This ongoing shortage of supply means that new-build rents in German cities are likely to continue to rise in the coming years.
Having said that, affordability could become an increasingly important issue in some regions. Newer buildings are less likely to be affected by political measures to regulate rents, however.
In summary, the unofficial motto of ExpoReal 2023, “Survive till ’25”, seems to have been spot-on. Germany’s real estate markets have bottomed out. Interest rates are expected to fall significantly by mid-2025 and property prices are set to rise again. Attractive investment opportunities already await the early birds.
Alejandro Obermeyer is head of investment management for offices in the DACH countries (Germany, Austria and Switzerland) at Union Investment.
