Chapter 2
Investment Market
Germany Real Estate Market Outlook 2024
Key Takeaways
- Momentum
The market is picking up momentum from transactions postponed until now and fire sales, albeit at a lower price level than in the long boom phase. - ESG
Institutional portfolio holders need to divest part of their real estate portfolios in order to accommodate ESG criteria, which will also create headroom for new acquisitions. - Recalibration
Repricing is largely still under way, but the expectations of buyers and sellers are increasingly converging; in some asset classes, with healthcare property for example, this process has already reached a more advanced stage. - Economy
Inflation is set to fall further in 2024, which will confer greater planning reliability in investment decisions. - Yield
The yield uptrend is set to slow significantly, and capital values should stabilize further over the course of the year, although at a considerably lower level.
Lowpoint reached – positive outlook
Even though, at the last count, and for the first time since the financial crisis, the German real estate investment market produced lower transaction volumes due to the sharp increase in financing costs and the returns on alternative investments, the outlook is cautiously optimistic. As from the second half of 2024, market momentum will pick up noticeably again.
German real estate remains highly desirable as an investment target. The market will nevertheless remain under constraint from partly very different price expectations and from short supply (with offers frequently being retracted due to bids being too low). In contrast to other real estate segments, the currently strongest asset class of industrial and logistics properties is not having to cope with developers’ insolvencies and, with supply running short and the associated increase in rents, is still much in demand. The fundamentally positive outlook in terms of stability and the performance of Germany’s office leasing markets will also boost recently sluggish investment in German office real estate. This scenario will stimulate the market through high transaction volumes.
Portfolio deals but not in all asset classes
In the medium term as well, investors will scrutinize their potential investments much more thoroughly than in past years. Major portfolio transactions that dominated the market in the boom years are likely to remain a rarity, especially in the case of office properties; operator real estate such as hotels or healthcare properties, along with retail and logistics properties, are more likely to be traded in the form of portfolios.
For the full year 2024, a transaction volume of around €35 billion, of which some €8 billion in multifamily properties (upward of 50 units), is realistic.
Transaction volume Germany by asset class
Source: CBRE Research
Market recovery from the second half of the year onward – investment strategy increasingly realigning toward upside potential
Converging price expectations, particularly in the value-add and opportunistic segment, will serve to alleviate the uncertainties still prevailing in the market. The ECB’s tightening monetary policy is increasingly taking effect. Accordingly, the cycle of interest rate hikes may have peaked and – coupled with falling financing interest and moderate yields for fixed-income securities – enable greater planning reliability in investment decisions, along with enhancing the appeal of investing in real estate.
Prime yields close to their peak – capital value benefiting from rental growth
The rapid uptrend in yields in 2023 is set to slow significantly. Consequently, the first half of 2024 will only see moderate increases, to be followed by all-pervasive stabilization as from mid-year.
The recent decline in capital values, although attenuated by the extensive increase in rents, will therefore also continue to stabilize and rise again in the medium term. This especially as rents will continue their uninterrupted uptrend in the leasing markets across all asset classes on the back of stable demand for high quality space accompanied by short supply (due to remain so given the slew of developer insolvencies).
Increase in real estate and benchmark yields in comparison (December 2023 vs April 2022)
Source: CBRE Research, Bundesbank
Risk strategies of German investors in 2024
Source: Germany Investor Intentions Survey 2024, CBRE Research
Investment opportunities for opportunistic investors
The opportunity is opening up most especially in the current market phase for some investors to position themselves on the German real estate market to derive benefit from the anticipated future upswing and rental growth potential.
The focus in 2023 was already increasingly shifting away from the core and core plus segment where there is still a huge discrepancy in price expectations, specifically for large-scale property in the office segment, toward value-add and opportunistic product with upside or repositioning potential. This trend is due to accelerate, especially as repricing is ongoing, and also evident in the valuations, with the result that one or other investor will be forced to sell. The recovery anticipated in the market will therefore also be driven by distressed real estate investment that, in turn, will attract opportunistic investors above all. Over the period from 2024 through 2027, approximately €228 billion worth of loans will be due for refinancing. However, of this volume around €77 billion would not be rolled over on the basis of current capital values and lending rates and in consideration of restrictions on loan-to-value and interest coverage ratios.
Furthermore, we anticipate additional supply from institutional portfolio holders who will divest parts of their real estate portfolios, also with view to complying with self-imposed ESG criteria.
German real estate remains highly desirable as an investment target. The market will nevertheless remain under constraint from partly very different price expectations and from short supply (with offers frequently being retracted due to bids being too low). In contrast to other real estate segments, the currently strongest asset class of industrial and logistics properties is not having to cope with developers’ insolvencies and, with supply running short and the associated increase in rents, is still much in demand. The fundamentally positive outlook in terms of stability and the performance of Germany’s office leasing markets will also boost recently sluggish investment in German office real estate. This scenario will stimulate the market through high transaction volumes.
Portfolio deals but not in all asset classes
In the medium term as well, investors will scrutinize their potential investments much more thoroughly than in past years. Major portfolio transactions that dominated the market in the boom years are likely to remain a rarity, especially in the case of office properties; operator real estate such as hotels or healthcare properties, along with retail and logistics properties, are more likely to be traded in the form of portfolios.
For the full year 2024, a transaction volume of around €35 billion, of which some €8 billion in multifamily properties (upward of 50 units), is realistic.
Transaction volume Germany by asset class
Source: CBRE Research
Market recovery from the second half of the year onward – investment strategy increasingly realigning toward upside potential
Converging price expectations, particularly in the value-add and opportunistic segment, will serve to alleviate the uncertainties still prevailing in the market. The ECB’s tightening monetary policy is increasingly taking effect. Accordingly, the cycle of interest rate hikes may have peaked and – coupled with falling financing interest and moderate yields for fixed-income securities – enable greater planning reliability in investment decisions, along with enhancing the appeal of investing in real estate.
Prime yields close to their peak – capital value benefiting from rental growth
The rapid uptrend in yields in 2023 is set to slow significantly. Consequently, the first half of 2024 will only see moderate increases, to be followed by all-pervasive stabilization as from mid-year.
The recent decline in capital values, although attenuated by the extensive increase in rents, will therefore also continue to stabilize and rise again in the medium term. This especially as rents will continue their uninterrupted uptrend in the leasing markets across all asset classes on the back of stable demand for high quality space accompanied by short supply (due to remain so given the slew of developer insolvencies).
Increase in real estate and benchmark yields in comparison (December 2023 vs April 2022)
Source: CBRE Research, Bundesbank
Risk strategies of German investors in 2024
Source: Germany Investor Intentions Survey 2024, CBRE Research
Investment opportunities for opportunistic investors
The opportunity is opening up most especially in the current market phase for some investors to position themselves on the German real estate market to derive benefit from the anticipated future upswing and rental growth potential.
The focus in 2023 was already increasingly shifting away from the core and core plus segment where there is still a huge discrepancy in price expectations, specifically for large-scale property in the office segment, toward value-add and opportunistic product with upside or repositioning potential. This trend is due to accelerate, especially as repricing is ongoing, and also evident in the valuations, with the result that one or other investor will be forced to sell. The recovery anticipated in the market will therefore also be driven by distressed real estate investment that, in turn, will attract opportunistic investors above all. Over the period from 2024 through 2027, approximately €228 billion worth of loans will be due for refinancing. However, of this volume around €77 billion would not be rolled over on the basis of current capital values and lending rates and in consideration of restrictions on loan-to-value and interest coverage ratios.
Furthermore, we anticipate additional supply from institutional portfolio holders who will divest parts of their real estate portfolios, also with view to complying with self-imposed ESG criteria.