Activity on the German investment market remains subdued overall and continues to be overshadowed by high borrowing rates and a weakening economy. Institutional investors are acting cautiously. Against this backdrop, Simon Jeschioro, Head of Capital Markets & Investment Advisory at Cushman & Wakefield Germany, has drawn up the following forecasts for the further development of the property investment markets:
Forecast I: Falling key interest rates as a driver for the investment market
The European Central Bank (ECB) has lowered its key interest rates due to the fall in inflation. Although this measure had been expected, it is beginning to ease the situation on the financial markets and in the property sector. The interest rate cut also facilitates pricing and purchasing decisions on the property market, leading to a stabilisation of yields. For the first time since the second quarter of 2022, there was no further increase in yields for the main types of use retail and logistics. For office properties, it continued slightly with an increase of 13 basis points in the 2nd quarter. However, we expect this to stabilise by the end of the year.
The spread between the prime office yields of the top 7 markets and 10-year German government bonds increased from 136 basis points in Q4 2022 to around 240 basis points at the end of Q2 2024. This development increases the attractiveness of property investments compared to other asset classes. Cushman & Wakefield therefore expects increasing momentum on the transaction market.
Forecast II: Germany remains a key investment destination in the EMEA region
Germany remains a key investment destination in the EMEA region. Although it has lost its leading position as the largest investment location in Europe to the UK, it is still perceived as a safe investment location. The proportion of foreign capital invested in German property has risen significantly. While it was still at 29 per cent at the end of the first half of 2023, one year later it is already 37 per cent.
Several large-volume individual transactions in the triple-digit million euro range have already brought the investment market a significant increase in turnover this year. After €5.61 billion in the first quarter, commercial properties worth €11.16 billion were traded by the end of June this year, which corresponds to an increase of 22 per cent compared to the same period last year.
This trend towards more transactions will continue as the market stabilises. One of the reasons: Numerous internationally active funds have funds or capital commitments. As soon as the financing environment brightens and the fog regarding pricing has lifted further, they will invest, a large proportion of this in properties in Germany. Office properties in particular could then come into focus. This is because, unlike in other markets in the EMEA region, prime yields have not yet peaked here. This is likely to attract opportunistic and value-add investors. With regard to this development, it should be noted that prime yields in Germany were lower than in other European markets and the adjustment process will take longer.
Forecast III: No dominance of one asset class, but dominant market players
While there has been a clear shift in investor interest away from office properties and towards logistics properties in recent quarters, a balanced distribution of invested capital is expected in the coming months. It is true that logistics and industrial properties accounted for the highest transaction volume in the first half of the year with a total of €2.59 billion and 23 per cent of turnover respectively. However, with a 22 per cent share of turnover for retail properties and 21 per cent for office properties, it is not possible to speak of the dominance of one asset class.
However, in the case of the latter, the question remains to what extent there will be higher utilisation of the available space with regard to home offices and mobile working. "I personally assume that the proportion of people working from home and thus the demand for office workspaces will continue to increase, but will not reach pre-pandemic levels. As a result, interest in this asset class is likely to increase again and attract more value-add and opportunistic market players," says Simon Jeschioro.
In terms of the players involved, I expect to see investment and asset managers as well as private equity investors very active on the buyer side. Some of them have high capital commitments, particularly for the residential and logistics sectors. As the cost of capital has risen significantly, some investors need the money invested for other projects and are looking for an exit. In some cases, it is also necessary to sell if an investor is only allowed to hold certain property quotas in the portfolio or if there are liquidity bottlenecks
The role of project developers is likely to be similarly ambivalent. While some traditionally sell their projects and/or completions in order to generate liquidity for new projects, others are forced to do so due to capital shortages. At the same time, they are on the buyer's side when it comes to land or properties earmarked for development.
