The German commercial real estate market is expected to recover from the second half of 2024 onwards, according to Savills.
After a 60% decline in 2023, transaction volumes are forecast to pick up in the latter part of this year, reaching €25-30bn for the full year.
Initial yields softened in Q4 2023 but are unlikely to have peaked yet. The rise in yields over the past two years is the sharpest on record.
Marcus Lemli, CEO Germany and head of investment Europe at Savills, commented: ‘The good news for most market participants is that the majority of the downturn is likely behind us. The bad news is that there is no genuine upturn in sight and prices are likely to fall further for the time being.’
Across all real estate sectors monitored by Savills in Germany, the prime yield rose by 57 basis points last year, compared with 76 basis points in the previous year. Overall, the rise in yields over the last two years is by far the sharpest ever witnessed since recording began in 1991.
Looking at offices, Matthias Pink, head of research Germany for Savills, said: ‘For small to medium lot sizes, family offices and private investors are filling the void left by institutional investors. Properties that are too large for private capital, however, will have a hard time finding a buyer in the current environment.’
Lemli added: ‘If we look at the state of the German office leasing markets, investors may have now written down offices too severely. While both economic and structural trends are impacting demand for office space, the vacancy rate remains low both in historical and international comparison and rents on modern space in good locations have been rising. In addition, the excessive supply that we have seen in previous cyclical changes will not be a factor this time in view of the wave of insolvencies in the development sector.’
In most other sectors, too, vacancy rates remain low, and rental growth prospects remain favourable, which is likely to stabilise demand in the investment market.
In the short and medium term, however, Savills believes that it will be the financing markets that shape the real estate investment market going forward.
Lemli added: ‘Since the majority of financing taken out at the highest prices or the lowest interest rates is only just maturing, we expect stress to increase both on the part of the banks and owners. On follow-up financing, additional equity will be required in many cases that is then no longer available for new acquisitions, accordingly dampening demand for property. To what extent the increasing refinancing stress will trigger disposals will depend substantially on the attitude of the banks. We are yet to observe any indications of a wave of forced sales.’
At the same time, Savills expects a rising number of sales aimed at preventative liquidity management. Vendor groups here are likely to include developers, listed companies and open-ended real estate retail funds.
