Germany saw a good seven billion euros of transactions in the first quarter of 2023, marking a decline of 71% year-on-year, according to research published by CBRE.
Measured against the five-year average of first quarters, the current quarter dropped 66% and 60% compared with the 10-year average. The office segment saw an especially steep decline in the investment volume, which was also attributable to being benchmarked against the high figure posted in the first quarter of 2022 that was dominated by Brookfield’s takeover of alstria office REIT.
International investors proved to be more reserved in the past three months than a year ago, accounting for 41% of the overall volume compared with half in the year-earlier period. These are the conclusions drawn in a current analysis prepared by the global commercial real estate services company CBRE.
'“The swift and incisive interest rate turnaround is constraining current transaction activity as investors are having to adjust their pricing to current market conditions. At present, we are seeing extremely muted investment activity even though many foreign investors in particular are keeping a very close eye on Germany as one of the most important target markets in the world. Buyers and sellers are still not finding consensus in the large-scale core segment in particular,' said Fabian Klein, head of Investment at CBRE Germany. 'The very different market and interest rate environment has not yet triggered forced sales or restructurings. Supply can nevertheless be expected to increase across all asset classes on the back of developments like this – driven especially by financing arrangements expiring. Attractive opportunities will therefore arise for investors who are clear about the investments they are targeting. The generally upbeat rental trend, above all in the case of premium office properties in central locations, contemporary logistics buildings, and most especially in the residential segment will enhance the appeal of opportunistic product for cash-on-cash oriented investors.'
From the standpoint of the full year, the recession in Germany will be a mild one, if at all, especially as the major German research institutes are revising their economic forecasts upward and the future inflation rates are also incrementally being corrected downward. Although economic output dropped again in the first quarter of 2023, the decline was less pronounced than in the previous quarter.
Focus on core and core plus
Despite difficulties in market repricing, a large part of the capital invested was accounted for by core and core plus properties. Investors are still opting for risk management through selective single asset transactions. Barely two billion euros (27% of the overall volume) was attributable to portfolio acquisitions in the first quarter. All in all, only 13 investments above the 100-million-euro mark were made, principally in the residential and office segments. In all transactions with commercial usage, these large-scale deals took the form of single asset deals, and all of them as portfolio transactions in the residential segment.
Residential as the largest asset class
Multifamily housing (upward of 50 units) proved to be the strongest asset class, capturing €1.94 bn (28%) of the overall transaction volume. Second place was taken by retail properties with €1.34 bn (19%). This unusually strong result was driven first and foremost by the partial takeover of KaDeWe in Berlin by Thai Harng Central Department Store Limited. Office real estate ranked only in third place with €1.14 bn (16%), followed by warehouse and logistics properties with €1.03 bn (15%), with the lack of portfolio transactions having the greatest impact on this asset class.
Outlook
CBRE anticipates that price expectations on the part of buyers and sellers will increasingly converge, and that investors will be in a better position to estimate future interest rate developments and adjust their investment decisions accordingly, according to Klein. 'At the moment, pitch and marketing activities are on the rise, so a new price signal can be sent with the benchmark transactions expected on the market, which will greenlight greater momentum.'
