The latest reports from brokers – such as Savills and BNP Paribas Real Estate – as well as from real estate managers paint a confident picture of the development of the real estate investment market in Germany. According to BNP Paribas Real Estate, the transaction volume for commercial real estate in the 4th quarter of 2024 was just under € 8 billion, more than 14% higher than in the same period last year, and for residential real estate investments it was even 60% higher at € 3.4 billion. Prime initial yields in Germany have been largely stable in almost all types of use since the end of 2023, and have even tended to fall in the residential sector in the second half of the year. The leading indicators for the real estate market, such as the Deutsche Hypo Real Estate Climate (for Germany) and the INREV Consensus Indicator (for Europe), also point to a brightening of sentiment in recent months.
However, the assessments of the real estate industry players based on this neglect the fact that long-term interest rates, the main determinant of real estate performance over the last 15 years, have risen significantly since the beginning of December. For example, the interest rate on ten-year German government bonds has risen from 2.04% to over 2.60% in the meantime (currently around 2.5%), and the 5-year euro interest rate swap, which is decisive for real estate financing, has risen to over 5% in the short term. The reasons for this increase are the inflation trend, which is proving to be sluggish in the eurozone at an annual rate of 2.4%, as well as the increased political uncertainty in the USA as well as in France and Germany, the two most populous countries in the European Union.
Against this backdrop, the risk premium of investments in German prime office and logistics properties (prime yields in the German top 7 locations most recently at 4.36% and 4.3% respectively) compared to ten-year German government bonds, which had risen to around 240 basis points at the end of 2023, has slipped well below 200 basis points again. Therefore, many investors are once again asking themselves whether the initial returns achievable in the real estate asset class are risk-adequate in view of the comparatively low market liquidity and transparency. A setback in the German real estate investment market cannot therefore be ruled out, although a further reduction in key interest rates in the eurozone is to be expected due to the economic weakness.
In any case, the prospects for a recovery in value in 2025 are only good in the top segment, as a continuing shortage of modern space is to be expected due to the low level of new construction activity, and thus rents are expected to trend towards rising despite economic stagnation. As soon as the investment markets for real estate pick up again, it can be assumed that portfolio holders will put part of their real estate portfolio on the market, whether because of refinancing issues that have not yet been conclusively resolved, be it because of the selling pressure, not least in the case of German open-ended mutual funds, which were confronted with high outflows of funds in 2024, or because various institutional funds have reached the end of their maturity in recent years. Against this backdrop, the recovery in the real estate investment markets propagated by many players in the real estate industry is likely to be bumpy in 2025 beyond the top segment.
