Bumpy recovery expected in real estate investment markets in 2025

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.