Four forward, one back – moderate market recovery takes a break

Individual deals in the order of more than 100 million euros remain rare due to the long marketing and review processes, but continue to be concluded. This is evidenced, among other things, by the sale of the Munich office building at Prinzregentenplatz 7-9 for 167 million euros. CONREN Land acquired the property on behalf of a European family office from Union Investment's open-ended real estate fund UniImmo:Deutschland. The top 7 markets, which accounted for more than half of the transaction volume over many years, continue to be disproportionately affected by the current market situation with a market share of 36 percent.

Baumann explains: "Sheer size continues to be seen as a risk factor among the currently remaining players. With increasing property volumes, risk premiums for financing increase disproportionately, credit checks are stricter and financing commitments are withheld – as the example of the Frankfurt Opera Tower shows."

Francesca Boucard, Head of Market Intelligence & Foresight at Colliers, looks at the macroeconomic drivers: "We have to be prepared for the fundamental conditions on the financial and capital markets to remain challenging for the foreseeable future. The ECB's interest rate hike in June was foreseeable in view of the persistently high inflation. It remains to be seen whether further interest rate steps will follow in this volatile environment. A normalization of energy costs and international trade flows is also likely to take time."

Real estate-related capital market interest rates have already risen significantly since March. Ten-year German government bonds are trading around the three percent mark again. "In view of extensive government investment programs and permanently higher defense spending, we are experiencing a noticeable fiscal expansion. This macroeconomic scenario suggests that long-term capital market interest rates will rise rather than fall in the future," Boucard analyses. For ongoing purchase price negotiations, which are still based on interest rate assumptions from the beginning of the year, this often means a revaluation. At the same time, real estate investments are in stronger competition with lower-risk government bonds, which have become more attractive again.

The increased price sensitivity of investors is now evident in all liquid types of use. Baumann observes: "We are seeing rising yields again across all situation and risk classes – after a prolonged phase of price consolidation, even in the top segment." For example, slight yield spreads of 10 basis points could be seen in the top 7 office centres, and even up to 25 basis points for logistics properties in the eight top German destinations. Even in the food-anchored specialist retail segment, it is becoming increasingly difficult to enforce the price expectations from the beginning of the year, despite continued high demand and an attractive product.

The increasing selling pressure on large portfolio holders is likely to favour further price adjustments. Open-ended mutual funds in particular are affected by depreciation and loss of attractiveness compared to higher-yielding government bonds. In June, net outflows reached record levels. Suspended share redemptions and the first fund liquidations are already the result.

Baumann also sees opportunities in this: "With the growing supply, especially in the core-plus and value-add segments, in combination with price discounts, there is also a possible driver for higher market activity, which is not necessarily evident from the increase in volumes. For active, risk-averse buyer groups who are primarily looking around in the small to medium-sized market segment and want to leverage value in the long term, the window for opportunities will remain open for a while."

Since the beginning of the year, these buyer groups have mainly included asset managers who invest on behalf of family offices and private investors (24 percent market share). This is followed by open-ended real estate and special funds as well as corporates and owner-occupiers (15 percent each). Private investors and family offices reach 14 percent.

Boucard summarizes the outlook for the year as a whole: "Although the market recovery is paused, a relapse into shock after the outbreak of the Ukraine war is not expected. The far-reaching reorientation of investors after the end of the zero interest rate phase has largely been completed. However, a sustained strengthening of investor confidence is inevitably linked to a settlement of the Iran conflict and the containment of its global economic consequences. Due to the usual transaction durations, we assume that the third quarter will still proceed with the handbrake on. We are adjusting our forecast for the full year accordingly and now expect a transaction volume at the previous year's level of around EUR 25 billion."

Source: Colliers