Real estate markets offer opportunities to build strategic allocations
After three challenging years on the real estate markets with significant valuation corrections, significant increases in construction and financing costs and shifts in demand for space, rays of hope are increasing on the markets. The ECB’s key interest rate cuts will be followed by further interest rate cuts. Capital market interest rates and valuation levels in the core segment are stabilizing. The transformation and adjustment process of the German economy and the effects of the long-term megatrends will also continue in 2025.
All in all, these developments result in a significant widening of the yield spreads of real estate investments compared to government bonds, thus leading to a renewed increase in the attractiveness of real estate as a portfolio component, which is also reflected in an improvement in investor sentiment. A further decline in real estate prices is not to be expected – on the contrary, the first price increases are also being recorded again, especially for housing, and the bottom also seems to have been found for high-quality office properties in central, inner-city locations in the top 7 locations. This is the result of the current consensus office market forecast by the Gesellschaft für immobilienwirtschaftliche Forschung (gif) and the Center for Real Estate Studies (CRES).
Bottoming out and new investment opportunities
This does not mean that real estate markets will return to record levels from the last cycle high in 2025. However, a bottoming out can be seen and there are signs of a revival of the markets. The weak economy in 2025 will also not provide any positive impetus for the real estate market, and refinancing outside the core segment as well as project developments will pose challenges. However, the resulting selling pressure could also create attractive long-term investment opportunities for investors with strong equity. At the same time, the recalibration of the markets ensures that the use of debt capital in new investments once again makes a positive contribution to returns.
Different developments in the types of use
In the coming real estate cycle, the individual types of use will be supported by various fundamental factors and social developments. The housing markets are benefiting in particular from the high excess demand in the growth regions, which will continue to increase in 2025 due to the continuing decline in new construction activity and lead to further rent increases, as well as the high level of economic resilience. The rental income is thus subject to a high level of security. Even if the new federal government puts housing construction at the top of the priority list, new construction activity will not pick up anytime soon, as the formation of a government and the adoption and implementation of new subsidy programs will take time.
In the case of local shopping centres, economic resilience combined with tenants with strong creditworthiness from the daily needs sector ensures high demand for space and stable rental income. The possibilities of online retail are only accepted to a very limited extent by consumers in this segment of stationary retail.
In the case of logistics real estate, the price correction has taken place most quickly and with a very high level of momentum, so that attractive investment opportunities can once again be found in this sector. In the selection of suitable properties, the focus on new-build properties in established locations will become increasingly important. In the long term, the decline in speculative project developments, increasing online trading and the shortening and flexibilisation of supply chains will support demand for space and have a positive impact on rent levels.
With regard to office properties, the market is most fragmented. The change in working environments and the war for talent are leading to a high demand for high-quality, ESG-compliant, modern inner-city office space, which means that such properties have stable rental income and low vacancy rates as well as attractive earnings prospects.
Attractive investment opportunities also arise in niche segments such as healthcare properties, medical centres and senior citizens’ homes, where demographic developments and social changes will ensure additional demand in the coming years.
Conclusion: Strategic allocations as an opportunity for investors
The opportunities on the real estate markets resulting from the current mixed situation in conjunction with the future prospects of the individual types of use offer investors high-yield opportunities in 2025 to build up strategic allocations to promising and largely cyclically resilient sectors and thus to benefit from the current market environment in the long term and sustainably.
