• Overall transaction volume* just shy of €29 billion in 2023 – 57 percent lower than in the previous year
• Logistics as the strongest asset class on the investment market, followed by residential and retail
• Yield uptrend still ongoing across all asset classes in the fourth quarter as well
• Greater momentum and higher transaction volume anticipated in 2024

Investments on the German investment market came in at €28.6 billion* in 2023, around 57 percent lower than in 2022. At €7.5 billion, the fourth quarter of 2023 delivered the second strongest result of the year but, as expected, a year-end rally, customary in previous years, failed to materialize. A mere 39 percent of the transaction volume was accounted for by the Top 7 investment locations of Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne, Munich and Stuttgart, as opposed to 2022 when this was almost a half. With a good €5 million invested over the course of the year, Berlin remained the most desirable location in 2023, followed by Munich and Hamburg. The strongest net buyers consisted of open-ended real estate and special funds whose investments exceeded their divestments by €4.2 billion. These are the conclusions drawn in a current analysis prepared by the global commercial real estate services company CBRE.

In 2023, only 45 transactions above the 100-million-euro mark (eight of which were office properties) were registered across all asset classes, corresponding to around only a third of the deals observed in this category in 2022. As a whole, the average transaction size contracted by almost 30 percent to approximately €26 million.

The recently resumed decline in financing interest and more moderate yields generated by fixed-income securities enable greater planning reliability and make investing in real estate more attractive. Consequently, the opportunity is opening up most especially in the current market phase for some investors to position themselves on the German real estate market with a view to benefiting from the anticipated future upswing and rental growth potential. However, an asset-specific risk/return analysis is more important than ever, especially as the discussion about repricing and the future positioning of property with a view to ESG issues is bound to intensify.”

Yields trending up

Prime yields continued their uptrend in all asset classes. Whereas, expressed as an average of the Top 7, the prime yield of high quality office properties in the top locations has advanced by 0.4 percentage points quarter on quarter to currently 5.0 percent, high street retail properties in the cities increased by 0.3 percentage points and therefore to an average 4.8 percent. Contemporary logistics properties also saw growth of 0.3 percentage points, bringing prime yields in this highly desirable asset class to 4.3 percent at year-end 2023. “Repricing is ongoing and as also in evidence in the valuations, meaning that one or other investor will be forced to sell,” says Klein in anticipation.

Generally, the focus on the core and core plus segment where there is still a huge discrepancy in ideas about pricing, particularly for large-scale product and especially in the office segment, is being increasingly redirected toward value-add products. This is where upside potential can be leveraged or repositioning undertaken, which includes the repurposing of vacant hotels into serviced apartments, of offices into residential and retail properties into mixed usage.

Logistics leading the way ahead of residential, retail and office

For the first time, logistics real estate at almost €7 billion, corresponding to 24 percent of the overall volume, constituted the strongest asset class, with residential (upward of 50 units) at €5.7 billion (20 percent), and retail assets at just under €5.4 billion (19 percent) coming next. Office real estate as the traditional industry leader followed on shortly behind in fourth place (€5.3 billion, equivalent to 19 percent). Significant year-on-year declines are evident across all asset classes, especially in the case of office real estate (down 77 percent), healthcare real estate (down 63 percent) and residential (down 59 percent). By contrast, hotels (down 24 percent), other usages (down 26 percent), as well as warehouses and logistics properties (down 34 percent) recorded the smallest downturns.

Outlook for 2024

“The investment year 2024 is likely to be much more dynamic than the year now ended. Along with numerous larger transactions that have been postponed in recent months due to the uncertain market situation, we are expecting a considerable increase in the number of fire sales, which will pull in opportunistic investors in particular. We anticipate additional supply from institutional portfolio holders that will divest parts of their real estate portfolios, also with view to complying with self-imposed ESG criteria,” Klein predicts.

“Inflation is beating a retreat despite the somewhat higher rate in December, but it is still much too early to signal the all-clear and for meeting the central bank’s inflation target,” Linsin offers in warning. According to the Bundesbank’s most recent projections, the core inflation rate, minus sharply fluctuating energy and food prices, peaked at 5.1 percent in 2023 and is predicted to drop discernibly to 3.0 percent in 2024. “The tight monetary course steered by the ECB is increasingly taking effect, with the result that the cycle of interest rate increases is likely to have peaked, enabling greater planning reliability in investment decisions. Contrary to many other market participants, we would nevertheless advise against counting on the rates being lowered any time soon as the ECB is still voicing its concerns – it is seemingly convinced about intransigent inflation,” Linsin cautions.

“Against the backdrop of stabilizing financing interest, we anticipate that real estate yields will tick up only marginally in the first half of the year, with the investment market gradually gaining momentum – albeit at a lower price level. Generally speaking, we are expecting a residential and commercial real estate transaction volume of at least €35 billion,” Klein says in anticipation.