German real estate investment market: transaction momentum still stalling

  • Transaction volume of €13 billion – 64 percent below the previous year’s level
  • Residential as strongest asset class on the transaction market, office in second place
  • Expectations of another significant increase in yields

Germany’s real estate investment market recorded a transaction volume of €13 billion in the first half of 2023, reflecting a decline of 64 percent compared with the year-earlier period*. Commercial properties accounted for around three quarters of this volume, and one quarter was attributable to institutional housing. At just under six billion euros, the second quarter also registered an unusually low result that had dropped another 16 percent below the already weak previous quarter and by 51 percent year-on-year. Market momentum slowed considerably in the segment of large-scale transactions compared with the medium and small categories. While 67 transactions above the 100-million-euro mark were completed in the first half of 2022, there have only been 21 deals so far this year. These are the conclusions drawn in a current analysis prepared by the global commercial real estate services company CBRE.

Fabian Klein, Head of Investment

The changed financing conditions and the prevailing uncertainty about the price trend are making many investors very cautions, particularly regarding large and financing-intensive acquisitions. High net worth investors less rattled by the interest rate hikes are at an advantage and can proceed with partly full-equity investment. Nevertheless, this group is also proving reticent in the current market phase as the benchmark is naturally also set by other market players. On the purchasing side, the market is counting on prices falling further and it is only a question of time until a new balance is struck at a significantly lower level.

Fabian Klein, Head of Investment
Dr. Jan Linsin, Head of Research

The increase in the yields of fixed-income investments have prompted many investors to give these instruments preference with a view to diversifying their portfolios, on the one hand, while adjusting them in line with their requirements for return, on the other. The appeal of real estate investments has suffered substantially in this market environment, and even if institutional investors want to remain allocated in this asset class, this will only be if the risk premium versus the benchmark return is right.

Dr. Jan Linsin, Head of Research

Yields continue their uptrend

The substantially changed interest rate environment is ensuring that yields continue to rise. “Almost all asset classes have recorded further increases,” Linsin states. The net initial yields for prime office buildings as an average of the Top 7 locations climbed by 0.17 percentage points compared with the start of the year. As before, Munich recorded the lowest figure at 3.90 percent. The other six investment centers saw the four-percent mark reached (Berlin) or exceeded (Hamburg, Düsseldorf, Frankfurt am Main, Cologne, Stuttgart).

Compared with the last cyclical low in April 2022, the prime yields for office properties have risen by 1.40 percentage points as against the benchmark yield on the capital market that is currently running around 1.60 percentage points higher at 2.56 percent. “Office properties are a case in point: Against the backdrop of the growing user polarization with regard to very good location and property quality, along with structural changes emanating from hybrid work and the growing importance of ESG criteria, we are seeing a significant need for yields to be adjusted upward,” Klein states.

The yields of high street properties as an average of the Top 7 increased by another 0.15 percentage points to 4.24 percent compared with the first quarter. At mid-year, warehouse and logistics properties prime yield stabilized at 4.00 percent, which sends the first signal that the price adjustment process may have found its new market equilibrium, at least in this asset class. By contrast, hotels reported a rise of 0.25 percentage points to currently 4.90 percent. The increase in the care home segment was slightly higher at 0.3 percentage points, also to 4.90 percent, compared with the first quarter.

Residential produces the largest transaction volume – office remains the strongest commercial real estate asset class

Multifamily housing (upward of 50 units) proved to be the strongest asset class, capturing 24 percent of the overall transaction volume or €3.1 billion, followed by office buildings with a share of 22 percent or €2.8 billion. Warehouse and logistics real estate, along with retail properties, took third and fourth place, each with just under €2.4 billion and a share of 18 percent. Of the established asset classes, the latter, so retail, was the one with the least decline, down 37 percent compared with the first half of 2022, supported by large-scale transaction such as KaDeWe in the first quarter and MYND & Galeria Weltstadthaus in the second, both in Berlin.

Berlin remains the hotspot for real estate investment

“Investors continue to focus on the top locations although many transactions took place outside market boundaries due to the high level of activity in the logistics segment,” Klein says. All in all, €5.9 billion was channeled into these markets, accounting for 45 percent of the overall volume, with Berlin as the undisputed number one investor favorite with €2.8 billion. Munich followed on in second place with €1.2 billion.

Focus on core and core plus investments

At almost €9 billion, 67 percent of the total volume was attributable to the core and core plus segment, up five percentage points compared with the year-earlier period. The proportion of opportunistic and value-added investments contracted from 38 percent to 27 percent. “Although there are definitely “bargain hunters” in the markets, we are still not seeing any forced selling yet. This also applies to developers though the difficult framework conditions may well trigger a slight market consolidation in this case,” was Klein’s analysis. Many potential buyers who do not have to refinance just now or are generally not under pressure to sell are postponing such plans in anticipation of repricing on the market.

Share of international investors in marginal decline

Investors from Germany raised their share slightly by seven percentage points in a year-on-year comparison and have invested around €7.9 billion over the past six months, corresponding to 60 percent of the transaction volume. “Despite the substantially lower investment volume compared with the previous year’s period, international capital originated above all from European investors, especially from the UK and France, as well as from US investors,” Klein says.

Outlook for the remainder of the year

“It’s probably going to take a while until interest rates really come down and there is liquidity across the board again. Right now, we are expecting another ECB interest rate hike of a quarter of a percentage point at the end of July. Other interest rate measures to combat the intransigent high inflation rates cannot be excluded, and the recent signals from the ECB indicate that its restrictive monetary policy could be with us for a while longer. What this also means is that the financing conditions offered by banks for commercial real estate investments in Germany are set to become more expensive in the form of higher loan interest rates and margins. Consequently, the pressure on real estate yields will remain commensurately high. Aside from this, more stringent regulation on tightening capital backing for banks has had the effect of said banks substantially scaling back their exposure to real estate financing. Alternative lenders are more expensive in terms of financing conditions and will not be able to close the gap to conventional real estate financing,” Klein predicts.

Once the interest rate trend and financing conditions have stabilized, market players should have some security in their investment decisions and therefore in bidding processes. There are currently signs of somewhat greater momentum materializing in the market, as indicated by the number of properties and portfolios being prepared for sale,” Klein says.



Fabian KleinDr. Jan Linsin
Head of Investment GermanyHead of Research Germany
+49 (0)69 170077-55+49 (0)69 170077-404

About CBRE

CBRE Group, Inc. (NYSE: CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2022 revenue). The company has more than 115,000 employees (excluding Turner & Townsend employees) serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services.

CBRE Germany has been represented by its head office in Frankfurt am Main since 1973; there are further branch offices in Berlin, Düsseldorf, Essen, Hamburg, Cologne, Munich and Stuttgart.