• Investment volume tumbles 77 percent to €5.5 billion in 2023
• Average prime yield in the Top 7 locations up 1.29 percentage points to 5.01 percent
• Virtually no large-scale transactions from institutional investors

Germany’s office real estate investment market recorded a transaction volume of €5.3 billion in 2023, reflecting a decline of 77 percent compared with the previous year. At 81 percent, the downturn in the Top 7 locations where a total of only €3.6 billion was invested was even more pronounced. Consequently, office as the traditionally strongest asset class achieved only 19 percent of German real estate investment, lagging in fourth place behind the segments of logistics, multi-family housing (upward of 50 units) and retail. These are the results of a current analysis prepared by the global commercial real estate services company CBRE.

“We are seeing the first signs of a trend reversal, however: 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. 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.”

Berlin as the most important office market despite the crisis

Having captured a fifth of the overall volume, Berlin continued to lead the way of Germany’s seven most important office markets in 2023. Office properties worth more than €1.1 billion (21 percent) changed hands in the capital city. Hamburg came in second place with €773 million (15 percent). Funds of €554 million were invested in Munich (10 percent). Düsseldorf, Frankfurt, Cologne and Stuttgart only achieved shares in the single-digit percent range. All locations saw significant declines compared with 2022. The final quarter was nevertheless relatively strong in Stuttgart, Cologne and Hamburg.

Transactions: core, small and German

As opposed to the overall German investment market, investor focus in the office segment in 2023 continued to center around core and core plus products that accounted for 70 percent of the investment volume. In terms of shares, the value-add and opportunistic segment saw less invested than in the previous year, explained by the positive trend of prime rents, particularly for ESG-compliant new buildings. Another contributing factor emanated from the share of home office paring down requirements for office space due to the coronavirus pandemic. “Increasing the value of older office properties is more problematic. Achieving market eligibility often entails a great deal of investment, which makes financing more difficult,” Klein explains.

This is also the reason why investors are continuing to opt for cherry picked assets that undergo due diligence, especially in the smaller and mid-size segment. Portfolios captured a share of a mere five percent in 2023. Accordingly, only half of the overall volume was attributable to transactions above the 50-million-euro mark compared with 80 percent in the year before. By contrast, shares in the size category of between ten and fifty million euros increased substantially.

High net worth domestic players were especially active on the office investment market in 2023. One fifth of the volume (2022: just under 50 percent) was attributable to international investors who principally originated from European countries outside Germany. Investors from overseas tending more toward large-scale transactions were thin on the ground. The strongest net buyers consisted of open-ended real estate and special funds, followed by the public sector. The latter proved to be very active, making large acquisitions in Hamburg in particular. Almost half of the office investment volume in Hamburg in 2023 was accounted for by public institutions.

Yields uptrend holding steady

Compared with the previous quarter, high quality office properties in the top locations delivered growth of 0.4 percentage points. To the exception of Munich and Hamburg (4.80 and 4.90 percent), all office markets achieved the five-percent mark (Berlin) or exceeded it. As an average of the Top-7 locations, office yield has now settled at 5.01 percent. City fringe properties in the top locations stood at between 5.00 percent (Munich) and 5.70 percent (Berlin). The prime yields for peripheral locations in the market areas have all exceeded 6.00 percent and are partly approaching 7.00 percent.

Outlook for 2024

“Along with numerous more major transactions that have been delayed due to lack of clarity in the market, 2024 is likely to see a notable increase in distressed real estate investments, i.e. fire sales, which will be of interest to opportunistic investors in particular. Institutional portfolio holders will also sell off properties with a view to divesting part of their portfolios in the context of complying with their self-imposed ESG criteria,” Klein says in anticipation.

“In the first six months we expect an only marginal increase in office yields against the backdrop of stabilizing financing interest rates. This scenario will trigger some recovery in the office investment market – at a new, lower price level,” Linsin predicts.