Market in Minutes Investment Market Germany

Cycle turnaround under difficult circumstances

The German property investment market has completed its cyclical turnaround. The transaction volume at the end of 2024 totalled €33.1bn, which corresponds to an increase of 11% compared to the previous year.

The recent increase in activity is also reflected in the fact that the final quarter was once again the quarter with the highest turnover after an interruption of two years. Although there has not yet been a turnaround in prime yields (Graph 3), they have stabilised in all segments and have either not risen at all or only by a few basis points since last spring.

We expect the upturn to continue in the current year, albeit at a moderate pace given the rather unfavourable overall conditions. Moderate interest rate cuts, robust letting markets and a large amount of available private capital should continue to support the investment market. In addition, more and more institutional investors are returning to the market. However, headwinds also remain, for example in the form of the weak economic environment, restrictive lending by banks and, last but not least, the upcoming Bundestag elections and the associated uncertainties. Overall, the German property market remains a market for investors with a strong equity base who can take advantage of opportunities in the current environment.

Potential supply surplus for offices foreseeable
Transaction volumes in the different market segments changed only slightly compared to the previous year. In residential property (only transactions with at least 50 units), the transaction volume totalled €8.8bn, 14% higher than in the previous year. The largest increase was seen in industrial properties, where the transaction volume rose by a fifth year-on-year to €6.9bn. This also puts them at the top of the list of commercial uses with the highest turnover, followed by retail properties (€5.4bn or +8% compared to 2023) and offices (€5.3bn or +10% compared to 2023). The discrepancy between the transaction volumes in the last cycle and those of the last two years is by far the greatest for the latter. Based on a typical investment horizon of five to ten years, we believe that a significant potential supply surplus with a corresponding price effect is emerging here in the future and owners will have to consider whether to keep properties in their own portfolio for longer than originally planned instead of selling them.

Base scenario for 2025: selective yield compression with slightly higher transaction volume
In our view, the further course of the investment market will largely depend on how the affected landlords close their refinancing gaps or fulfil their liquidity requirements. If this happens primarily through (short-term) sales, the result would be a significant increase in transaction volumes and rising yields beyond the top segment. If such sales fail to materialise or at least remain the exception, for example because alternative financiers provide landlords with sufficient capital, prices are likely to remain largely stable. However, the transaction volume would then probably continue to rise only slowly. We currently consider the second scenario to be more likely, partly because interest rates are likely to fall slightly, which will not only make refinancing easier, but will probably also see more institutional capital return to the market. Against this backdrop, we forecast a transaction volume of €25bn to €30bn for commercial property and €8 bn to €10bn for residential property in 2025 as well as a selective compression of prime yields with little overall movement in initial yields.

All illustrations and the corresponding data can be downloaded here.