• Transaction volume of €4.95bn (-51% year on year)
• Only 15 transactions in Q3 – the lowest number of transactions since records began in 2009
• Development acquisitions accounted for 20% of investment
• The prime yield rose to 3.6% – the price correction is likely to continue

Residential property in Germany changed hands for almost €5bn in the first three quarters of 2023 (transactions for at least 50 apartments). This represents a decrease of 51% year on year. Savills recorded a transaction volume of €1bn and just 15 transactions in the third quarter, which is the lowest number of transactions in a quarter since market observations began in 2009. Karsten Nemecek, Managing Director of Corporate Finance – Valuation for Savills Germany says: “We are continuing to witness a scarcity of transactions in the residential investment market. The majority of institutional investors are seeking new build, both to avoid modernisation risks and to avoid strict regulation of rents on existing properties. In view of the increasingly acute housing shortage, the fundamental data is also undoubtedly very attractive for owners on existing properties. However, this part of the market has evidently lost its attractiveness for many institutional investors. The reason for this is the strict regulation of rents with discussions ongoing as to further restrictions, the rather unusual indexation of leases for existing properties and the recent significant decline in tenant turnover. In times of high inflation and growing modernisation requirements, investors run the risk with portfolios of existing properties that their costs will rise faster than their rental income. For institutional investors to return to existing property, greater predictability of future rental regulation would be required. It is also likely that yields would have to rise further to offer an attractive premium compared with government bonds. The future development of the residential investment market will, therefore, materially depend on whether conditions for existing properties appear sufficiently attractive again to draw institutional capital in large volume. For investors who can overcome a phase of potentially lower returns, on the other hand, residential property promises long-term value retention. A glance at recent decades even demonstrates that capital values on residential property are protected against inflation in the long term, which is why residential property can act as an anchor of stability in multi-asset portfolios. The current market phase also offers opportunities for relatively favourable market entry.”

Few forward deals
Approximately 26,100 apartments have changed hands during the year to date, Portfolio transactions have accounted for approximately 79% of units transacted and 68% of the transaction volume. At the same time, the proportion of development acquisitions has declined. Properties under construction have accounted for around 20% of investment volume during the year to date, which is significantly lower than the corresponding figure last year (36%). Marco Högl, Director and Head of Residential Capital Markets for Savills Germany, says: “In the current market environment, we are primarily witnessing transactions in the core-plus and value-add risk categories. Pricing tends to be more advanced in these segments than on new-build properties. Many value-add purchasers plan energy-efficient modernisations and seek to sell to institutional investors within three to five years. Going forward, institutional investors may shift increasingly towards modernised and ESG-compliant existing properties since, in view of the collapse in new-build activity, supply of new-build property will become scarce. Conversely, many investors are reticent when it comes to purchasing development projects or are pricing in risk premiums to reflect the increased insolvency risk for the developers.”

Private investors are increasing their acquisition volume
The challenging circumstances in the residential investment market are expressed in a strong degree of reticence on the part of many investors. Of the twenty largest investors over the last five years, just three have been active as purchasers this year. There has been a significant decline in acquisition volume among almost all investor types. While residential property companies have switched completely to the vendor side, fund managers and open-ended fund vehicles have reduced their acquisition volume by 64% year on year, or by €3.5bn in absolute terms. Insurance companies and pension funds have reduced their acquisitions by 87%, investing less than €60m.

Conversely, private investors and family offices have made acquisitions totalling approximately €412m, representing an increase in acquisition volume of 130% compared with the corresponding period last year. Acquisition volume from the public sector and its housing associations has remained constant. Högl says: “The number of bidders in many sale processes remains lower than prior to the reversal in interest rate policy. In view of the reduced field of bidders, private investors and the public sector are often securing investments. While equity investors, such as family offices, can submit higher bids at the current interest rates than their debt-financed counterparts, many public-sector housing associations are being encouraged to expand their holdings. Hence, they can secure properties that they may not have come close to acquiring two years ago.”

Prime yield rises but remains below 4% for the time being
The acquisitions of some equity purchasers to date have ensured that the prime yield on apartment buildings (residential properties with at least 50 residential units only) remains below the 4% mark. The average prime yield across the top six cities rose in the third quarter by 20 basis points to stand at 3.6%. Nemecek says: “We continue to see isolated transactions with gross multipliers of twenty-six. These transactions are often only completed using equity or the investors may still have access to a favourable line of credit. However, many investors are highly reticent and are either submitting bids for core properties below a multiplier of twenty-two or are not submitting bids at all. There is much to suggest that the price correction process in not yet complete.”

Rents continue to rise
Meanwhile, the supply-demand relationship in the occupier market is increasingly shifting in favour of landlords. Matti Schenk, Associate Director of Research for Savills Germany says: “While Germany's population continues to grow, there is no reversal in housing development in sight. This is evidenced by continued significant declines in building permits and an increasing number of residential developments being aborted. Hence, vacancy rates will fall while rents will continue to rise. In July 2023, average quoting rents on new-build apartments broke the €20 per sq m mark on average across the top six cities for the first time and there is no end in sight to this rally in rental levels for the time being.” The emerging housing shortage has attracted the attention of politicians. However, the recently announced measures will only begin to affect the supply after a period of time. Matti Schenk says: “Measures such as suspending the EH-40 standard, declining balance depreciation for new-build projects and the raising of the income threshold for KfW subsidies are incentives to boost housebuilding. However, the continued high building and financing costs and the sharp decline in values in the investment market remain major stress factors for developers. Even if the anticipated reversal in new build materialises, the positive effects will only be noticeable in several years. In view of the housing shortage in the core cities, migration to surrounding areas and well-connected small and medium-sized towns and cities is likely to continue, resulting in faster rental growth in those areas. Consequently, such locations offer opportunities for investors.”

Outlook: more activity in the final quarter but still no trend reversal
In view of the favourable fundamental data for investors, Savills expects a revitalisation of the residential investment market sooner or later. However, the trend in the market has not yet reversed, as Marco Högl explains: “In the fourth quarter, there will be more transactions because many of the sale processes that commenced in the spring will be completing. In recent weeks and months, however, the number of sale preparations has remained modest, meaning that we cannot yet speak of a genuine trend reversal. Demand for high-value product in particular remains subdued.” The transaction volume for the year is likely to come in significantly below €10bn, which would be the lowest transaction volume since 2011.

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