Investment volumes for residential properties (transactions for at least 50 apartments) in Germany reached approximately €3.7bn during the first half of 2023, according to Savills. This was 53% lower than in the corresponding period last year and the weakest investment volume recorded for a first half year since 2011. For the full year, the international real estate advisor is maintaining its projection of a total transaction volume of less than €10bn.
A small number of deals accounted for the majority of transaction volumes in H1, with the bulk of market activity being fragmented. There were four transactions in the first half of the year with a volume in excess of €250m, accounting for 62% of the total transaction volume. These included the acquisition of an interest in the Südewo portfolio by Apollo and the disposal of five new-build properties from Vonovia to CBRE Investment Management.

Karsten Nemecek, Managing Director of Corporate Finance – Valuation for Savills Germany, says: “As interest rates have risen, the price expectations of buyers and vendors have been drifting apart in the residential market, with prime yields having previously approached the 2% mark.

“The price adjustment process has proven to be correspondingly prolonged and there has been a shortage of transactional evidence of achieved pricing. In recent weeks and months, some sales of new-build properties have been publicised, with multipliers of around 25 to 27 times net annual rent being achieved. With these benchmark transactions, there is now more clarity among market participants in terms of achievable initial yields when entering the market or upon disposal.

“On the one hand, this is likely to facilitate transactions over the coming months. On the other hand, the increase in yields is unlikely to be sufficiently pronounced to entirely untangle the knots in the residential investment market. In the medium term, initial yields for existing property must be above the costs of debt capital in order to attract fresh institutional capital.”

Marco Högl, Director and Head of Residential Capital Markets at Savills Germany, says: “Besides the rare large disposals by some property companies, the residential investment market is clearly content with smaller transactions at the moment. These small properties are attracting equity-rich purchasers. When it comes to high-value product, however, many investors are proving reticent or demanding corresponding price deductions.”
The softening of prime net yields since March 2022 by around 120 basis points to the current level of 3.4% has created a noticeable decline in capital values in the short term.

Savills believes that this could open a window of opportunity for a favourable entry into the German residential market.
Matti Schenk, Associate Director of Research for Savills Germany says: “The supply/demand ratio in the occupier markets is more imbalanced than almost ever before. The vacancy rates in many cities are already at record lows and the supply shortage is likely to worsen further.

“Projections assume that the number of housing completions per annum will fall below 200,000 in a few years. This is less than half the long-standing new-build target stated by politicians. The consequence of this will be a worsening of the housing shortage, which is likely to manifest itself in further rent increases. In the long term, this will result in a return to capital growth.
“Against this background, the current lower pricing levels represent an opportunity for investors with a long-term time horizon. The foreseeable housing shortage also creates scope for a variety of value-add approaches, e.g., by leveraging potential for further development or adding storeys to existing properties. The shortage of rental apartments could potentially also strengthen demand for owner-occupied apartments, meaning that privatisation strategies could be another opportunity.”

While the current situation represents a window of opportunity for long-term investors to enter the market, it may also be a favourable time for owners willing to sell. Nemecek adds: “For long-term holders, the good fundamental growth prospects mean that is not attractive to sell for the time being. However, for owners who want to, or have to sell, there could be advantages to a prompt sale rather than holding off further. There are still currently a relatively large number of equity investors active in the market, who are stabilising prices on low and medium-value properties in particular. However, once this capital is invested, there could be a further decline in pricing.”

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Germany Resiential Investment Market