Easing of the occupier markets recedes into the distance
At the beginning of the year, there was still a slight easing on the horizon in the occupier markets of many cities. This picture has changed noticeably due to the war in Ukraine as well as ongoing global supply chain disruptions and literally skyrocketing construction costs. It is already becoming apparent that the rate of new construction will be lower than expected. This will hardly provide any relief on the supply side. On the demand side, the influx of hundreds of thousands of refugees has suddenly led to a considerable increase in demand. In addition, Germany again recorded a significant migration surplus last year. In many regions, vacancy rates are therefore likely to remain very low for the foreseeable future and rents can be expected to continue to rise (see graph below).

Yields are still stable
So while the situation on the occupier markets remains favourable from the perspective of real estate investors, the initiated turnaround in interest rates is likely to lead to adjustments in yields in perspective. Recently, the prices announced at the beginning of the year could be confirmed for some transactions, so that there was no change in prime yields in the second quarter. Above all, the continuing high investment pressure of many full-equity investors has stabilised the price level so far. However, it is unlikely that full-equity buyers will continue to stabilise the yield level in the future. Residential property has been the bond substitute per excellence in recent years and is likely to react correspondingly sensitively to the rise in bond yields. Consequently, equity-rich players will also adjust their price expectations or shift capital into bonds. For leveraged buyers, the noticeable rise in lending costs has meanwhile led to a negative leverage effect given the very low starting level of residential yields. This too will undoubtedly lead to a change in price expectations among bidders. All in all, an increase in initial yields should be very likely.

Project developments accounted for more than half of the quarterly volume
The consequences of the high inflation rate are possibly already reflected in the investment market. While indexation is rather uncommon in existing lease agreements and can only be implemented gradually, such contracts are now quite common for new buildings. This could be one reason why investors continue to rely heavily on such products despite higher completion risks in new construction projects. In the second quarter, the transaction volume of project developments exceeded that of existing buildings for the first time. Around 51% of the volume in the second quarter was attributable to forward purchases. In the year to date, forward deals accounted for around 43% of the transaction volume and thus considerably more than the average of the last five years (23%).

Number of transactions noticeably lower - recovery expected towards the end of the year
While the prime yields have been confirmed so far, a significantly lower activity on the investment market can be observed overall. Less than 45 transactions were recorded in the second quarter (see graph below). Such a low number of transactions was last recorded in 2010.

Many investors have temporarily withdrawn from the market and want to wait for further developments on the occupier and investment market. In addition, different price expectations of vendors and buyers are currently preventing many transactions. However, we expect an adjustment process in the coming months, so that a higher number of transactions can be expected again towards the end of the year. In the coming months, however, we expect activity on the residential investment market to remain rather subdued. For the year as a whole, we expect a transaction volume of up to €15bn.

Risk factors: politics and ancillary costs
In view of the positive fundamental data for landlords on the rental markets and the conclusion of index-linked rents, new-build residential properties in particular are likely to remain in demand among risk-averse investors. However, the current developments may call politicians into action. Massively rising electricity and ancillary costs, for example, will present many households with enormous challenges. In view of the social implications of this issue, politicians could react and, for example, make it more difficult to conclude index-linked rental contracts. It also cannot be ruled out that rent increases will be further limited. Investors should include the possibility of such a reaction in their considerations. The high inflation itself could also limit the ability of many households to pay and thus make rent increase potentials more difficult to realise.

All in all, the further development on the occupier markets and thus also on the investment market will depend very much on the further course of the geopolitical turmoil and the consequences for the German economy.