The downturn is largely over

The German property investment market ended 2023 with a turnover of around €29.0bn (Fig. 1). This corresponds to a decline of 56% compared to the previous year and is the lowest figure since 2010. Although the bottom appears to have been reached, we do not expect activity to pick up until later in the year.

Strongest price correction ever recorded should end in 2024

Initial yields rose more slowly in the last three months of 2023 than in the previous quarters (Fig. 3). The rise in yields in 2022/23 is by far the strongest ever measured on the German property market. We assume that the price correction is well advanced and that initial yields will stabilise over the course of the year. The fact that long-term interest rates have fallen significantly in the last three months and are now even just below the level reached a year ago should also help to stabilise property yields in the medium term. In the short term, however, the predominant factor is that there is still a gap between the prices on offer and those in demand in large parts of the market and the pressure on the landlords tends to be greater than on the side of potential buyers. This is all the more true as borrowing costs have recently fallen somewhat, but banks are still exceptionally restrictive in their lending. This makes refinancing difficult. In view of upcoming devaluations and the recent significant increase in the proportion of non-performing loans, this is unlikely to change much for the time being. In this respect, we expect supply on the commercial property market to increase in the coming months while demand remains unchanged, which suggests that initial yields will continue to rise. Added to this is the weak economic environment, which, according to the latest forecasts by several economic research institutes, will not improve in the current year either. This in turn is likely to be reflected in lower rental growth expectations on the part of investors, which also argues in favour of rising initial yields. In contrast, yields on new-build residential property have probably already peaked and we do not expect a relevant increase in selling pressure on the housing market due to non-performing loans. In addition, further increases in residential rents and falling vacancy rates are to be expected.

Financing stress likely to increase significantly

Although interest rates have probably already peaked, the property markets are still far from having fully digested the higher interest rates. Both the devaluations and the rise in lending rates are only gradually eating into investors' portfolios and much of this process is still to come. Recently, the proportion of non-performing loans and the banks' risk buffers have already risen significantly at a low level. As most of the financing taken out at the price peak or during the interest rate trough is yet to expire, we expect increasing stress on both the banks and owners, particularly on the commercial property market. Additional equity will be required for many follow-up financings, which will then no longer be available for property purchases and will dampen demand accordingly. The extent to which the increasing refinancing stress will trigger sales will largely depend on the behaviour of the banks. We are still not seeing any signs of a wave of distressed sales. Nevertheless, we expect to see an increasing number of sales that serve to preventively secure liquidity. Seller groups here are likely to include project developers, listed companies and open-ended mutual property funds.

Yields expected to stabilise over the course of the year and a slight increase in transaction activity

While the number of sales processes should gradually increase in the current year, the potential pool of buyers will initially remain small. However, it should have sufficient capital to absorb the increasing supply and thus ensure a slightly higher transaction volume than last year. We anticipate a volume of between €25bn and €30bn for commercial property and slightly less than €10bn for residential property.

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