Investment Market Overview

The German real estate investment market recorded a transaction volume of EUR 15.7 billion in the first half of 2024. This represents a significant increase in activity in the second quarter and a growth of around ten percent compared to the first half of 2023. After the first quarter, the volume stood at EUR 6.3 billion, a decrease of 19 percent. However, many market participants are still struggling with the market environment: restructuring is on the agenda, investors and representatives of financing banks are looking for solutions to current challenges. Nevertheless, it can be seen as a positive sign that there has been no flood of distress sales, which would have led to further price and value declines.

What we have been seeing in the United States since the beginning of the year is now also becoming evident in Germany: the market is slowly returning to a growth trajectory. Industrial and logistics properties confirm their relative resilience shown since 2023 with a significantly positive momentum compared to 2023, and the retail sector demonstrates its potential by seeing the return of trading of shopping centers. There is also increased activity in the living sector in terms of broad transaction market dynamics. Real estate specialists are more cautious with offices, once the industry leader. However, we also expect some transactions in this segment by the end of the year, which will provide clear indicators of the current price level.

After the European Central Bank (ECB) began cutting interest rates on June 8, a sense of relief was noticeable in the financial and real estate markets, but there was no indication of euphoria over this step. The interest rate cut was generally expected and had also been announced through the ECB's rhetoric. This rather sober and already priced-in reaction was evident, for example, in the five-year swap rates and yields on German government bonds, which even slightly increased in the following days. The interest rate cut of 25 basis points was also rather homeopathic, and the ECB left it open in its commentary whether there would be further cuts.

The focus is still on inflation, and in particular, core inflation is still significantly above the two percent target. Construction costs are still high, although the severity of the cost increase has significantly mitigated. Wage increases are also monitored closely. In addition, there is a cautious approach from the US Federal Reserve. There will not be more than two additional interest rate hikes this year, and they are also likely to be modest. From our perspective, this is appropriate because on the one hand, the European and especially the German economy needs fiscal support, and on the other hand, it is essential to dose the steps correctly in order not to fall back into an overly euphoric sentiment too quickly. The central bank is receiving support from the pricing front: inflation rates in key European countries fell more than expected in June, and the ECB's two percent target could be reached this autumn.

We should always bear in mind that the current interest rate level represents a normal environment. The past years have been abnormal in this respect, and it would be illusory to assume that we will return to a world without interest rates. There is no question: the situation is difficult for all owners of existing assets, depending on the price at which they were invested. For those looking to enter the market with fresh capital or equity, there are great opportunities, as we expect an upward movement in capital values by the end of our forecast horizon in 2028.

Nevertheless, it remains a tough recovery process for the real estate investment market, as many institutional investors currently do not have real estate as a focus for investment. News of fund downgrades or developer bankruptcies does not help to restore confidence in this asset class. Interestingly, the view from abroad is much more positive, with new entry opportunities seen rather than risks. Such opportunities can arise from the repositioning of existing properties or the restructuring of credit obligations. Against this backdrop, we expect further market recovery in the second half of the year and confirm our forecast of EUR 40 billion for the full year.

The current upturn has been achieved solely through single transactions. These amounted to EUR 11.5 billion for the first six months, an increase of 26 percent. In contrast, the share of portfolio transactions continued to decline, reaching only EUR 4.2 billion, a decrease of 19 percent compared to the first half of 2023.

The sale of KaDeWe in Berlin to the Thai Central Group for approximately EUR 1 billion is the largest transaction in the first half of the year. In addition, there were another 31 transactions in the range of EUR 100 million or more, indicating a revival in the investment market compared to the previous year (23 transactions in this range).

The slow release from shock paralysis that was expected at the beginning of this year has continued and is now evident in realized transactions, especially in the living, logistics, and mixed-use property sectors. The living asset class has regained the top spot with a volume of EUR 3.7 billion, of which EUR 3.4 billion is for residential properties and nearly EUR 300 million for healthcare properties. The turnover of logistics properties amounted to a transaction volume of EUR 3.4 billion in the first half of the year, accounting for more than one-fifth of the total volume. Compared to the first half of the year, this represents an increase of almost 60 percent for this asset class.

Office properties are still struggling to regain their footing. The transaction volume is approximately the same as the previous year, reaching EUR 3 billion. Although office occupancy rates are now increasing again, and most companies have implemented a concept between office presence and remote working, the question of sustainable quantitative demand for office space is still unanswered. In addition, negative headlines affecting individual properties add to the challenge. An example is the Trianon in Frankfurt, where various challenges coincide: the departure of a major tenant, a maintenance backlog, and an expiring interest rate commitment. Even though the Trianon does not represent all office properties in Frankfurt and Germany, such news does not foster confidence in the future viability of this asset class.

A total of nearly EUR 2.6 billion was invested in retail properties, placing this asset class in fourth place. In addition to the aforementioned billion-dollar transaction, there were many activities in the range between EUR 10 million and EUR 30 million.

Large transactions are currently facing difficulties, with "large" now being defined as anything above EUR 50 million. Products that do not meet the requirements of potential buyers are not further considered. Strong arguments are needed to convince investors of the opportunities the market currently offers for fresh capital investments. The situation is different in the logistics sector, where we expect further increased activity in the coming months. Investors are very interested, and the high number of bids in corresponding bidding processes speaks a clearly positive language.

Looking at the cities, there is a significant increase in transaction volume in the seven major strongholds. Investments in the first half of the year amounted to EUR 8.4 billion, an increase of about 29 percent compared to the first half of 2023. The share of these markets in the nationwide transaction volume increased from 45 percent to currently 53 percent. On the one hand, this is naturally due to the larger supply, but the result also shows that investors primarily expect profitable investments in the major cities.

Berlin continues to top the list of cities with the highest sales turnover: EUR 3.5 billion, equivalent to an increase of 67 percent. Munich achieved a similar growth rate, with a plus of 63 percent (EUR 1.8 billion). Only in Hamburg (minus 14 percent) and Stuttgart (minus 62 percent) was there a lack of comparable dynamics. In Hamburg, large-volume transactions are still missing - the largest deal amounted to less than EUR 60 million. In Stuttgart, there is a general lack of sales, with only nine deals counted between January and June.