Savills expects German commercial real estate market to recover from H2 2024 onwards

According to Savills, the German commercial property investment market ended 2023 with total investment volumes of approximately €21.5bn. This represents a decline of 60% compared with the previous year and is the lowest figure since 2010. As the market appears to have bottomed out, the international real estate advisor expects activity to increase during the latter part of the year. In its baseline scenario, Savills expects a transaction volume of €25-30bn for the full year 2024.

Initial yields softened more slowly in the last three months of 2023 than in previous quarters but are unlikely to have reached their peak, according to the international real estate advisor. The rise in yields in 2022/23 is by the far the sharpest ever recorded in the German real estate market.

Marcus Lemli, CEO Germany and Head of Investment Europe, says: “The good news for most market participants is that the majority of the downturn – both in terms of pricing and transaction activity – is highly likely to be behind us. The bad news is that there is no genuine upturn in sight and prices are likely to fall further for the time being. Hence, while the environment remains challenging on the vendor side, potential buyers are likely to be offered more and more opportunities in view of further price decreases and the investor-friendly fundamental conditions in many sectors.”

Across all real estate sectors* monitored by Savills in Germany, the prime yield rose by 57 basis points last year. This compares with 76 basis points in the previous year. Overall, the rise in yields over the last two years is by far the sharpest ever witnessed since recording began in 1991.

Looking at offices, Matthias Pink, Head of Research Germany for Savills, says: “For small to medium lot sizes, family offices and private investors are filling the void left by institutional investors. Properties that are too large for private capital, however, will have a hard time finding a buyer in the current environment.”

Marcus Lemli adds: “If we look at the state of the German office letting markets, investors may have now written down offices too severely. While both economic and structural trends are impacting demand for office space, the vacancy rate remains low both in historical and international comparison and rents on modern space in good locations have been rising. In addition, the excessive supply that we have seen in previous cyclical changes will not be a factor this time in view of the wave of insolvencies in the development sector.” In most other sectors, too, vacancy rates remain low and rental growth prospects remain favourable, which is likely to stabilise demand in the investment market.

In the short and medium term, however, Savills believes that it will be the financing markets that shape the real estate investment market going forward. “Even if peak interest rates are probably already behind us, the higher level of interest rates in the real estate markets is probably a long way from having been fully digested. Both devaluations and higher interest rates are gradually working their way through investors’ portfolios and the majority of this process still lies ahead,” says Pink.

Lemli adds: “Since the majority of financing taken out at the highest prices or the lowest interest rates is only just maturing, we expect stress to increase both on the part of the banks and owners. On follow-up financing, additional equity will be required in many cases that is then no longer available for new acquisitions, accordingly dampening demand for property. To what extent the increasing refinancing stress will trigger disposals will depend substantially on the attitude of the banks. We are yet to observe any indications of a wave of forced sales.”

At the same time, Savills expects a rising number of sales aimed at preventative liquidity management. Vendor groups here are likely to include developers, listed companies and open-ended real estate retail funds.

* Offices, high-street properties, retail parks, logistics property, nursing homes, shopping centres and supermarkets

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