The commercial real estate market in Germany is experiencing a significant downturn, with deal volumes reaching their lowest level since 2017. According to data provided by real estate firm JLL, the first half of 2023 saw a 50% decline in commercial property transactions compared to the previous six months, amounting to €14.9 billion ($16.2 billion). This figure is also two-thirds below the average over the past five years.
Germany is not alone in experiencing this market standstill. Other European countries, including Sweden, Ireland, and the UK, have also seen commercial property markets seize up as buyers and sellers struggle to agree on pricing. One of the key factors contributing to this decline is the rise in interest rates, which has driven up borrowing costs. As a result, potential property investors are demanding higher yields, leading to lower offer prices. Additionally, owners are hesitant to grant steep discounts to book values, fearing that it could lead to an increase in debt ratios.
The effects of this downturn are also noticeable in the German residential real estate market. BNP Paribas Real Estate reported a 69% plunge in deals in the residential segment during the first half of the year, considerably below the 10-year average.
Investment bank Stifel suggests that the industry may face a decade of limited earnings growth due to these challenging market conditions. As a result, they have downgraded the ratings on German residential landlords LEG Immobilien SE, TAG Immobilien AG, and Vonovia SE to sell, causing their shares to decline. Analysts at Stifel believe that the era of endless growth supported by cheap finance in the real estate market has come to an end, and a "protracted hangover" is now expected.
However, there are some signs that the pace of the contraction in commercial property deals may be slowing, according to JLL data. The year-on-year drops are becoming less severe, which could be the first step toward an eventual rebound. Certainty about the future path of interest rates could play a significant role in getting the market back on track as it would make it easier for buyers and sellers to find common ground. Market expectations currently suggest that the European Central Bank will end its series of interest rate hikes later this year.
BNP Paribas suggests that if the ECB stops raising rates, there is a realistic chance that price expectations could converge by the end of the year. This could provide planning security for both buyers and sellers and potentially lead to a rebound in the market.
However, it is expected that deal volumes will remain at a low level for the rest of the year due to the sluggish German economy, which will provide very little, if any, tailwind to the real estate industry.