While commercial real estate properties transacted for more than €20bn in the first quarter of the year in Germany, the transaction volume in Q2 totalled just €8bn. Hence, Savills believes that the exceptionally long bull market in German real estate investment, which has produced yield compression and rising or sustained high transaction volumes over the last twelve years, is over. The current period of adjustment heralds the start of a new cycle and Savills expects the overall transaction volume for the year to come in below €50bn (2021: €60.7bn).

Marcus Lemli, CEO Germany and Head of Investment Europe at Savills, says: “While market participants have been anticipating a reversal in interest rate policy and a potential correction in the real estate market for some time, they have been surprised by the speed at which this transformation occurred.

“However, the temporary decline in competition offers opportunities for those investors willing and able to make acquisitions in the current environment. We expect many of the buyers who have withdrawn from the market for the time being to return in the autumn. Provided that the financial and economic environment remains stable between now and then, we expect a smooth cyclical transition despite the current faltering market.

“The pressure to invest for many buyers appears as high as ever and, in a world of higher inflation, real estate could even become more attractive as an asset class. Furthermore, the lettings markets have remained predominantly stable thus far, with rental growth prospects even improving in some segments.”

The significant decline in transactional activity is primarily due to a stronger divergence in price expectations between buyers and vendors says Savills.

According to the international real estate advisor’s observations, this divergence in price expectations is greater in the core segment than in the value-add segment owing to the higher interest rate sensitivity. The former has been particularly illiquid in recent months, and it is scarcely possible to determine market prices.

Matthias Pink, Head of Research, Savills Germany, says: “The extent to which prices have already corrected is difficult to determine owing to the low number of transactions. Price corrections depend on how interest rates develop as well as other parameters, such as expectations as to rental growth and inflation. These might moderate the interest rate effect in some segments but strengthen it in others.”

To depict the extraordinary spread between some quoting prices and offers, Savills has used yield ranges rather than individual figures for the second quarter. The prime yield for offices in the top six cities averaged 2.7% - 3.1% (Q1 22: 2.6%), with the lower end of the range reflecting the price expectations of vendors and the upper end indicating those of buyers. The range for prime logistics properties is narrower at 3% - 3.2% (Q1 22: 3%). In other segments, recent completions or a lesser divergence in price expectations in ongoing sale processes means that individual figures can be used. In some cases, such as care homes (3.9%), these figures have remained stable compared with the previous quarter, while other segments have already registered softening yields. The prime yield for retail parks, for example, has risen from 3.5% to 3.75%.

“Price expectations are also so far apart since, despite the sharp rise in interest rates, most owners are not under pressure to sell and would rather decline a sale than sell at a lower price. This demonstrates that the whole cycle was dominated by equity-rich investors. In addition, while debt has become more expensive, it still remains available. This differentiates the current downturn from the financial crisis. Hence, the possibility of ‘bargain’ investments from distressed situations, for which some investors are already lying in wait, is probably rather unlikely and principally limited to the development segment,” says Lemli.

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Market in Minutes - Investment Market Germany - July 2022