According to Savills, the transaction volume for residential properties in Germany stood at almost €3.1bn in Q2 2022 (transactions of at least 50 residential units).

This brings the investment volume for the year to date to around €7.5bn, which is approximately 27% lower than in the corresponding period last year. The international real estate advisor expects subdued activity in the residential investment market over the coming months and a transaction volume for the full year of up to €15bn.

“Many investors have temporarily withdrawn from the market and intend to wait and see how developments unfold,” says Karsten Nemecek, Managing Director Corporate Finance – Valuation for Savills Germany, adding: “Diverging price expectations from buyers and vendors are currently preventing many transactions. We expect a period of adjustment over the coming months and a higher number of transactions once again by the end of the year.”

Savills also notes that the reversal in interest rate policy is likely to result in yield adjustments. However, the company did not observe any changes in prime yields during the second quarter.

Nemecek continues: “A number of recent transactions have confirmed the price levels indicated at the beginning of the year. The sustained high pressure to invest on many equity-rich investors has, therefore, stabilised price levels in the residential market to date.

“However, it is unlikely that this group will continue to stabilise yields going forward. Residential property has been the bond substitute par excellence in recent years and is likely to respond correspondingly sensitively to the rise in bond yields. Even equity-rich purchasers will correct their price expectations or shift capital into bonds. For buyers using debt capital, in view of the very low starting level of residential yields, the noticeable increase in financing costs has now produced a negative leverage effect. This, too, will no doubt result in changing price expectations among bidders. All in all, an increase in prime yields is highly probable.”

In the occupier market, conditions remain favourable, with Matti Schenk, Associate Research, Savills Germany, noting that vacancy rates in many regions are likely to remain very low for the foreseeable future and rents can be expected to rise further. He comments: “It is already apparent that the new-build rate will be lower than expected. This means scarcely any relief to the strain on the supply side.”

In view of the positive fundamental data for owners in the rental market and the agreement of indexed rents, new-build residential property in particular should remain sought-after by investors. However, current developments may attract the attention of policy. “The massive increase in electricity costs and service charges will be an enormous challenge for many households. In view of the widespread societal impact of this issue, politicians may, for example, respond by impeding the agreement of indexed leases. It cannot be ruled out that rental increases will be further limited,” says Schenk, adding: “Investors should take the possibility of such a response into account. The high rate of inflation itself could impact the solvency of many households, making rental growth potential more difficult to realise.”

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Market in Minutes - Residential Market Germany - July 2022