• Quarterly take-up stable at €5.7bn – 9-month volume of €16.3bn, representing a two-thirds decrease year on year to reach the lowest level since 2010
• Prime yields softened further, mostly by 20 to 30 basis points

The transaction volume and number of transactions have bottomed, with prices falling further at the beginning of the previous quarter – such was the analysis of the German commercial property investment market presented by Savills at Expo Real 2023. The figures substantiating this view are as follows: Commercial property changed hands for approximately €5.7bn across around 200 transactions during the third quarter of 2023. Both figures are broadly in line with the two previous quarters. In contrast, prime yields softened across all segments, mostly by 20 to 30 basis points. The fact that the market has rapidly fallen to levels not witnessed for a long time, both in terms of the transaction volume and prices, is only apparent when comparing figures year on year. The transaction volume for the first three quarters of the year stood at approx. €16.3bn, which was almost two thirds lower than in the corresponding period last year, while prime yields across the major commercial real estate sectors have risen by an average of almost one percentage point over the last year and as much as almost 1.5 percentage points since their low in the Q1 22.

Marcus Lemli, CEO Germany and Head of Investment Europe, says of these figures: “Prices in the German real estate market have corrected to an unprecedented degree owing to the steep and rapid interest rate hikes. This price correction is accompanied by an at least temporary withdrawal of many institutional purchasers. The beneficiaries are those investors who have frequently or completely missed out in recent years.

Consequently, we are increasingly seeing family offices and other long-term private investors in transaction processes on the bidder side, with others sounding out the market and who now believe the time has come for counter-cyclical investments. This could stabilise the market even though both prices and volumes are likely to plateau at a significantly lower levels in the medium term than prior to the interest rate hikes.”

The extent of the price correction is impacting liquidity in individual segments: retail leads the way, offices show the strongest decline
The steep price correction has also thinned out the field of vendors, with many owners postponing planned disposals since they fear that they will be unable to achieve their desired sale price. Since prices on individual use types have fallen to varying degrees, some sectors have remained more liquid than others. With a transaction volume of approximately €4.7bn, or 29% of overall investment, retail property is not only leading the investment ranking for the year to date, it has also registered the lowest decline of -32% compared with the corresponding period last year. This relatively strong performance is also likely related to the fact that the yield increase on most retail segments has been milder than on most other uses since the commencement of the interest rate hikes and the fact that strong rental growth has at least partially offset the softer yields, thus correspondingly supporting capital values. The latter is true of food retail properties, which have witnessed the sharpest decline in investment volume. Capital values have also stabilised on industrial/logistics property, which have posted the second highest investment volume with almost €3.6bn thanks to the increase in rental levels. The office property sector, which has also attracted a transaction volume of almost €3.6bn, has witnessed the strongest decline in investment across all sectors of -79%. Rents have also risen in this sector until recently. However, the rise in yields on office property has been particularly steep since investors are pricing in higher risks owing to the structural changes in the occupier market. Moreover, the average transaction volume in the office sector has more than halved from €80m to approx. €35m within a year. No other sector has witnessed such a decline, which may indicate that some investors are now regarding high-value office properties as too great a cluster risk for their portfolio in the current environment.

Perfect environment for value-add investors
In any case, the structural changes in the office markets are likely to dampen demand from more risk-averse investors for the time being. Matthias Pink, Head of Research Germany for Savills, says: “The transformation to remote working has created many shifts in the office lettings markets: lower demand, changing location preferences and different requirements in terms of fit-out. Conditions that represent a difficult environment for risk-averse market participants are perfect for value-add investors. Availability of capital is currently the highest for this risk profile and is likely to rise further. The same applies in other sectors, particularly retail.”

However, the large void left by the reticence of institutional investors will neither be filled by this risk-prone capital nor through private investors with a long-term investment horizon. This is also likely to manifest itself in significantly lower transaction volumes in the medium term compared with the average figure over the last ten years. Savills expects a transaction volume of around €22bn for this year with no increase in market activity during the first half of 2024.

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