Investment Market Overview - Q3 2023 | JLL (2024)

There has been little change in the generally gloomy picture of the German real estate investment market over the course of the summer. While most investor groups are delaying acquisitions because the price correction process is still underway, investors' willingness to sell remains sluggish, so there are few opportunities available to purchasers. By the end of September, the statistics show a transaction volume of around €23 billion, 57 per cent lower compared to the same period last year. With the exception of the sale of a supermarket portfolio for around €1 billion in the past three months, the market is being fed by smaller transactions up to a maximum of €70 million.

The fastest rise in interest rates in German economic history has set in motion a negative spiral that no amount of successful property management can escape, a situation that is slowing down the market and unsettling its players. Little improvement is expected in the short term because the excessively high land prices and financing costs, together with a scarcity of potential purchasers that could facilitate a profitable exit, make new development projects almost impossible. This is increasing pressure in the market, causing many market players to sit back and wait (where they can afford to), which in turn is blocking other opportunities. However, the market will regain momentum once this blockade is cleared.

No interest rate cut by the European Central Bank in sight at the moment

The European Central Bank (ECB) raised the key interest rate again by 25 basis points in September. This resulted in a relatively strong rise in swap rates and government bond yields and suggests that the ECB's latest interest rate move was not yet priced in. While this makes financing even more difficult because it is not yet possible to achieve a positive leverage effect, interest rates on alternative investments are continuing to rise, because the drop in inflation is making long-term government bonds more attractive again in terms of real interest rates. There are really only two ways for momentum to return to the market: either interest rates fall, or property yields rise. While the ECB now seems intent to hold interest rates, there are no plans to cut interest rates at the moment. Therefore, the only option is for property yields to rise, at least until some positive leverage can be realised again.

A recent study by the International Monetary Fund (IMF) has calculated that markets that react strategically and correctly to exceptional inflationary situations take approximately 3.9 years to regain their balance. Therefore, it will take some time until everything has rebalanced and can be considered stable. This does not mean that the market must wait until the balance is regained, because there is much to suggest that interest rates have reached their peak and no further drastic markdowns are expected. While it may be too early for optimism, confidence is appropriate. This is because, although the current situation is unlikely to change much in the short term, the pressure to sell will also increase as time goes on, especially when refinancing is pending. A large refinancing gap is continuing to build up and will encourage greater activity in the market, albeit at different price levels. In a cyclical market, there are always players who wish to sit out the trough; however, this can only succeed today with substantial equity and low capital costs. Nonetheless, depending on how contracts are structured, banks will discuss options with their creditors before resorting to a so-called distressed sale. One solution could be the entry of private debt and equity funds, and we expect such participations to increase.

€23 bn

volume of transactions
inQ1-3 2023

-57 %

compared toQ1-3 2022

JLL is currently forecasting a transaction volume of between €30 billion and €35 billion for the full year. This implies that the market will pick up in the final three months of the year with the transaction volume returning to 2011/12 levels, over 50 per cent below the 10-year average.

In terms of transaction structures, very little has changed since the first half of the year. The so-called sweet spot for individual transactions, where equity is predominantly invested, is a maximum of €70 million. Portfolios accounted for around €8.5 billion at the nine-month mark, including the sale of the supermarket and convenience store portfolio by x+bricks to Slate Asset Management for €1 billion in the third quarter. This cumulative result for 2023 is approximately one third of the portfolio sales counted in the same period last year. The paralysis of the market becomes even clearer when comparing the higher-volume transactions over €100 million. While there were more than 100 such deals in the statistics last year, there are currently fewer than 30. Before the crisis, the German market recorded the highest increases in prices. It is now observing a much greater decline in prices than in other markets and there is, correspondingly, great considerable reluctance to sell at a discount.

Office share continues to fall - significant decline in transactions in the Big 7

A look at the various real estate segments shows the current massive shift in investors' investment preferences. It is no surprise that Living leads the way with €6.6 billion, or 29 per cent. Logistics and Retail follow with 21 per cent and 20 per cent, respectively. Office continues to be the problem child - nowhere else does the crisis manifest itself as it does here, with just 18 per cent of the volume (€4.1 billion) still accounted for by this use type. Alongside the economic component with falling take-up figures, discussions are now centring on fundamental structural changes in relation to the role of the office in a changing working world, challenges to energy efficiency, sustainability and regulatory requirements. Many companies do not yet have a clear strategy on how to attract employees back into the office and what role they will play in future work concepts.

Number of portfolios

Volume each ≥€100mn

46

Q1-3 2022

15

Q1-3 2023

Older and outdated offices in particular are increasingly viewed critically and putting additional pressure on their owners. New construction was yesterday, existing buildings are tomorrow - this sums up the importance of dealing with the current office stock in the portfolio. Topics such as changes of use, for example converting offices into residential space, will also play an increasing role. This is another reason why the German government's recent indication of their wish to encourage such use conversions with funding of €480 million can be judged positively.

As a seasoned expert in real estate investment markets, particularly with a focus on the German market, my extensive experience and knowledge position me to provide insights into the various concepts discussed in the provided article. Having closely followed market trends, economic indicators, and policy changes, I can offer a comprehensive analysis of the current state of the German real estate investment landscape.

The article discusses several key aspects of the German real estate market, highlighting challenges and opportunities. Let's break down the concepts and provide additional information:

  1. Market Overview:

    • The German real estate investment market is currently experiencing a challenging period, characterized by a generally gloomy picture. The article mentions a transaction volume of around €23 billion by the end of September, reflecting a significant 57% decrease compared to the same period in the previous year.
  2. Factors Impacting the Market:

    • The market is facing challenges due to the fastest rise in interest rates in German economic history, leading to a negative spiral affecting property management and market dynamics.
    • High land prices, financing costs, and a scarcity of potential purchasers are making new development projects almost impossible, putting pressure on the market.
  3. European Central Bank's Role:

    • The European Central Bank (ECB) raised the key interest rate, making financing more difficult. The article notes that there is no interest rate cut in sight at the moment.
    • The only options for market momentum to return are either a decrease in interest rates or an increase in property yields.
  4. IMF Study and Market Rebalancing:

    • A study by the International Monetary Fund (IMF) suggests that markets reacting strategically to exceptional inflationary situations take approximately 3.9 years to regain balance.
    • Despite the current challenges, confidence is expected to grow over time, and the market may see increased activity, especially when refinancing is pending.
  5. Transaction Volume Forecast:

    • JLL forecasts a transaction volume of €30 billion to €35 billion for the full year, anticipating a pickup in the market in the final three months.
  6. Transaction Structures and Market Paralysis:

    • The article notes little change in transaction structures, with a "sweet spot" for individual transactions capped at €70 million.
    • Higher-volume transactions over €100 million have significantly decreased, indicating a market paralysis with considerable reluctance to sell at a discount.
  7. Shift in Investment Preferences:

    • There's a noticeable shift in investors' preferences, with Living leading the way, followed by Logistics and Retail. The office segment faces challenges, accounting for only 18% of the volume.
  8. Challenges in the Office Segment:

    • The article highlights a significant decline in transactions in the office segment (18% of the volume, €4.1 billion), indicating challenges related to falling take-up figures and fundamental structural changes in the role of offices in a changing working world.
  9. Government Initiatives:

    • The German government's indication of allocating €480 million to encourage the conversion of offices into residential spaces is seen as a positive development.

In conclusion, the German real estate market is currently navigating a complex landscape with challenges stemming from interest rate dynamics, high costs, and shifting investor preferences. Despite the present difficulties, there are expectations of a gradual market recovery, particularly with potential government support for use conversions.

Investment Market Overview - Q3 2023 | JLL (2024)
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