In the past year, the brake marks of the interest rate turnaround from 2022 arrived on the market with a time lag. Investors’ conviction that the peak of the rate hike cycle is likely to have been reached and that the financing environment has improved again compared to the previous year will only have an impact in the coming months.
The macroeconomic outlook deteriorated again at the end of the year. In addition to weak global economic stimulus, the wars in Ukraine and Gaza, structural deficits and the uncertain budget situation since the November ruling of the Bundesverfassungsgericht are weighing on the economic and consumer climate in Germany. An economic recovery, at least moderate, is not expected until the second half of 2024.
Transaction Volume in Germany (in bn. €)
Transaction Volume in Germany by Property Type (in m. €)
According to our analyses, obsolescence risks, which are caused by increasing location and quality requirements of new working environments, but also by increasing ESG requirements, affect up to 69 percent of the office stock in the TOP 7.
Prime Yield Office (in %)
Despite the difficult market environment, the German industrial and logistics real estate market ended 2023 with a solid transaction volume totalling around EUR 6.7 billion. Compared to the previous year, the annual result was missed by 28 percent. In a long-term comparison, the transaction volume in 2024 was at the level of the ten-year average (EUR 6.3 billion). In the first half of the year, transaction activity was significantly influenced by interest rate developments and financing costs. The end of the interest rate rally was not heralded until autumn 2023.
Transaction Volume Industrial & Logistics (in bn. €)
Forecast from 2023
Portfolio transactions were the main driver of transactions in the third and fourth quarters. Overall, they accounted for around 35 percent of the transaction volume, which is in line with 2020 levels. The record value from the previous year (40 percent) was narrowly missed. Overall, a solid result was achieved with just under 25 portfolio deals. The largest portfolio transactions took place in the third quarter. The most market-defining deal was Deka’s participation in eight VGP project developments, amounting to around EUR 560 million. This was followed by a portfolio consisting of six properties, which the joint venture of DFI Real Estate and Hansainvest Real Assets purchased for around EUR 270 million. In the fourth quarter, two portfolio sales of more than EUR 100 million took place, including the purchase of several properties in Hamburg’s Billbrook district, which the Kaldox Group completed for a low three-digit million amount. Both national and international buyers were equally active in portfolio purchases. In terms of total transaction activity, national buyers were the most active group, accounting for around 53 percent of the transaction volume. This is in line with the figure from 2021 (52 percent). In the previous year, the share of domestic buyers was around 48 percent. Most of the foreign capital comes from European countries.
At the end of the year, Colliers recorded a gross prime yield of 4.70 percent for core logistics properties with an area of more than 3,000 square meters. While the first half of the year was marked by uncertainties and the low number of transactions made it difficult to determine returns in line with the market, general market conditions were noticeably more favourable in the second half of the year thanks to the stabilisation of the interest rate environment and financing conditions, resulting in a large number of core and core-plus transactions.
With a market share of around 28 percent, logistics was the strongest type of use within the commercial real estate sector. This is a clear statement that the market for industrial and logistics real estate is particularly robust compared to the other sectors.
Transaction Volume by Type of Building
Taking into account the continuing high interest and financing costs, the high prices of the past are no longer being paid in the retail segment either. Currently, the gross prime initial yields for local supply properties range between 5.60 and 6.25 percent.
We see the weak quarter-end of the year as a temporary interruption in the gradual recovery process that is beginning in the investment market as a whole. Moderate economic growth, which will also support private consumption, as well as the increased predictability of the interest rate and financing environment will have a positive effect.
The increased market activity in the fourth quarter shows that the price expectations of buyers and sellers have continued to converge and thus more transactions are crossing the finish line again.
We also see a convergence of price expectations in initial yields, with a stable level of prime yield in the fourth quarter of 3.85 per cent for existing properties in A-cities and 4.50 per cent in other locations.
In 2023, around EUR 2.6 billion were invested in office and commercial buildings outside the top 7, a significant decline of 62 percent compared to the previous year. In the top 7, the decline in transaction volume was 84 percent. The number of transactions in B, C and D cities has fallen by more than half compared to 2022. Portfolio transactions accounted for only a very small share of less than 10 percent of the investment volume. Furthermore, the absence of international investors, who are traditionally represented in B & C cities, is not as strong as in the top 7 anyway. Only 11 percent of the investment volume was accounted for by investors based outside Germany. In recent years, their market share has regularly been between 20 and 35 percent.
There is no doubt that we can look back on an investment year that was marked by a high degree of uncertainty, numerous crises and a search for guidance in price discovery. The reluctance on the part of investors in view of the discussions about the future of the office as well as the fundamentally changed framework conditions in the financing environment are also evident outside the top 7.
Analogous to the top 7 cities, prime yields in B&C cities have continued to move upwards. In the unweighted average of the 14 B cities examined, the prime yield for first-class office and commercial buildings in central locations was 5.20 percent at the end of 2023 (+60 basis points compared to the previous year), the first time since 2017 that it was below 20 times the annual net rent. In C-cities, very good office and commercial buildings were available for an average of just over 17 times or around 5.85 percent (+80 basis points compared to 2022) prime yields.
In view of the low number of transactions, especially for premium properties, it is difficult to make statements about pricing.