German real estate market remains strained
Verband deutscher Pfandbriefbanken
Lower transaction volumes and price declines offset by rise in yields.
In the second quarter of 2023, the development of the previous quarters continued on the German real estate market. Accordingly, activity continued to be characterized by great restraint. This was reflected, for example, in a comparatively low transaction volume: In the first half of 2023, real estate worth just under EUR 15 billion was transacted, with such a low volume last seen in 2012. In parallel, the decline in capital values continued: The vdp property price index fell by 6.4% compared with the second quarter of 2022, with the sub-index for commercial property falling by -10.3%, significantly more than that for residential property (-5.4%).
Office yields on the rise
After two years of significantly increased take-up, the office rental market also had to contend with declines in the first half of this year. Demand for space was subdued against the backdrop of the winter recession and the increasing implementation of new workplace models, which was often accompanied by a reduction in space in expiring leases. According to JLL, new leases in the first six months of this year were accordingly just under 1.2 million sqm, which is only just under 70% of the 5-year average (1.7 million sqm).
The office vacancy rate rose to around 5.3% at mid-year. In addition to weak demand for space, this was due to the significantly higher supply of sublet space, which built up because of the continued high home office ratio. As of June 30, 2023, sublease space accounted for more than 15% of total vacant space.
The changed situation on the rental market contributed to a decline in office real estate investments, in addition to obstacles such as uncertainty about economic development and the rise in inflation and interest rates. As a result, the transaction volume in the first half of 2023 amounted to only around EUR 3 billion, almost 80% below the volume in the prior-year period. The reluctance to buy was accompanied by a decline in purchase prices – measured by the vdp index – of 9.8% compared with the second quarter of 2022. While rents continued to rise slightly, yields also continued their upward trend – year-on-year, the vdp property yield index rose by 16.1%. The increase over the past four quarters meant that net initial yields at mid-year were at the level of the second quarter of 2016.
High interest rates paralyze housing market
Yields on multifamily properties have also risen noticeably since the start of the rise in interest rates – by more than 100 basis points. The corresponding vdp property yield index rose by 14.2% year-on-year in the second quarter. At the same time, the transaction volume fell by around 40% compared with the first half of 2022, but at a good EUR 5 billion, residential was still the strongest asset class in the first half of the year.
The owner-occupied market also showed great restraint. For example, in the first three months of this year alone, the Berlin Valuation Committee reported a decline in purchases for owner-occupied homes of around 25% and for owner-occupied apartments of more than 40%. This trend is likely to have continued in the second quarter of 2023 against the backdrop of further increases in mortgage rates. For this period, the vdp index shows a decline in purchase prices for Berlin of 4.9% for owner-occupied homes and 3.0% for condominiums. Subdued demand in residential property markets increased the pressure on Berlin’s rental housing market, which was reflected in a 9.5% rise in new contract rents (by comparison, Germany: +6.2%). Contrary to the nationwide trend of significantly declining building permit figures – from January to June this year: -27% compared with the same period last year – the number of apartments approved in the capital has so far fallen only slightly, by -2%, thanks to high approval figures in the first four months. This downward trend in the German market was limited to the construction of single- and two-family homes (-40 %), while the number of apartments approved in multi-family houses still rose slightly (+1 %).
Subdued demand for real estate financing continues
The restraint prevailing throughout Germany on the real estate market was confirmed on the financing side: New real estate financing business by the institutions affiliated to the vdp amounted to around EUR 31 billion for residential real estate and almost EUR 22 billion for commercial real estate in the first half of 2023. Compared with the first half of 2022, in which record results of EUR 59.4 billion and EUR 35.2 billion respectively were recorded, partly due to pull-forward effects in anticipation of rising interest rates, there was a drop of around 48% and 39% respectively.
First published in vdp Quarterly no. 3, 2023