Offices in Germany are not attracting investors: the reasons
Office prices in Germany are falling at a record rate. Analysts cite investor sentiment as the main reason for the negative momentum. Investors are in no hurry to invest in local real estate due to low returns.
Offices price dynamics in Germany
At the end of 2023, office prices fell by 5.2% compared to the same period in 2022. According to the banking association VDP, the annual decline was 13.3%. This is the sharpest fall in property values in Germany since 2004.
However, if we look at other sectors, the situation is not so critical. In the retail property segment:
– prices fell by 9% year on year;
– values fell by 3.9% over the quarter;
– retail rents for new lets rose by 2.5%;
– yields rose by 12.7%.
VDP analysts note that prices in this sector have been falling for some time, unlike offices. As for rental rates, they have reached record highs since 2019. Yields have also reached new highs. It has been a long time since the German property market has seen such high performance in the retail sector.
The profitability of office properties at the end of 2023 increased by 17.5% compared to 2022. However, despite the good results, investors’ expectations have not aligned with expectations. According to VDP’s Jens Tolkmitt, other factors are also putting pressure on demand in the sector:
– the instability of economic processes in Germany;
– the impact of the remote working format on the demand for space.
As a result, investor interest in office space remains low. This, in turn, leads to a decline in property values. The situation is different in the retail sector. Here, the market goes through a longer cycle. For example, the current rent increase is the first in more than four years. Moreover, it only affected new contracts. The rest remained unchanged.
Experts are not in a hurry to predict the German property market. According to Tolkmitt, the sector needs time to reach equilibrium. At the beginning of 2024, office prices will continue to fall. This trend will continue until buyers and sellers agree on prices. After that, we can expect the market to recover.
Should we expect a commercial property crisis in Europe?
The European Central Bank has noted the growing instability in the commercial property market. Rising inflation and interest rates have slowed the sector in Europe, the US, Japan and other countries.
The European Central Bank has noted the growing instability of the commercial property market. The regulator said prices in the sector were falling, exacerbated by low activity levels. The ECB also reported a sharp drop in transaction volumes. In the first half of 2023, their number fell by 47%. They increased slightly towards the end of the year, but not enough for the market to recover.