German residential investments: Pricing bottomed out, transaction volume up

“Big tickets” drive the second quarters volume

In Q2, the transaction volume for residential real estate in Germany amounted to €1.8 billion. This is the highest figure since the first quarter of 2023. It still falls short of the historic 10-year average of €3.5 billion, though. Combined with the first quarter, this results in a first-half volume of €2.9 billion. With just over 10,000 residential units traded in Q2, the number of apartments sold also represents a high volume that has not been reached since the beginning of 2022.

Large-scale deals are the main driver of the second quarter – transactions with a volume of over €100 million accounted for 51% of the total volume. The purchase of 4,500 residential units and 40 hectares of land (including 6 hectares of buildable land) the key deal of Q2. HOWOGE and Berlinova paid € 700 million to Vonovia for the portfolio. Other listed real estate companies, such as LEG, which sold portfolios in NRW or Laatzen near Hanover, are also among the active sellers.

Transaction volume residential, Germany Q2 2024

Besides overseas “private equity” players that are currently targeting the German real estate market, more institutional real estate funds are increasingly active. More than 25 new real estate funds with a "Resi Germany" investment focus have been initiated or announced during the last 18 months.  There were 10 funds in 2022 and only 9 vehicles in 2021. A large proportion of the new funds were initiated by German managers. So there is certainly a lot of domestic demand for residential real estate.

Prices have bottomed out, GIYs stabilised

During the first half of 2024, we have identified a stabilisation of gross rent multiples for our 111 focus markets remaining similar to year-end 2023. This applies to both existing properties and new-built properties. The investment market is still very much a buyer's market. This means that transactions only take place if the seller is willing to sell at the price offered by the buyer. We explicitly take this fact into account when deriving the market gross rent multiples.

For existing properties, gross rent multiples in tier-1 are on average 20.8 times in average (GIY: 4.8 %) locations and 23.1 times (4.3 %) in good locations. The gross rent multiples for tier 2 (16.5 times medium location (6.1 %) | 19.4 times good location (5.2 %)), C (16.3 times (6.1 %) | 19.1 times (5.2 %)) and D markets (14.4 times (6.9 %) | 17.2 times (5.8 %)) were correspondingly lower. In the area of new-build properties, the range is between 23.9 (4.2 %) in good and 22.2 (4.5 %) in medium locations in A cities to 20.4 (4.9 %) in 18.6 (5.4 %)in D markets.

Gross rent multiples for existing properties, average location, range and average - Q2 2024

Gross rent multiples for new-built properties, average location, range and average - Q2 2024

There only was a minimal market developments compared to the end of 2023 and we expect that the market correction in the investment market is largely complete. Devaluations are still possible for existing portfolios of listed real estate companies and, in particular, real estate funds, because in some cases property valuations do not yet correspond to the price currently achievable on the market. However, we are in an environment of rising rents, which should have a positive effect on performance in the medium term.  

The turnaround in interest rates policy has not yet had a significant impact on the markets – particularly because financing costs have hardly been affected by the ECB’s move. More solid effects are likely to be seen when there is a sustained trend of falling rates. According to current market opinion, this could manifest itself more slowly or more cautiously than was assumed a few months ago. At the same time, it is not certain whether the Fed – unlike the ECB – will cut interest rates at all this year.

Nevertheless, the interest rate move sends an important signal to the market, especially psychologically. It marks the start of a change in interest rate policy, which reduces interest rate risks for investors and generally makes investments more calculable and quantifiable. In combination with largely completed price correction, this represents an attractive environment for investments. It should lead to more market activity in the coming quarters.

Outlook: price development positive, but rents driven

Against the backdrop of the expected slow decline in interest rates, it is likely that purchasing factors will also show little to no movement in the coming quarters. The capital market side is therefore likely to have little influence property values. However, the rental market remains very tight and the new construction pipeline will remain thin for the foreseeable future. It can therefore be assumed that there will be further upwards pressure on rents this year and next. As in previous years, we expect this to happen at abroad scale, affecting both the top markets and second-tier cities.

Accordingly, the income side should provide positive impetus for the performance of real estate: if GIYs remain steady and rents rise, capital values will also increase.

High activity and investment demand aside traditional transactions

Alternative finance and acquisitions, which are not included in the traditional transaction volume, continue to be relevant in the residential market. This has been evident in recent months, for example, in the large-scale Apollo – Vonovia investments. In Q2 2024, CDC Investment Immobilier also made a large-volume minority share acquisition of 49% in a Berlin residential real estate portfolio. (Note: minority investments like this are not included in our transaction volume figure). Further evidence of the demand for German real estate is the takeover of the insolvent developer Interboden by the Scottish alternative asset manager "Arrow Global", which in turn belongs to the private equity investor TDR Capital. Anglo-Saxon and increasingly also Asian capital remain active players and observers of the German market – especially in the field of non-traditional transactions.

Download: Factor map Q2 2024

Contact: mark.holz@luebke-kelber.de  

_Methodology

_{Our analysis includes all properties used for residential purposes that have at least 20 residential units and in which commercial uses only play a subordinate role. In addition, minority interests and pure M&A transactions or equity deals are not included. Special forms of housing, such as student housing or retirement homes, are also not included in the analysis. The factor analysis relates to market-typical medium to good buildings without significant underrent and without significant capex requirements.}