Cityscape of Frankfurt am Main, Germany

Respondents to a survey on the prospects for the German real estate market have provided a negative outlook on the availability of debt for the medium term, with expectations of scarce financing over the next two years.

Around 250 real estate participants responded to the survey by German bank lender Berlin Hyp in mid-December. Most believe market activity is unlikely to improve in 2024 owing to a continued scarcity of finance and the current gap between buyer and seller assessments of asset values. Many are hoping for interest rate cuts to stimulate activity.

Berlin Hyp said over half – 53 percent – of commercial real estate professionals quizzed for the survey said they expect lender appetite to provide finance will be “limited” for the next two years. A further 4 percent said they expect lenders will be much less willing to offer debt over this period than in 2023, while 19 percent expect their willingness to remain “unchanged”.

The total transaction volume in Germany’s investment market is also not expected to improve, according to the survey.

It is estimated between €30 billion and €35 billion was transacted in 2023 – 60 percent lower than in 2022, according to Berlin Hyp. Most participants said transactions would not exceed this by much in 2024. Fifty-six percent forecasted a sales volume of between €30 billion and €40 billion.

When asked about their willingness to invest, 40 percent of participants said it was “limited” or “very limited” and a further 41 percent said it was “balanced”.

Rate cut hopes

Interest rates levels were cited by the majority of respondents as being the most important issue of 2024, with 71 percent reporting this as the key issue for 2024. When asked what factor was giving most reason for optimism, 74 percent claimed a possible reduction in rates was providing hope for a more positive market performance in the months ahead.

The financial markets are betting the European Central Bank will make several cuts to interest rates this year, with the first expected in March or April as inflation comes under control. However, Sascha Klaus, chair of the board of management of Berlin Hyp, urged the market not to depend too much on such a development.

Klaus said: “The mood seems to remain very cautious and one is hoping for some type of stimulus from outside the industry. Government support measures and possible interest rate reductions are certainly important, but they’re not a cure-all. If the market is to regain momentum, the available opportunities will have to be systematically seized. In 2024, we therefore need to move on from neutral to at least back to first gear.”

The report also criticised the market’s dependence on underlying political conditions – 56 percent of respondents cited this as crucial for the real estate outlook.

It said while finance for the stabilisation of the real estate sector had been approved in the federal budget for the year ahead, it was risky to be too dependent on political decisions.

In December, Germany’s Constitutional Court ruled that the government’s plans to redirect public funds from pandemic-related emergencies to provide debt for building retrofits was unlawful.

Commenting on the decision, Berlin Hyp said in the report: “Hopes for a change in underlying political conditions appear to be risky, as was most recently demonstrated by the Constitutional Court ruling on the German government’s Climate and Transformation Fund.

“Indeed, many of the planned projects for stabilising the construction and real estate sector are to be financed using this fund. Agreement has now been reached on a federal budget for 2024. Nevertheless, this situation has demonstrated that even a firm commitment does not guarantee that what is promised will actually be delivered.”