May 21 2024: International investors are increasingly avoiding the German property market, exacerbating what is being described as the worst crisis in a generation for Europe’s largest economy. Foreign buyers accounted for only 35% of commercial real estate purchases in the first quarter, the lowest level since 2013, according to BNP Paribas Real Estate. This decline is set against a backdrop of a 70% drop in sales volumes compared to pre-pandemic levels of 2020-2021.
The dismal figures come amid renewed concerns about Germany’s economic health, evoking memories of the “sick man of Europe” label it struggled with in the late 1990s. This period of economic stagnation and high unemployment was overcome after years of effort, but the current situation, involving a shift away from Russian energy, bureaucratic entanglements, and rising far-right political sentiments, has reignited such fears.
Kurt Zech, one of Germany’s leading developers, emphasizes that recovery will hinge on the return of foreign investors. “The Americans have to come back,” Zech told Reuters, highlighting the importance of investments from major global firms like Blackstone, BlackRock, Morgan Stanley, Carlyle, and Apollo.
Factors Behind the Crisis
Germany’s property sector, contributing approximately €730 billion ($793.51 billion) annually to the economy (around one-fifth of the nation’s output), experienced a boom sustained by low interest rates, cheap energy, and a robust economy. This boom ended abruptly when soaring inflation forced the European Central Bank to rapidly increase borrowing costs, resulting in a severe contraction in real-estate financing, stalled projects, bankruptcies among major developers, and instability within some banks.
Market Decline and Economic Impact
Commercial property prices continued to fall, with a 9.6% drop in the first quarter of 2024 compared to the previous year, following a 10.2% decline in 2023, according to the VDP banking association. The ongoing decline is predicted to persist, adding to the market’s woes.
Carsten Brzeski, chief economist at ING in Germany, noted, “Germany was a beacon of stability in Europe and people flocked to buy property here. Now, the economic engine is stuttering and needs maintenance. It’s no longer the shiny new thing investors want.”
Foreign investment in German commercial property, which was at its lowest in a decade at 37% in 2023, further slipped to 35% in the first quarter of 2024. Historically, foreign investors have often accounted for half of all commercial property transactions, underscoring the significance of the current downturn.
Sector Challenges and Investor Sentiment
High interest rates have impacted property markets globally, but Germany has been hit particularly hard. At the annual real estate conference in Cannes, France, in March, the sentiment towards Germany was notably pessimistic. Simone Pozzato, managing director at Hines, remarked, “Where the mood is really at its worst is Germany.”
Executives from European developers also indicated a strategic shift, redeploying staff from Germany to more promising markets like Britain. High energy costs, weak global demand, the transition to net-zero economies, and increasing competition from China are all contributing to doubts about Germany’s economic model.
Market Dynamics and Future Outlook
Germany’s property market is characterized by its decentralized design, which can deter foreign investors who prefer more straightforward markets like London or Paris. Additionally, German landlords typically avoid cutting property prices during downturns, discouraging potential buyers and slowing market recovery.
The scarcity of deals and peculiarities of those that do occur, often involving distressed assets or unique circumstances, further complicate the market. Zech calls on banks to support the industry by ensuring the flow of funds to complete ongoing projects. He remains optimistic, urging foreign buyers to recognize the value in current German projects despite the prevailing market challenges.
In conclusion, the German property market’s recovery depends heavily on the return of foreign investment and a favorable economic environment. Until then, the sector will likely continue to struggle amid high interest rates, economic uncertainty, and geopolitical challenges.