Market Analysis

International investors are avoiding German property deals as they reduce their involvement in a market facing its most severe crisis in decades, potentially exacerbating the challenges for Europe's largest economy.

According to BNP Paribas Real Estate, foreign buyers made up 35% of commercial real estate purchases in the first quarter, the lowest share since 2013, amidst a sharp 70% drop in sales volumes from pre-pandemic levels. This downturn coincides with a debate on whether Germany is once again becoming "the sick man of Europe," a title it worked hard to shed in the late 1990s.

Kurt Zech, a prominent German developer, warns that the market will continue to struggle until American giants like Blackstone, BlackRock, Morgan Stanley, Carlyle, and Apollo return. These firms' reentry, he suggests, would signal a market bottom.

Germany's property sector, which contributes about a fifth of its GDP, enjoyed a boom driven by low interest rates, cheap energy, and a robust economy until inflation pressures prompted the European Central Bank to raise borrowing costs. This led to dried-up financing, stalled projects, developer bankruptcies, and banking instability, prompting calls for government intervention.

Commercial property prices in Germany fell another 9.6% in the first quarter of 2024 compared to a year earlier, following a 10.2% decline in 2023, with more declines anticipated, according to the VDP banking association.

The share of foreign investors in German commercial property transactions fell to 35% in the first quarter, down from 37% in 2023 and significantly below previous years when foreigners often accounted for half of all deals. This market downturn contrasts sharply with more resilient markets like London and Paris, where investor interest remains stronger.

Executives in the sector, speaking at industry events such as the Cannes gathering, highlighted Germany's particularly bleak mood and the challenges posed by high energy costs, weak global demand, and the shift towards net-zero economies.

Some executives are redirecting resources away from Germany to markets expected to recover sooner, such as the UK, due to Germany's decentralized property landscape and the reluctance of German landlords to lower prices significantly, which has deterred buyers and prolonged the market slump.

Amidst distress sales and asset shedding by struggling conglomerates like Signa, and debt-reducing measures by landlords like Vonovia, questions arise about the nature of transactions in the market.

Kurt Zech remains optimistic, urging banks to continue funding projects and hoping for a turnaround in the market soon. His message to potential foreign investors is that there are still attractive opportunities in Germany despite the current challenges.

Paraphrasing text from "Reuters" all rights reserved by the original author.