Real estate industry representatives are cautious in their predictions for the second half of 2023. The market correction cycle continues, and the market has not yet completed its return to more stable prices. In fact, it may not find a stable basis before the end of 2023 or not until 2024. CR Investment Management and HCOB believe that the market shake-out will continue and that we will see an increase in company insolvencies. In the continued absence of large-scale transactions, as current transactions tend to be smaller and to have a higher equity ratio. Many developers have reached financial breaking point and are forced to offer their assets at discounted prices. Borrowers in general have to bring significantly more equity to the table today, especially developers. Most financing arrangements for property developments are restrictive. By contrast, competition is intensifying in the core real estate financing segment. These are the key findings presented at today’s online press conference headlined “Quo Vadis Real Estate Market 2023: How will the Market Develop during the Second Half-Year?”. It was attended by Felix Meyen, Managing Director of HIH Invest Real Estate, Arnaud Ahlborn, Managing Director of INDUSTRIA, Peter Axmann, Head of Real Estate Clients at Hamburg Commercial Bank (HCOB), and Torsten Hollstein, Managing Director of CR Investment Management.
Felix Meyen, Managing Director of HIH Invest Real Estate, focused on the commercial asset classes as he provided an overview of the investment markets. Meyen said: “The second half-year will initially remain defined by uncertainties, even though players are gradually emerging out of their shock-frozen state and are coping increasingly well with the new market environment. The market action we are seeing is still rather slow, one main reason being that the pricing process has yet to conclude. Large-volume deals and major portfolio transactions continue to be the exception. Instead, smaller volumes are propping up the market to some extent and successively reviving it. At the same time, investors have become far more picky than they were during the boom in regard to qualities of location, asset and accommodation, and the situation is compounded by the catalytic effect of ESG requirements. Yet it presents a chance for equity-rich investors to seize opportunities on the investment market with little competition.”
Housing Market has Now Put Major Price Adjustments behind it
Arnaud Ahlborn, the Managing Director of INDUSTRIA, had this to say about the housing market: “We saw the biggest adjustments to residential real estate prices during the first half-year of 2023. In the second half of the year, the price erosion will proceed at a slower rate. Prices are asymptotically approaching a low point at the moment. Just when they will bottom out is impossible to say. A realistic projection would be late 2023 or in the course of 2024.”
INDUSTRIA is planning to step up its acquisitions during the second half-year. Ahlborn elaborates: “We acquired three properties for 68.3 million euros during the first six months of 2023. And we are planning to invest another 200 to 250 million euros during the second half-year. We are aware of great opportunities to do so. The pressure is rising on the sellers’ side. More and more developers are reaching financial breaking point. They need to put their assets on the market and accept price discounts. Some of them approach us proactively with adjusted price expectations.”
Sector Needs Time to Get Used to New Reality
Peter Axmann, Head of Real Estate Clients Hamburg Commercial Bank, said: “The outlook for the real estate industry remains bleak. The current level of interest rates, accelerated inflation, and the uncertain economic development are seriously slowing the transactions market. We therefore assume that we will be seeing a market shake-out, an increase in the number of insolvencies, and discounts of up to 30 percent on real estate values. As it emerges from a twelve-year boom cycle, the industry needs more time to get used to the new reality. We do not expect sentiment to brighten before 2024, and even this is assuming that inflation and interest level will have consolidated by then, and that a higher number of transactions will provide a better reference point. In the short term, the pressure to sell that funds, developers and public property companies are exposed to will strengthen the supply side.”
“The task of budgeting property developments remains as difficult as ever, and most banks take a cautious approach to financing. This contrasts with the funding situation for core real estate and ‘green’ buildings, where the competition is steadily intensifying. In general, though, banks expect higher equity stakes from their clients today,” Axmann went on to say. “In the medium term, Germany will remain an attractive real estate market, even if most market actors are playing it by ear at the moment.”
Torsten Hollstein, Managing Director of CR Investment Management, commented: “We assume that the transactions market will regain its momentum in the course of 2024. It’s been only a week that the European Central Bank raised its key lending rate to 4.0 percent, and it is expected to move ahead with one or two further interest rate hikes before the end of this year. This complicates the pricing process on real estate markets, and is driving refinancing costs up even further. You also need to remember that the real estate market tends to respond to the macroeconomic development with a time lag of six to twelve months.”
