Colliers report: German outlook 2024

13 December 2023

One key finding in the new report, “Colliers Outlook 2024. New perspectives. New opportunities.” is that conditions will continue to improve somewhat for Germany’s real estate business over the course of 2024, despite the fact that the markets are carrying a burden with them into the new year. The report sheds light on the economic environment in the real estate sector and covers topics such as the Corporate Sustainability Reporting Directive (CSRD) and artificial intelligence (AI). The report also includes an analysis of the most important types of use and the potential they hold for Germany’s investment and letting business in 2024.

Moderate economic growth and an adjusted financing environment.

In the wake of the 2023 recessionary phase, the Market Intelligence & Foresight experts at Colliers are forecasting moderate GDP growth at 0.5% for Germany in 2024. Inflation will continue its downward trend, dropping to an annual average of 2.7%. The European Central Bank is expected to adjust its interest rate policy in the second half of 2024 in line with these developments. We expect the key interest rate to fall below 4% by the end of the year and financing conditions to continue to stabilize as the year progresses. The recent negative spread between 5-year and 10-year SWAP rates should reverse during 2024. This means that interest rates on longer-term debt will again be more expensive than rates on shorter-term debt, which will provide investors with more opportunity to optimize their debt costs over the relevant terms.

“The financing environment will favor market growth in 2024 with volatility settling in the first half of 2024 followed by a slight drop in debt costs in the second half of the year. We expect the possibility of having left the interest rate peak behind us combined with a significantly larger supply of properties to boost market activity, which would send out a positive signal to the entire sector,” says Achim Degen, CEO of Colliers in Germany. The trend towards an uptick in market activity is being boosted as properties are revalued and companies announce insolvency. Both of these events create pressure to sell, which means more transaction activity.

New CSRD regulations and AI applications will impact the industry.

The EU Corporate Sustainability Reporting Directive (CSRD) forms the basis for European sustainability reporting standards. The directive requires companies to be more transparent when it comes to their sustainability strategies. 15,000 companies in Germany will be required to prepare a standardized sustainability report in compliance with CSRD for the 2025 calendar year, which means that companies will significantly intensify their preparations around this new requirement in 2024. The process is raising general awareness of sustainability criteria at corporate management level. Colliers therefore expects growing interest in letting commercial real estate that supports corporate sustainability goals. Investors and asset managers are likely to show higher tolerance for CapEx measures in 2024 if these mean making a property sustainable.

The release of ChatGPT has meant that AI applications are now receiving considerably more attention and the real estate industry is no exception. According to Quirin Privatbank, AI applications will experience 33% in global revenue growth in the coming year with total sales forecast to reach $71bn. The real estate industry is expected to make greater use of AI applications in 2024, especially when it comes to repetitive and standardized tasks.

2024 trends behind the most important types of use.

Office:
The price correction phase in office investment is already well advanced at the end of 2023 and the gap between buyer and seller expectations has narrowed. This gap is likely to close in 2024 thanks to less volatility in the financing environment over the course of the year, which will lead to an uptick in transaction activity. We expect average prime initial yields in Germany’s top 7 cities to post around 5.2%, comparable to 2016/2017. The recent office leasing trend appears to have bottomed out in many locations. Small and medium-sized units will once again provide a solid basis for take-up in 2024. The economic recovery over the course of the year will increase the chances that large-scale occupiers decide to take-up space, which will trigger a moderate increase in take-up on the overall market.

Retail:
When it comes to retail assets, Colliers expects to see an increase in the importance of retail locations close to residential areas and the revitalization of city centers through new mixed-use and store concepts with food anchors as well as non-food discounters. This will be accompanied by a general turnaround of rents in prime locations, partly due to the ongoing reduction in retail space. In terms of investment, yield increases are possible across all retail types in view of ongoing challenging interest and financing conditions.

Residential:
The ongoing rise in demand for housing combined with the collapse in new residential construction means that the housing market will be tighter in 2024 than it has been for decades. In addition, political stimulus is only likely to be effective medium term. All of this means that re-letting rents in Germany’s top 7 cities will continue to rise between 3% and 4% over the course of the year. Thanks to the price correction, investors will again have access to attractive investment opportunities, particularly around stock properties. The forward sales segment, however, will continue to be limited by the financing environment.

Industrial & logistics:
Looking at industrial & logistics assets, a shortage of space and low vacancy rates will continue to impact rent price trends in 2024 and make logistics assets particularly attractive to investors. Colliers expects rents to rise by an average of 8% in the country’s top 8 logistics locations. We should also expect take-up to increase 10% compared to 2023, putting it in line with 2019 and 2020 results.

Life sciences & tech, data centers and forests:
Investors can look forward to special investment opportunities in 2024 to help them diversify their real estate portfolios by adding assets from the life sciences & tech, data center and forest segments. Colliers has been seeing a sharp rise in project completions in the life sciences & tech segment with construction starting on a large number of property developments as well, particularly in Berlin, Baden-Württemberg and North Rhine-Westphalia. The digital transformation will also mean growing energy requirements and an increase in data center construction in 2024. Investors are starting to get more access to opportunities to participate in this trend and expand their portfolios. With prospects high around the potential for serial timber module prefabrication in residential construction, timber will gain in importance as a building material in 2024. More investors and asset managers are also beginning to add forests to their portfolios to help offset the portfolio’s carbon footprint. Both of these trends suggest that the popularity of forest investment will continue to grow.

“The macroeconomic environment will brighten for the real estate industry over the course of 2024. Moderate improvements will mean an uptick in transaction activity in many locations. However, we should not assume that things will go back to how they were before interest rates started to rise. Instead, what we will see will be a “new normal” taking shape on the markets as general conditions stabilize. This will provide a new sense of certainty around planning with a shift in capital values,” says Andreas Trumpp, Head of Market Intelligence & Foresight at Colliers in Germany.

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