Inflation and high interest rates cause slump in real estate market

The number of real estate transactions declined significantly in the fourth quarter. The economic conditions were not only felt in the market for private real estate.

There is a real estate slump in Germany: As a study by EY shows, the transaction volume of the real estate market in this country slumped significantly in 2022. At around €67 billion, deal volume was down 40 percent year-on-year, just above the 15-year average, which stands at €57.9 billion. "With Russia's attack on Ukraine and the ensuing energy crisis, inflation and then necessary interest rate hikes, we are also experiencing a turnaround in the real estate market," is Florian Schwalm, managing partner at EY Real Estate and author of the study, quoted as part of a release. "The signs have fundamentally turned: not only are we seeing transaction markets frozen in some cases, but also falling prices across most use types and locations."

Volume in commercial real estate halved

The real estate slump was particularly evident in the fourth quarter. According to Bloomberg, the increased financing costs scared off many investors. In the last quarter of the year, the transaction volume for commercial real estate slumped by around half to 9.9 billion euros, according to the news agency. The report cites higher interest rates and the weakening economy as the main reasons. In addition, record inflation weighed on the market.

For Marcus Zorn, head of BNP Paribas Real Estate Germany, the main reason is the different price expectations of buyers and sellers. Many large transactions that had already been in the marketing phase had therefore not materialized, the expert is quoted as saying in the report. "Above all, the significant increase in financing costs has led to a considerable divergence between the purchase price expectations of many sellers and the purchase price offers of many investors. The process of the necessary approximation of the purchase price expectations to a fair level for both sides, which is also known from previous crises, is running, but is currently not yet completed."

Residential real estate market also slumped

The negative factors also made themselves clearly felt in the market for residential real estate. Here, too, BNP's real estate experts cite historically high inflation as a reason for the real estate slump. Here, according to a BNP study, the transaction volume in 2022 collapsed by 74 percent. Nationwide, a good 13.1 billion euros were invested in larger housing stocks last year. In the previous year, a record result had been reported here, although there had also been a major transaction with the takeover of Deutsche Wohnen by Vonovia. In terms of the long-term average, the transaction volume fell short by around a third.

A total of around 310 transactions were concluded in the past year, little changed from the long-term average. However, the average deal volume of 42 million euros was significantly lower than in previous years.

Less optimistic outlook for 2023

The real estate market in Germany is not expected to recover significantly in the current year either. EY's real estate investment market trend barometer, in which more than 250 real estate investors such as banks, real estate funds or -already, institutional investors as well as wealthy individuals and Family Offices shows a less than optimistic assessment: According to the survey, more than three quarters of the investors surveyed expect the investment volume for real estate to fall in 2023. The experts expect transaction volumes of between 50 and 55 billion euros. Nevertheless, around two thirds of the survey participants rate the German real estate market as "attractive" or "very attractive.

Meanwhile, investors identified five issues as transaction barriers in the current year: A persistent discrepancy in price expectations, continued prevailing uncertainty about the economy and macroeconomic trends, uncertain financing conditions, rising risk awareness and ESG risks.

The experts expect relative price stability for logistics properties, while in the office and Residential segment price reductions are likely to be expected. Investors also expect prices to fall in the vacation and business hotel segment, while shopping centers are expected to see a more pronounced downward trend.

Marus Zorn from BNP Paribas Real Estate Germany also expects the weak trend from the end of 2022 to continue into 2023. At least for the first half of the year, he expects the developments from 2022 to continue. A turnaround is then to be expected in the second half of the year, according to the expert.