E&Y research shows that transaction volume has shrunk by more than 40% in 2022 and market participants expect falling prices across nearly all types of usage.
That image has become rarer in recent months as fewer real estate transactions have taken place.
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The German real estate investment market collapsed significantly in 2022. With a total investment volume (commercial real estate and residential real estate portfolios) of around €67 billion, it has shrunk by more than 40 percent year-on-year (2022: 113 EUR . Nearly 80% of investors expect trading volume to decline further this year. Only 4.0 percent predict an increase, 18 percent a sideways move. This is what a study by E&Y points out. For the new “Trendbarometer Real Estate Investment Market”, EY Real Estate interviewed around 250 investors who have been active in the German real estate market in recent years.
Falling prices almost everywhere
“With Russia’s attack on Ukraine and the ensuing energy crisis, inflation and the necessary interest rate hikes, we are also experiencing a turning point in the real estate market,” says Florian Schwalm, managing partner of EY Real Estate and author of the study. “The signals have fundamentally changed: we are not only seeing partially frozen transaction markets, but also falling prices across most usage types and locations.”
Germany is particularly affected by this paradigm shift and is losing its attractiveness: the proportion of those who assess the German property market as less attractive than before has increased significantly compared to the previous year from 4 to 36 percent.
exception logistics
Across all types of non-logistic use – i.e. offices, retail, hotels and even homes – the majority of survey respondents expect prices to fall. Only in the case of logistics real estate does a small majority of investors still assume that prices will remain stable. However, a positive price development is also no longer expected here. Most investors consider the discrepancy between the price expectations of buyers and sellers to be the main obstacle to transactions – before any ambiguity about macroeconomic developments or ESG risks.
Waiting for the pricing process
“In anticipation of falling prices, potential buyers prefer to wait while sellers insist on the usual price level. This phenomenon has always paralyzed the transaction market in times of crisis – but experience shows that it is temporary”, says Paul von Drygalski, director of EY Real Estate and also author of the study. About two-thirds of respondents expect buyers and sellers to agree on a common price base again in the current year.
The new building particularly suffers from the new structural conditions. Nearly all respondents (99 percent) agree that this is affecting new construction activity. The mortgage market is also severely affected: most investors see more difficult follow-up financing (99 percent), an increasing need for capital (94 percent), more frequent loan defaults (89 percent), a new interest rate hikes (88 percent) and lower new business this year (83 percent).
Interest rate development and demographic change are the most important megatrends
Something has also changed in the most influential megatrends: interest rate developments and demographic shifts are replacing digitalization trends and climate change that were even more relevant last year. According to around three-quarters of survey respondents, the proptech sector is also particularly suffering from the general economic situation.
“The development of interest rates has reappeared as a powerful megatrend and is currently dominating everything in real estate,” says von Drygalski. “It is all the more important now to keep a cool head, not to lose sight of the other challenges, for example in the area of sustainable transformation, and to continue on the path we have started.” (aa)