Banks see commercial property still sliding, with residential stabilising

The real estate landscape in Germany is bracing for a continuing downtrend in property prices, with the Pfandbrief-issuing banks anticipating further declines across various asset classes. As reported by Bloomberg and analyzed by the Association of German Pfandbrief Banks (VdP), which includes renowned institutions like Helaba and Aareal Bank, there's a consensus that the trajectory of property prices will exhibit noticeable drops, albeit with distinctions drawn among different types of assets.

Sector-specific forecasts point to varied declines

For the office real estate segment, the VdP has projected a notable decrease ranging between 5% to 10%. Retail properties are also expected to witness a downturn, with predictions of a 2.5% to 7.5% decline. In contrast, the residential sector offers a glimmer of resilience, where prices are forecasted to either move sideways or, at worst, encounter a modest retreat of up to 5%.

Gero Bergmann, President of the VdP and a board member of BayernLB in his day job, emphasized that the European Central Bank’s (ECB) forthcoming decisions, particularly any reductions in key interest rates, could pivotally influence market stabilization.

Residential vs. Commercial

Bergmann anticipates that prices in the residential market may start to level out in the latter half of 2024. However, commercial properties, especially offices, might not see a cessation in price declines until the end of the year or later. This lag is attributed to ongoing structural shifts, including the home office trend, which is expected to protract the commercial sector's recovery.

He pointed to the more cyclical nature of the office market, historically. "The market for office properties has always been more characterised by cyclical fluctuations than other asset classes. Accordingly, the current trend in offices is not overly alarming," he noted. "The German office property market is much more resilient than is often perceived."

"The fiscal year 2024 will undoubtedly pose significant challenges for all stakeholders in the property markets," Bergmann added, setting a tone of cautious endurance for the industry.

Reflecting on the recent past, the German property market registered an average price drop of 7.2% from the fourth quarter of 2022 to the same period in 2023. Since the peak in the second quarter of 2022, the cumulative reduction in prices stands at 10%.

Contributing to this downtrend were the steep interest rate hikes and reduced valuations, with the home office shift further exacerbating the situation for office properties. Notably, last year, German banks had to allocate approximately €2.5 billion in risk provisions for their commercial real estate lending, according to a Bloomberg survey.

Pfandbrief banks react to market dynamics

In the wake of this downturn, the property financing arm of the German Pfandbrief banks saw a significant contraction in 2023, with loan commitments plummeting to €110 billion from €160 billion euros the previous year. Even though Pfandbriefe issuance volumes in 2023, at €65.7 billion, were down 20% from an exceptional 2022, they aligned with the levels of 2021, which had already been marked by robust demand.

Pfandbriefe, the covered bonds utilized for refinancing by banks, are indicative of the broader health of the real estate financing market and will continue to be a barometer for the industry's vitality. As of the latest update, the VDP's roster includes 52 member firms, including all the big lenders such as DZ Hyp, Deutsche Bank, DekaBank, Helaba, Aareal Bank, and LBBW. Together they account for a market share of just under 97% of all the Pfandbriefe in circulation.

Mixed messages as to house price trend

The VdP is being cautious in its projections for the direction of house prices, expecting to see them move sideways or slightly downwards. Reports coming in from Immoscout24, the leading German property portal, suggest that prices may indeed be stabilising, while Europace, the fintech platform whose data is based on its own real-life lending figures, rather than the hoped-for asking price on the portals, said that based on its most recent figures, it could perceive a "clear upward trend" on the residential market.

Of course, rental prices have been rising significantly, particularly in the big cities. Immoscout24 data shows an annual increase of 6.9% for existing apartments and 8.1% for new-builds (which are exempt from the rental brake), with strong regional differences. But even on rents there is evidence of a slowing-down in the rate of increase.