EY Trend Barometer offers little comfort for investors for 2023

The extent to which Germany's real estate investment crumbled in the second half of last year was made clear in a presentation early-January by consultants EY, when they presented their annual EY-Trend Barometer, including their outlook for the coming year.

The bad news first. Overall, the total investment volume, including commercial real estate and residential real estate portfolios bought by professionals, came in at around €67bn, a fall of around 40% on the previous year's €113.8bn, and bringin it back to a level last seen in 2016. About 80% of the investors surveyed expect transaction volumes to fall further in 2023, with only 4% forecasting an increase, and the rest seeing a sideways movement.

Florian Schwalm, managing partner at EY Real Estate and the author of the Trend Barometer study, painted a gloomy picture of the state of the market. "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. The omens have fundamentally turned: we are not only observing partly frozen transaction markets, but also falling prices across most types of use and locations."

Notable is how Germany is losing its attractiveness for international investors, with 36% of respondents viewing the German market as less attractive than in the previous year, compared to 4% taking that view last year.

The majority of survey respondents expect prices to fall across all asset categories, with the exception of logistics, where prices are expected to remain stable, by a small majority of respondents. Investors cite the discrepancy between the price expectations between buyers and sellers to be the main obstacle to cranking up the volume of transactions - ahead even of their uncertainties about the likely direction of the economy or risks associated with ESG compliance.

Paul von Drygalski, co-author of the study, said this stand-off phenomenon "has always paralysed the transaction market in times of crisis, but experience shows that it is always temporary." Two-thirds of respondents expect buyers and sellers to arrive at a common price basis again before the end of the year.

Among megatrends facing investors, the level and direction of interest rates and demographic change have displaced digitisation and climate change as the dominating themes this year. This is bad news for the proptech sector, which is facing layoffs and difficulties raising fresh finance.

It's also bad news for developers, and any new construction activity, agreed 99% of respondents. A majority of investors each see more difficult follow-up financing (99%), an increasing need for equity (94%), more frequent loan defaults (89%), a further rise in interest rates (88%) and a lower volume of new business this year (83%).

90% of respondents view high energy costs as providing further impetus to renewed energetic transformation in the building stock - more than 60% expect that these higher costs will threaten the liquidity of property owners, and 91% expect that this year will see multiple properties in need of restructuring coming to the market.

Still, 88% of the respondents believed that specific "manage-to-green" strategies will struggle because of the lack of relevant valuations and benchmarks, while 60% admitted they didn't know the degree of conformity of their existing portfolios with the relevant EU taxonomy. This will have a big effect on their ESG due diligence in assessing any new investment, said 90% of respondents.

In residential, 81% of investors are anticipating a trend reversal to the steadily rising prices of the last decade. Higher utility charges could lead to lower per capita space consumption in future, and 60% of respondents believe that these higher home energy costs could impel employees back into the office again, boosting office occupation.

In retail, 92% of respondents said they expect a higher rate of insolvencies in the non-food sector as a result of rising consumer prices, falling purchasing power, and the higher home energy costs. Hotel properties will continue to suffer from the shortage of trained staff, said 96% of respondents.

All this gloom seems to be being borne out in the latest figures from real estate financing platform Hypoport, which we track closely here at REFIRE. Its Europace matching platform tracks actual sales prices (as against advertised prices), and with a matching volume of more than €70bn annually, is involved in more than 20% of all private mortgage financing in Germany.

The Europace House Price Index fell again in December 2022, as prices for existing homes and apartments continued to decline. Condominium (Eigentumswohnungen) prices fell the most, down 1.86% on the previous month. Year-on-year, condominium prices have fallen by 4.24%. For existing homes, the index fell 1.63%, a fall of 3.3% year-on-year.

In contrast, prices for new buildings continued to hold steady. Prices in the segment of new one- and two-family houses fell slightly by 0.20% compared with the previous month. Over the past twelve months, new-build prices have still increased by 5.03%, according to Europace.