Interest rates, Ukraine taking their toll on volume and transaction levels

Property adviser Savills issued a note that confirms how investors have been holding back on their investment decisions in Germany after the initial shock of the Russian invasion of Ukraine, which left the first quarter's figures looking a bit inconclusive. Transaction figures for April show without doubt that investors have become much more cautious.

Savills figures show that residential and commercial investment in German real estate totaled just under €3.4bn, the lowest level since July 2020, when the effects of the first wave of the COVID pandemic were beginning to kick in.

More notable is the actual number of transactions, which fell by a quarter over the previous month (March), a level of transactions last seen in August 2014.

There's nothing unusual per se in strong monthly fluctuations in both volume and transaction number, said Savills. Declines in April are often the rule, and not the exception. But the sudden decline in April is in keeping with the mood and tone of investor discussions and ongoing transaction processes. The effects of the war in Ukraine along with the sharp increase in interest rates are evidently taking their toll on investor action, despite the ongoing pressure to find investment targets for that wall of capital.

Among asset categories, the industrial/logistics real estate segment remains dynamic, with investors taking the view that fundamentals remain sound. The number of transactions actually increased in April compared to the previous month.

The same can largely be said for healthcare real estate, although in such niches the number of transactions is so low that monthly fluctuations don't really lend themselves to meaning interpretation.

Savills is interpreting the recently lower transaction activity as a temporary phase of waiting and readjustment. However, for individual sub-segments, such as transactions with typically high debt financing, the general conditions have certainly changed structurally, and probably fundamentally for the longer term. These patterns will emerge more clearly over the coming months.