EwaStudio/Envato
Germany's property managers have started the year with a rare mix of pessimism and guarded optimism. These mixed sentiments were very much in evidence at the recent MIPIM in Cannes, where REFIRE noticed a lot less of the exuberance that characterised last year's event, where many participants felt things simply HAD to change after two depressing years, and that this surely presaged the start of the upturn. A year later, and there was noticeably less euphoria in the air. Some justified optimism, it is true. But also a certain resignation that a real recovery is still some way away.
According to the latest ZIA-IW Real Estate Sentiment Index (ISI), the current business climate has worsened markedly compared to the previous quarter—yet expectations for the next twelve months have improved. The index now stands at 16.3 points overall, almost unchanged from the last reading, but masks a deeper split between deteriorating current conditions and hopes of policy-driven recovery.
In Q1 2025, respondents rated their business situation at minus 6.9 points, a decline of 11.1 points from the previous quarter. The shift reflects growing concern over rising financing costs, regulatory uncertainty, and delayed project activity. However, expectations for the coming year rose by 6.9 points to 16.3, suggesting many firms are pinning hopes on decisive political action following the approval of the federal government’s new €500 billion infrastructure fund.
Interest rate fears and political paralysis are dampening the outlook
The mood darkened notably after news that the federal debt-financed stimulus package—backed by the Bundestag on 18th March, and since ratified by the Bundesrat, or Upper House — had pushed up German ten-year government bond yields by 40 basis points. This, in turn, drove up mortgage and construction loan rates, threatening the viability of many projects. "The government's extra debt for national defence and infrastructure could make loans even more expensive," warned Iris Schöberl, President of the German Property Federation (ZIA). "Germany needs not just a boost in investment, but new courage for reform."
Dr. Michael Voigtländer of the IW Köln agrees that the short-term impact will be negative. "In the short term, the effect of interest rates is likely to prevail," he said, calling the fund a "double-edged sword." While better infrastructure may increase long-term real estate values, developers are already facing rising costs before any benefits materialise.
The survey, which consulted 1,200 senior executives across the sector, revealed a sharp drop in the proportion of managers expecting improved financing conditions—down to 14% from 28% last quarter. Meanwhile, nearly 20% now foresee tighter lending terms, up from just 7.7%. These figures suggest that the expected monetary easing in 2025 is already being undermined by geopolitical tensions and domestic policy decisions.
Residential holds up, but project developers are suffering
Across asset classes, the sentiment picture is mixed. The residential sector remains the most resilient, with a current business score of 24 points despite a 9.3-point drop. Expectations for the next year rose to 33.7 points, fuelled by steady rents and signs of price recovery. The office segment remains under pressure, with zero growth expectations and a slightly negative business climate. Uncertainty over remote working and weak service sector demand continues to weigh heavily.
Retail sentiment, while volatile, showed the strongest bounce in forward expectations—rising 14.4 points to 53.3—driven by rising prices following a sharp market correction. Much of this increase appears linked to limited supply in prime locations and the growing appeal of grocery-anchored assets, which are drawing investor attention back to the segment.
However, sentiment among project developers remains grim. Their business situation score was minus 13.7, and expectations slumped by 16.4 points. Selling new-builds remains difficult in the face of weak demand and financing constraints.
Institutional investors, meanwhile, appear cautiously selective. Several asset managers told REFIRE at MIPIM that they are reassessing deployment for H2 2025, with a renewed focus on stabilised income streams and opportunistic buying in undersupplied residential submarkets.
Industry pushes for reform and capital tools
The industry’s policy wishlist is clear. According to responses to a special question in the ZIA-IW survey, 70% of participants identified the simplification of standards, building regulations, and technical specifications as the most urgent need. A further 66% want faster land designation in growth regions, and over half call for subsidised loans and equity-like instruments provided through the KfW, the state's promotional bank.
Schöberl also flagged the detrimental effect of Germany’s so-called interest barrier, which limits the tax deductibility of interest costs. In a capital-intensive sector already squeezed by rising rates, many argue this measure is throttling construction activity just when new supply is most needed.
Without swift structural reform and targeted financial support, industry leaders fear that investor caution will persist well into 2025. Again, as Frau Schöberl put it bluntly: "We need new courage for reform."