bulwiengesa
bulwiengesa's The 5 % Study 2024
For a decade now, Bulwiengesa’s 5% Study has been an annual milestone, and one we've always reported on here in REFIRE. The last two years have been grim, to put it mildly, with that 5% yield proving very elusive.
This year Germany's real estate investors have been alert to more hopeful figures, looking for valuable insights into which asset classes still have the potential to deliver solid returns. With rising interest rates and shifting market dynamics, investors are more eager than ever to find out where they can still hit the magic 5% mark. This year's edition, the tenth in the series, has some surprising findings—though navigating the market will require a sharp eye and a willingness to adapt.
As with each year, Bulwiengesa takes its findings a tour around Germany’s major cities, with the law firm Advant Beiten hosting presentations of the results to real estate professionals eager for actionable insights.
So, where are the opportunities in 2024? According to Sven Carstensen, CEO of Bulwiengesa, “The turnaround in interest rates has brought about a fundamental change in yield requirements. Five percent no longer seems illusory, even for core products.” For the first time in several years, there’s genuine optimism—albeit tempered by caution. Let’s dive into the key findings.
Residential real estate - bouncing back to life
Residential property is seeing a remarkable comeback. After a rough couple of years that saw prices nosedive, the sector is finally showing signs of life. Demand for rental properties in major cities remains high, and with new supply constrained, rents are rising steadily. Jens Tolckmitt, Managing Director of the Association of German Pfandbrief Banks, whose member banks provide a lot of residential mortgage financen, had earlier commented, “There are signs that the difficult situation is easing,” although it's still too early to call it a full recovery.
Investors focusing on core residential properties in A-cities can now expect yields in the range of 2.1% to 3.4%, a significant improvement from the previous year’s 1.9% to 3.0%. Even in smaller university towns, yields are climbing, especially when energy refurbishments are factored in. Still, the market remains “ambivalent” from an investor's perspective, as Sven Carstensen puts it, with project postponements and insolvencies affecting new developments.
Office property - further reduced demand for space
Office property, on the other hand, continues to face headwinds. The post-pandemic shift to remote work has led to reduced demand for office space, with companies reassessing their long-term needs. Simon Krause from the Ifo Institute highlighted that “demand for office space could fall by around 12% in the long term due to home offices,” a stark warning for investors. While rental agreements tend to be long-term, the effects of this shift are starting to be felt.
Yields for office properties in A-markets have risen, with 4.1% to 4.7% now achievable, compared to the previous year’s range of 1.2% to 3.9%. The gap between big city offices and those in smaller markets is narrowing, as the demand for prime city-center locations holds firm. Still, investors are demanding higher returns to compensate for the uncertainty. Carstensen notes, “The continuing rise in net initial yields reflects investors’ demand for a risk premium.”
Retail real estate - cities losing more outlets
Retail property is a mixed bag. While online shopping continues to disrupt traditional retail spaces, certain segments like retail parks and food markets are holding their own. Broker Savills reported that retail properties accounted for 31% of commercial investment volume in the first half of 2024, surpassing even office transactions. However, this surge in transactions was driven by a few large deals, such as the sale of KaDeWe, and may not be indicative of a broader trend.
Savills is cautious about the future, noting that cities are losing a “massive number of retail outlets” as shopping locations shift or are abandoned altogether. For investors willing to reposition or repurpose these spaces, there’s still potential, but the sector is unlikely to return to its pre-pandemic dominance. Yields in core retail properties are expected to range from 2.9% to 4.9%, slightly down from last year.
Logistics - the steady performer
Logistics properties remain a top choice for institutional investors, with demand from online retailers and global supply chains continuing to drive up rents. However, Nicolas Roy, Head of Industrial & Logistics at Colliers Germany, warns that “economic uncertainty is causing a dip in transaction volumes,” though tenant expectations remain positive.
Yields for logistics properties are holding steady, with 3.3% to 4.8% achievable in the core segment. While momentum in the sector is slowing, logistics remains one of the more stable asset classes in the current market, and the sector’s long-term prospects are bright.
Hotels and hospitality - cautiously back in play
Hotels are making a cautious recovery after the pandemic, with yields ranging from 4.6% to 5% for two- to four-star hotels. Investors are slowly returning to the market, though the economic outlook remains uncertain, which may temper enthusiasm for new developments. Still, Bulwiengesa predicts that hotels will regain importance as alternative investments to traditional commercial assets once the broader market picks up again.
Senior living is also on the rise. With Germany’s population aging rapidly, demand for senior living and care facilities is growing, and institutional investors are taking note. This asset class now accounts for 28% of transaction volume in the care sector, with yields ranging from 3.5% to 6.9%. According to Carstensen, “The market potential is enormous,” and this trend is expected to continue as more investors recognize the opportunities in assisted living.
What Does This Mean for Investors?
For the first time in several years, the elusive 5% yield is no longer a fantasy. Across multiple asset classes—particularly logistics, retail parks, and assisted living—investors can reasonably expect to hit that mark. But, as Sven Carstensen warns, “While returns are rising, so are the risks.” Investors will need to carefully evaluate which sectors offer the best long-term potential and be ready to reposition assets to meet shifting demand.
Simon Krause’s insight into office space highlights one of the key challenges: adapting to structural changes. With more employees working from home, demand for office space may continue to shrink, making it crucial for investors to focus on prime, high-quality office spaces in central locations.
In the retail sector, it’s clear that a repositioning strategy is key. While certain types of retail properties, like food markets and retail parks, continue to perform well, others may need significant rethinking. Savills points out that many retail spaces will need more than just a facelift to remain competitive—they may need an entirely new purpose.
REFIRE: We'd say the 2024 Bulwiengesa 5% Study offers a cautiously optimistic outlook for German real estate investors. Yields are improving across several asset classes, and while some sectors, like offices and retail, face structural changes, others, like logistics and senior living, remain strong bets for those looking to achieve solid returns.
As Sven Carstensen puts it, “The market is more exciting than it has been for a long time.” However, excitement is no guarantee of success. Investors will need to stay agile and be prepared to reposition assets or adapt strategies in order to capitalize on the opportunities in a rapidly evolving market.
