Composite by REFIRE
As the industry gathers in Munich for Expo REAL, one narrative will likely shape many conversations: capital is rotating from offices into residential. The thesis sounds reassuring - offices face headwinds, so move to housing. Simple asset allocation.
Yet evidence presented elsewhere in this REFIRE issue suggests that something more fundamental is breaking. Germany's largest landlords will not build housing despite chronic undersupply. ESG financing barriers span both sectors. And Berlin's expropriation draft law, detailed elsewhere in these pages, threatens compensation at only 40–60% of market value via century bonds. The question is not whether investors are in the right sector, but whether both major asset classes now demand a fundamentally different investment approach than Germany's traditional institutional model provides.
The office market illustrates the point. What confronts investors is not a single difficulty but three interlinked structural shocks. The first is financial: valuations from the zero-rate era have been brutally exposed by the new interest rate environment, while refinancing volumes cluster ominously around 2027–2028. Ten-year leases signed at sub-2% rates will reset into today’s 5–6% financing reality, creating a refinancing wall that many landlords will not easily climb.
The second is regulatory: ESG requirements have shifted from aspirational goals to hard prerequisites, not only for new lending but for maintaining resale value a decade from now. Banks have become unwilling to finance even minor quality deviations, demanding credible renovation pathways or refusing credit outright.
The third is structural demand. Artificial intelligence and hybrid working patterns are permanently reducing space requirements, though the exact scale remains uncertain. At the same time, German corporate footprints are shrinking as competitiveness erodes. Together, these shifts mean that while properties in prime locations - top-seven cities, high-quality buildings, strong covenants - are stabilising, secondary locations face long-term value destruction. This is no cyclical downturn awaiting recovery but a permanent reset in demand. Active asset management is no longer optional but essential.
From offices to housing: no safe haven
Housing might appear to offer refuge, but here too the picture is distorted. Germany's chronic shortage should make residential the obvious rotation target. Yet Vonovia, LEG and other large landlords, listed or unlisted, are not building. Construction economics simply do not work at current costs and achievable rents. Building permits rose just 2.9% in the first half of 2025, with multi-family construction - the segment institutional capital would normally fund - effectively stagnant at 0.1% growth. The result benefits existing owners enjoying scarcity premiums, but it does nothing for tenants. Berlin rents climbed 15% year-on-year, far outpacing wage growth, while the supply crisis deepens.
Regulation compounds the difficulty. Berlin's “Deutsche Wohnen & Co enteignen” initiative has produced draft legislation to transfer 220,000 apartments to public ownership at below-market valuations, compensated via 100-year bonds. Whether this survives legal challenge matters less than what it signals: political volatility around tenant protections is injecting risk into long-term return assumptions. Spain’s rent controls and the Netherlands’ extension of caps into the mid-market show housing stress is prompting intervention across Europe. For global investors, the message is that political stability can no longer be assumed in residential housing strategies. Combine this with the same ESG financing barriers already visible in offices, and residential looks less like a safe haven than a sector with its own structural hurdles.
Germany's institutional model for real estate rested on three assumptions: liquid transaction markets, predictable refinancing, and stable demand fundamentals. Portfolio diversification, quarterly performance metrics, passive management - these approaches worked when all three held. None do now. Both offices and residential require permanent capital, operational expertise, and patient willingness to fund ESG capital expenditure. Traditional institutional investors have largely stepped back, while foreign capital and family offices are filling the void, albeit with their own different time horizons and return requirements.
This raises the uncomfortable question that Expo REAL will not address directly: is there enough operator-led capital to replace the old institutional model, or will both sectors have to shrink to match the capital actually available to function this way? It is not only a property-sector issue but part of the wider macro story: an economy wrestling with declining competitiveness, cautious banks, and an ECB unwilling to ease prematurely for fear of reigniting inflation.
Yet the structural break also creates genuine opportunity. The polarisation between prime and secondary assets is not market failure - it is markets working. Capital flows to properties with genuine demand drivers, credible sustainability pathways, and operators capable of hands-on execution. Germany remains Europe’s largest economy with deep fundamentals. Real estate still functions, but success now requires capabilities largely absent in the last cycle. Operators who can identify properties with tenant demand, fund necessary ESG improvements, and hold through market cycles will find opportunities others miss.
The housing supply crisis will eventually ease, though the path forward runs through modular construction, serialised building methods, and creative financing structures rather than traditional institutional capital alone. Offices will stabilise once demand resets to sustainable levels and stranded assets clear from the system. Both processes demand time, capital discipline, and operational skill that passive portfolio management cannot provide.
What will separate tomorrow's winners from today's rotation strategists is this: the former are building platforms capable of creating value through active management in either sector, while the latter are still seeking safety through asset class selection. The market is not broken - it is just repricing the difference between ownership and operation.