The market showed the biggest “plunge” in two decades commercial real estate at Germany mainly due to the higher cost of financing combined with the low rates of return of employees to the offices.
The fall in prices accelerated in the fourth quarter to 13% from a year earlier, according to data published on Monday by the German banking association VDP. For the year as a whole, prices fell by more than 10%, recording the biggest drop since records began in 2003, while the outlook calls for further declines in early 2024.
The real estate crisis affects offices more than residences, said Jens Tolckmitt, CEO of VDP. As Germany’s economy falters and uncertainty about whether workers will fully return to the office grows, “demand for offices remains subdued,” he added.
Problems in the commercial real estate market threaten to plunge some banks into crisis. Concerns about exposure in the sector are increasing and in particular the banks of Germany are increasingly under the microscope of investors.
Shares in Deutsche Pfandbriefbank AG fell to record lows on Friday after the listed company warned of potential losses due to weakness in the commercial real estate market. In an attempt to calm the markets, it stressed that its financing needs for the year had already been largely met.
VDP’s Tolckmitt reckons the German commercial real estate market may remain weak, as potential office buyers still demand bigger discounts than most sellers are willing to offer. “At the beginning of 2024 the market is still in recession, with prices continuing to decline,” he said.
Meanwhile, a new poll of analysts conducted by Bloomberg does not allow much room for optimism for the German economy. The poll showed that Europe’s biggest economy will likely close the first quarter of the year without development, continuing in the same pattern as 2023, when it achieved positive growth rates for just one quarter of the entire year. Analysts last month expected German GDP to rise by 0.1% in the first quarter.
Their new forecasts are in line with those of the Bundesbank, which has said that even if the situation around household income improves, economic activity may “stagnate at best” in the first quarter.
A third of respondents to the Bloomberg survey are even more pessimistic, predicting a contraction in GDP, which in turn would mean Germany is in recession.
“The data still point to a modest contraction in the first quarter, although it appears that the ‘bottom’ is close,” notes Erik-Jan van Harn, an analyst at Rabobank. “Sentiment has improved slightly in the manufacturing sector, while activity remains strong in the services sector.”
Germany was the only G7 economy to contract last year, while a growing number of economists, including those at German banks Deutsche Bank and Commerzbank, are predicting further contraction in 2024. The outlook for the coming years is not much better, with the Economic Council Germany’s consultants see potential growth of just 0.4%.