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New apartments in Berlin: Investments are no longer worthwhile for large investors

Photo: Monika Skolimowska / dpa

According to the most important financiers, there is still no end to the crisis in sight on the German real estate market. According to data from the Association of German Pfandbrief Banks (VDP), residential properties fell in price by an average of 1.6 percent in the fourth quarter of 2023 compared to the previous quarter. Compared to the same period last year, there was a minus of 6.1 percent, reported the association, which represents, among others, Deutsche Bank, Commerzbank, Landesbanken and large savings banks. In commercial real estate, where offices in particular are under pressure due to the home office trend, the association recorded price drops like never before in this area.

The crisis is now also reaching German banks. Deutsche Pfandbriefbank had to increase its risk provisions against crises in the fourth quarter and recently tried to reassure investors with a statement on its liquidity position.

Deutsche Bank is comparatively heavily involved in the American commercial real estate market. It has granted loans for around 17 billion euros for US commercial real estate, 7 billion of which for offices. The financial institution will be able to cope with defaults on loans for US commercial real estate, CFO James von Moltke recently said. However, they are likely to be higher in the first and probably second quarter than Deutsche Bank would like. At the same time, the institute pointed out that the US office portfolio only makes up 1.5 percent of the entire loan book.

Numbers more meaningful

The real estate market figures published on Monday show that the turnaround will probably be longer in coming than many expected. Prices have been falling since mid-2022. “A turnaround in real estate prices, which is often the subject of public speculation, is not yet foreseeable,” said VDP general manager Jens Tolckmitt. “2024 will also remain difficult for the time being.”

The VDP real estate price index is based on data on transactions from more than 700 banks and is more meaningful than analyzes based solely on advertisements. Because when selling real estate, negotiations take place and deviations from the offer price are common.

The main reason for the drop in prices is increased interest rates, which make real estate financing more expensive. Many people can no longer afford to buy, and investments are no longer worthwhile for large investors. According to the Kiel economic research institute IfW, prices for residential property in Germany fell to a historic extent last year. Official data for the fourth quarter is still pending.

According to the VDP, at the end of the year prices for multi-family homes were once again under slightly greater pressure than for owner-occupied residential property. In the seven metropolises, the average price decline was just over five percent compared to the same period last year, which was lower than the national average. The biggest minus was in Munich and Frankfurt with a good 6 percent each, the lowest in Cologne (4.4 percent) and Düsseldorf (4.8 percent).

At the beginning of the year, the real estate market was still in a downturn, said Tolckmitt. Residential property prices can be expected to stabilize in the summer, but commercial property prices will not stabilize before the end of the year.

For commercial properties, the VDP recorded historically strong declines at the end of 2023, with prices falling by 12.1 percent compared to the same period in the previous year and 4.9 percent compared to the previous quarter. Because the home office trend means fewer offices are needed, real estate in many countries is under pressure, which is particularly putting a strain on the balance sheets of US banks.