Real estate investments 2024: What do professionals pay attention to?

Real estate market 2024: recovery in sight

According to EY, the German real estate investment market experienced a significant slump in 2023 for the second year in a row: The transaction level was 29.3 billion euros, which is another 56 percent less than in the previous year (67 billion euros). This year, however, only a quarter of those surveyed by EY expect a decline — last year it was 80 percent. 45 percent predict a sideways movement, and just under a third even an increasing momentum. Specifically, residential properties in very good locations are even expected to rise (29 percent) or constant (47 percent). Half of the respondents expect prices to fall only for weaker locations.

The majority of institutional investors want to seize the opportunity and invest in the real estate markets again as early as 2024. That shows a Survey by Real Blue, the investment manager of the Dress & Summer Group. According to this, 69 percent of the institutional investors and asset managers surveyed want to buy properties again this year.

In addition to the slight decline in construction interest rates, the “low” price in particular is a buying motive. Because the According to data from the Bundesbank, real estate prices fell by 5.7 percent over the year in the first three months of 2024. Historically speaking, however, these are still at a very high level, as prices more than doubled on average between 2010 and mid-2022.

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What are the requirements for real estate investors?

But which properties are professional investors looking at? One criterion was and is decisive for purchasing: the location. According to the Research firm JLL a significant increase in transaction volume in the seven major cities. Overall, the share of these markets in Germany-wide transaction volume rose from 45 percent to currently 53 percent. Berlin continues to lead the ranking of the cities with the highest turnover: 3.5 billion euros represent an increase of 67 percent. Munich achieved a similar rate of increase. Here, the increase is 63 percent (1.8 billion euros).

The main motive from an investor's point of view is, of course, returns in sought-after metropolises. For apartment buildings in the “Big Seven”, this is currently around 3.6%, although new, sustainably built properties can generate significantly higher returns.

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Which trends are emerging?

• Metropolises and surrounding areas

Since 2020, there have also been signs of a shift from major cities to the suburbs, a trend that has been significantly accelerated by the pandemic. Experts assume that this development will continue until at least 2025. The main reason for this is the fact that living in the suburbs is often much cheaper than in the urban center. This migration is leading to an increasing demand for single-family homes, which is also due to the current low interest rates. At the same time, millennials, who are increasingly looking for homes due to starting a family, are increasing demand. As a result, the supply of single-family homes is scarcer than ever before.

• Residential real estate and logistics

By far, the most popular type of investment is residential real estate with a share of almost 80 percent. Looking into the future, it is quite likely that houses and apartments will become more expensive again. Especially in excellent locations such as A-metropolises, as there is a persistently scarce supply meeting high demand. According to JLL, the Living asset class achieved a volume of 3.7 billion euros in the first half of 2024, of which 3.4 billion euros are attributable to residential real estate and just under 300 million euros to healthcare properties. Sales of logistics real estate amounted to a transaction volume of 3.4 billion euros and thus more than a fifth of the total result. Compared to the same period of the previous year, this asset class saw an increase of almost 60 percent.

• ESG criteria

When asked about investments outside the traditional asset classes, more than a third (35 percent) of the asset managers interviewed by EY stated that they wanted to invest in life science properties in the future. 22 percent were considering districts.

The world's leading Real estate services and investment company CBRE stated that net-zero commitments combined with structural changes in user requirements will increasingly result in higher demand for buildings with good social and sustainability features and improved energy efficiency. Users are already showing a willingness to pay a “green rent premium” of 5.9 percent on average in the top 5 cities for ESG-certified office properties.

The quest for returns and diversified income outside the financial markets has triggered a significant increase in investments in private assets such as real estate in recent years. Only a few expect demand to decline in the near future. Although the economic environment has changed from low interest rates and strong growth to a scenario of higher interest rates and recession fears that have not yet occurred, interest in alternative assets remains strong in 2024 and beyond.

Whether private equity, private credit, infrastructure or real estate — (digitized) private assets continue to play a central role in the portfolio planning of institutional and private investors in a variety of ways.

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