Outlook for the real estate investment market in 2025: sector on the upswing, but significant improvements not yet visible

20. Nov 2024

The real estate transaction market has bottomed out. After three difficult years for the real estate industry, conditions will improve in 2025. The main reasons for this are the significant drop in the inflation rate and lower interest rates as a result of this year’s key interest rate cuts by the ECB. However, a further boom phase on the real estate market is not expected for the time being. Residential and logistics are particularly popular asset classes among investors. The office sector, on the other hand, must be viewed in a very differentiated manner. These are the key findings of the online press conference “Outlook 2025: Interest rates down, inflation down – will everything be fine on the real estate investment market again?” with Michael R. Baumann, Head of Capital Markets at real estate consultant Colliers in Germany, Jan Philipp Daun, Managing Director at GARBE Industrial Real Estate, Carsten Demmler, Managing Director of HIH Invest Real Estate, Camille Dufieux, Managing Director of INTREAL, and Gerhard Lehner, Head of Germany at Savills Investment Management.

Institutional investors remain cautious

All participants agree that the first signs of an increase in transaction activity can already be seen, but that a significant increase is still a long way off due to the wait-and-see attitude of many industry participants.

Carsten Demmler, Managing Director of HIH Invest Real Estate, says: “The transaction market will pick up again in 2025, as there are selectively favorable acquisition opportunities. Nevertheless, the year is likely to continue to be characterized by portfolio adjustments in terms of investment strategies. The real estate ratios in the portfolios will remain stable, but investors will undertake greater sectoral diversification within the real estate allocation.”

Camille Dufieux, Managing Director of INTREAL, comments: “There is a little more movement in the market than six months ago. We are seeing more inquiries for new products. Our fund partners are working more intensively on transactions than was the case in the middle of the year. I see this as a sign that the transaction market is slowly recovering.”

Even if some opportunities are currently arising again due to lower prices, none of the participants expects the next boom phase.

Gerhard Lehner, Head of Germany at Savills Investment Management, comments: Institutional investors are currently still too cautious for this. In the last two years, the focus of German institutional investors has primarily been on managing existing portfolios. Family offices, on the other hand, are currently very active on the investment side. They are taking advantage of the market correction, recognizing opportunities and investing mainly anti-cyclically in smaller properties. We are also seeing larger investments from this group of investors in the three-digit million range.”

Jan Philipp Daun, Managing Director at GARBE Industrial Real Estate, adds: “Institutional investors pursuing core strategies have practically not invested at all over the past two years. This is slowly changing. We have had some interesting discussions with German investors in recent weeks and are optimistic that the investment market has bottomed out.”

Michael R. Baumann, Head of Capital Markets at real estate consultant Colliers in Germany, adds: “There are increasing signs that one or two opportunistic players who have been absent from the market for the last ten to 15 years are returning.”

Focus of investors strongly differentiated: Residential and logistics are “everybody’s darling”, office properties face challenges

The overall mood on the transaction market is brightening compared to the previous three years, although the slightly positive forecasts do not apply to all asset classes. Experts expect rising investor demand in the residential and logistics asset classes. Office properties, on the other hand, must be viewed in a differentiated manner. Michael R. Baumann explains: “Residential properties will remain attractive for investors in the long term due to factors such as demographic trends, a continuing high immigration rate and the low quality of new construction. The same applies to logistics. Contrary to many assumptions, office properties in prime locations and with good tenant structures will continue to be attractive. On the other hand, there are non-ESGcompliant properties in locations where there is no pricing yet. These properties will also have a hard time in the coming year.”

Carsten Demmler adds: “We see a very clear ‘flight to quality’. The office asset class is far from dead and, under the right conditions, offers very attractive entry opportunities, especially for anticyclical investors.”

Markets with economic growth particularly attractive for investment

The participants see the best investment opportunities within Germany for office properties in the top 7 locations. However, both the macro and micro location must be right here. The residential asset class, on the other hand, also works in the metropolitan regions somewhat further outside the larger cities.

Outside Germany, Jan Philipp Daun sees the greatest opportunities in growth regions: “The capital markets hardly differ from one another. The tenant market is often more challenging. This is why we are concentrating our logistics activities primarily on countries and regions with high economic growth, above all northern Italy and the Czech Republic. Germany is still attractive, but the path to a signed rental agreement is much longer here.”

Gerhard Lehner adds: “Ultimately, the fundamentals and the different speeds countries of the market corrections are decisive. Outside Germany, we have recently identified attractive investment opportunities for our investors in the residential sector in Scandinavia, Spain and the Netherlands, for example.”

There will be several new funds in 2025 – individual mandates and club deals are leading the way

All participants agree that significantly more funds will be launched in the coming year. According to Jan Philipp Daun, these will mainly come from large platforms: “Smaller fund boutiques that are less specialized and have hardly any track record will have a hard time.”

In this context, Gerhard Lehner also emphasizes the importance of existing funds: “When investing in established funds, investors benefit from investing in an existing portfolio that is already broadly diversified and generates returns. With a newly launched fund, this process can take a few years from subscription. In addition, the fund manager of an existing fund already has an extensive track record.”

According to Camille Dufieux, individual mandates and club deals will dominate: “Pool funds and blind pools have not worked this year. Investors are busy tidying up their own portfolios, and that is of course much more difficult if they are dependent on co-investors. In 2024, we saw significantly more individual mandates and club deals – at least among those investors who are large enough to set up their own special fund. This trend will in the coming year. ELTIF 2.0 is a product that some market participants have high hopes for, but it currently plays hardly any role in the real estate sector.”

Outlook 2025: light at the end of the tunnel

Now that the real estate transaction market has picked up speed again in recent months, the majority of participants expect a further upturn in 2025. However, everyone agrees that the sector will not return to the figures of the low-interest phase for the time being and that a renewed real estate boom is not to be expected.

Carsten Demmler is somewhat more cautious about the coming year: “2025 will be another year of transition for us. We have to completely move away from the expectations of 2018 to 2021. We won’t see these figures again for a long time. The industry needs to recalibrate and find a new normal, which is more likely to be at the level between 2012 and 2016.”

According to Gerhard Lehner, asset management will play a major role in the coming years: “Investors expect us to the promised returns on real estate investments. In this context, it is all the more important to maintain and systematically improve the sustainability and ESG compliance of existing properties.”

Camille Dufieux can also see something positive in the developments of recent years: “There has been a market shakeout. The wheat has been separated from the chaff – we will certainly see fewer transactions in the coming years than before 2021, but more quality. We may still be in a tunnel at the moment, but at least we can see the light.”