Strongest price correction ever recorded should end in 2024
Initial yields rose more slowly in the last three months of 2023 than in the previous quarters (Fig. 3). The rise in yields in 2022/23 is by far the strongest ever measured on the German property market. We assume that the price correction is well advanced and that initial yields will stabilise over the course of the year. The fact that long-term interest rates have fallen significantly in the last three months and are now even just below the level reached a year ago should also help to stabilise property yields in the medium term. In the short term, however, the predominant factor is that there is still a gap between the prices on offer and those in demand in large parts of the market and the pressure on the landlords tends to be greater than on the side of potential buyers. This is all the more true as borrowing costs have recently fallen somewhat, but banks are still exceptionally restrictive in their lending. This makes refinancing difficult. In view of upcoming devaluations and the recent significant increase in the proportion of non-performing loans, this is unlikely to change much for the time being. In this respect, we expect supply on the commercial property market to increase in the coming months while demand remains unchanged, which suggests that initial yields will continue to rise. Added to this is the weak economic environment, which, according to the latest forecasts by several economic research institutes, will not improve in the current year either. This in turn is likely to be reflected in lower rental growth expectations on the part of investors, which also argues in favour of rising initial yields. In contrast, yields on new-build residential property have probably already peaked and we do not expect a relevant increase in selling pressure on the housing market due to non-performing loans. In addition, further increases in residential rents and falling vacancy rates are to be expected.