Skip to content Skip to Search
Skip navigation

German decline scares off Middle East property investors

Berlin's economic malaise is putting off Middle East buyers of 'premium assets' Unsplash/Raja Sen
Berlin's economic malaise is putting off Middle East buyers of 'premium assets'
  • Sales fall 59% from 2022
  • ‘Valuable clients’ seeing how market reacts
  • German GDP growth hit zero in Q2

Middle East investors are increasingly wary of buying German real estate due to the country’s stuttering economy and the allure of more profitable, less risky alternatives.

This hesitance is exacerbating a slump in Germany’s property sector.

Sales in the first half of 2023 totalled €14.9 billion, down 59 percent year on year and 53 percent below the industry’s long term average, property consultant JLL estimates.

Although Middle East investors constitute only a small part of Germany’s total real estate transaction value, they have been important buyers of large-scale “premium assets in the best locations”, Florian Schwalm, managing partner at Ernst & Young Real Estate in Munich, told AGBI.

“They have always been very valuable clients and highly respected – you have to show them top notch real estate assets otherwise they would not be interested,” Schwalm said.

“Currently they’re not investing, they’re waiting to see how the market reacts.”

Rival consultants CBRE measures real estate sales slightly different to JLL and estimates transactions excluding minority interests totalled €13 billion in the first half of 2023, down 64 percent on the year before.

“Market momentum slowed considerably in the segment of large-scale transactions compared with the medium and small categories,” CBRE wrote in a report, noting just 21 commercial property deals worth more than €100 million each were made in the first six months of 2023, down from 67 in the prior-year period.

The European Central bank has steadily hiked the eurozone’s main refinancing rate – considered its benchmark interest rate – to 4.25 percent in August from just 0.5 percent in July 2022.

These increases have changed Germany’s real estate market “completely”, said Schwalm.

Property prices have declined slightly, while yields are now below borrowing costs, according to Savills.

Russia’s invasion of Ukraine has also hurt Germany’s property sector.

“It’s not the war itself, but more the energy crisis” the conflict has caused, said Schwalm.

Germany, along with the broader European Union, has sought to phase out imports of Russian gas, which was formerly a cheap, plentiful energy source for much of the bloc.

Soaring energy prices have roiled major German industries such as steelmaking and petrochemicals, worsening a broader economic malaise.

Germany’s quarterly GDP growth was zero in the second quarter, while the economy contracted 0.1 percent in the first quarter and 0.4 percent in the final three months of 2022, official data shows.

Adding to the property sector’s woes, building materials such as glass and cement are made through energy-intensive processes and have leapt in price. Overall, construction costs are up 70 percent in the past year, Schwalm estimates.

“Foreign investors can invest anywhere, so they’re analysing the different regions and many came to the conclusion that the real estate market isn’t easy – not in mainland Europe, the UK or US,” Schwalm said.

“Countries like the US are recovering quicker and therefore its real estate market is more [attractive for investors] than Germany.”

Foreign investors accounted for around 25 percent of the first-half sales value, according to JLL, down from nearly 40 percent in full-year 2022.

As well as raising borrowing costs, higher interest rates have also made other asset classes more attractive, reducing investors’ allocation to real estate. For example, US 10-year government bonds, which are considered almost risk-free, now offer a yield of about 4.2 percent, a 16-year high and up from 0.6 percent in mid-2020.

“So why should I invest for a 3 percent [return] in residential property in Germany?” Schwalm said. 

JLL forecasts Germany’s full-year 2023 real estate sales will be €40 billion, down 47 percent on the 10-year average.

Expectations for further interest rate rises make it “difficult to determine prices and there is uncertainty about the further development of property yields,” JLL wrote.

“Nevertheless, the market still offers investment opportunities, especially for equity-rich buyers.”

Middle East sovereign funds fall into that category but purchases of distressed assets in Germany’s property sector will likely remain the preserve of Western private equity firms, Schwalm said. This is because Middle East funds tend to be more risk averse, he added.

Latest articles

Over 400 global food brands are taking part in the SaudiFood Manufacturing show in Riyadh this month

Saudi Arabia’s food factory count rises to 1,300

The total number of food factories operated by the Saudi Authority for Industrial Cities and Technology Zones (Modon) has reached 1,300, across 36 cities. The increase signifies the growing capacity of the domestic food industry and its localisation efforts, the state-run Saudi Press Agency reported. Food industry companies have recorded a growth rate of more […]

Garden, Nature, Outdoors

UAE commits $50m to development fund

The UAE has committed $50 million to the second phase of the Lives and Livelihoods Fund 2.0 (LLF 2.0), a multi-donor initiative targeting sustainable economic development in the Islamic Development Bank’s (ISDB) 57 member countries. The funding will be deployed by LLF 2.0 to support critical projects in health and infectious diseases, agriculture, and social infrastructure in low […]

Abu Dhabi’s last debt market activity included a $2 billion bond in May 2021 followed by a further $3 billion in September

Abu Dhabi launches $5bn bond issue

Abu Dhabi has initiated $5 billion in a three-tranche bond after a hiatus of three years, according to a media report. The $1.75 billion five-year bond, $1.5 billion 10-year tranche and $1.75 billion 30-year issue was priced at 35, 45 and 90 basis points, respectively, over US Treasuries, fixed income news service IFR reported. Abu Dhabi […]

Oman UAE deals Sultan of Oman president of UAE

Oman and UAE sign deals worth $35bn

The UAE and Oman have announced a host of new commercial and business deals worth a total of AED129 billion ($35 billion). The partnerships were agreed during Monday’s state visit to the Emirates by the ruler of Oman, Sultan Haitham bin Tariq al Said.  Investment and collaboration agreements covered areas including renewable energy, green metals, […]