German real estate: Cautious optimism prevails amid uncertainty

Praemia REIM Germany's Q2 2025 report, "Standpunkt Q2/2025," indicates a lack of a strong rebound in the German real estate market due to ongoing economic policy uncertainties. 

Frankfurt

While there is talk of increased capital allocation to Europe, the actual flow into German markets remains uncertain, given the global economic landscape. Despite a projected moderate economic growth of 0.9% for Germany this year, experts advise "cautious optimism" rather than euphoria.
Monetary policy stability, with the ECB's key interest rate unchanged at 2.15% and inflation at 2.2%, has improved conditions for investors, enabling more reliable planning after two years of volatility. International investors, unburdened by legacy issues, may increase activity in the German market.
Logistics and hotels performed moderately well, remaining above the neutral threshold, while office and retail properties lagged.
Transaction volume totaled approximately €14 bn, slightly exceeding the previous two years, with residential properties accounting for about a third of the investment. Logistics, office, and retail followed with comparable shares. Healthcare properties also gained momentum, particularly due to a major portfolio transaction.
Office real estate reached a 10-year low with a transaction volume of €2.5 bn due to uncertainty about hybrid work, economic data, and geopolitical tensions. However, the leasing market is performing positively, and prime rents are rising slightly. Countercyclical investors may find attractive opportunities in A-list and B-list locations.
Residential real estate remains highly sought after, reflected in transaction volumes and a positive Real Estate Climate Index rating. Transaction volume amounted to €4.8 bn with a stable prime yield of 3.4%. While building permits increased by 1.9%, a significant shortage of housing persists. Investors are facing fierce competition for high-yield properties and are increasingly considering alternative housing models.
Retail real estate presents a mixed picture, ranking fourth in transaction volume with €2.3 bn but facing selective demand. Prime yields remain at 4.6% for high-street shops and 4.6% and 5.9% for supermarkets and shopping centers, respectively. Consumer confidence and growth outlook remain subdued.
Healthcare real estate developed dynamically, exceeding the previous year's volume by mid-year to €0.9 bn. Stable prime yields of 5.4% for nursing homes indicate smooth price discovery. Demographics, high purchasing power of the older population, and political stability are driving interest.
Hotel real estate experienced a strong first half with €1.1 bn in transaction volume, doubling the previous year. Rising transaction volume and foreign investor participation signal a slight upswing. Rising rents and constant prime yields (5.3%) indicate a resilient market.
Finally, logistics asserted itself as a reliable asset class with a transaction volume of €2.7 bn, a 72% share of foreign transactions, and stable prime yields (4.4%). Solid demand and structural space shortages, especially in metropolitan areas, are a concern. Failure to address these space shortages, such as through brownfield redevelopment, could increase development on global supply chains and threaten German economic stability due to company relocations.