On the occasion of MIPIM, one of the most important international real estate trade fairs, Greif & Contzen is taking a look at Cologne’s real estate investment market with its German and international stakeholders. A total transaction volume of EUR 1.2 billion was generated in the cathedral city last year – this corresponds to a year-on-year decrease of around two thirds.

War, inflation, rising interest rates: the geopolitical situation and the economic downturn in Germany have left their mark also on Cologne’s real estate investment market. The interest rate turnaround in particular has prompted investors to reconsider their options, to abandon sales processes and enabled them to achieve purchasing price reductions, following several years of price increases. Transaction activity declined noticeably from the second quarter of 2022 onwards, and prices went down. According to the calculations of the property experts of Greif & Contzen, a total transaction volume of EUR 1.2 billion had been generated with commercial properties by the end of the year. This corresponds to a decrease by around two thirds compared to the record-breaking result recorded in 2021 (EUR 3.8 billion). At EUR 4.3 billion, the transaction volume generated in 2022 across all types of real estate was about 35 percent lower than the 2021 result.

Transaction volumes of the individual asset classes
All real estate segments were affected by the decline. Office properties remained the most traded asset class, accounting for some 70 percent of the total volume generated with commercial real estate. However, the transaction volume in this asset class was only EUR 875 million. While the 2021 result of EUR 2,300 million achieved with office properties had been exceptional, 2022’s result is below average also from a long-term perspective. The retail and tourism industries were affected by severe restrictions over the Covid years. This also had an impact on the hotel and retail property markets. Footfall recovered in the retail industry in the past year, however, it is not quite back to pre-Covid levels. Rising energy prices and consumer reluctance combined with high inflation dampened a further recovery. The overall situation is reflected in the transaction volume that dropped from EUR 300 million (2021) to just EUR 100 million in the past year. However, rents stabilised. The hotel segment recovered from the Covid-related downturn in 2022, but hardly any properties were sold last year. In addition, only few investment products in mint condition are available on the market in the short term, owing to the fact that fewer new projects were added to the development and investment pipelines in the Covid years. The transaction volume realised with industrial and logistics properties within Cologne’s city limits also dropped to around EUR 60 million. This result was far below the five-year average of around EUR 120 million. However, if the entire Cologne / Bonn logistics region is considered, a number of major deals concerning warehouses and distribution centres were realised. This led to a considerable rise of the transaction volume from EUR 320 million to EUR 550 million. The investment volume generated with apartment buildings halved compared to the year before to around EUR 830 million. Purchasing price factors decreased significantly, and the highest factors were around 30-fold the annual net rent. Around one fifth (21 percent) less was generated with condominiums, where the transaction volume dropped to around EUR 1.5 billion. While purchasing prices for existing condominiums went down, prices for new builds remained stable owing to high construction costs: the current core range for newly built condominiums in popular neighbourhoods is between 6,000 and 8,000 euros per square metre.

Yields
Following several years of rising purchasing prices, reductions could be observed across all asset classes in 2022, and initial yields increased. The net prime yield in the logistics segment rose from 3.4 to 4.0 percent, returning to the level recorded in mid-2020. The prime office yield went up by 0.8 percentage points and stood at 3.5 percent at the end of the year. The increase observed for retail buildings was not quite as pronounced: the prime yield increased by 0.3 percentage points to 3.6 percent.

Outlook
The real estate experts of Greif & Contzen anticipate that investors will initially be reluctant in the current year 2023, and will wait to see how interest rates develop. „Investment activity is likely to increase if the European Central Bank indicates that there will be no more interest rate adjustments for the time being, making the interest rate environment more predictable once again,” explains Thorsten Neugebauer, Head of Investment at Greif & Contzen Immobilienmakler GmbH. “After all, the office, logistics and residential letting markets all continue to be robust with low or even very scarce availability, and there are signs that suggest rent and yield increases. These are key requirements for investments that are attractive for investors, also compared to other investment opportunities.” Cologne’s real estate investment market is in general likely to develop favourably from the point of view of buyers. According to Greif & Contzen, sellers will have to anticipate that further price reductions will be demanded. In this context, the yields obtained by buyers are likely to increase. “Interesting purchasing opportunities will be available to high-equity investors in particular,“ Neugebauer explains. “They are more likely to meet the requirements of banks and will have to pay little interest on their loans. This places them at an advantage when it comes to bidding, and gives rise to opportunities for expanding portfolios.” The experts from Greif & Contzen predict that 2023 will be a rather low-key investment year on the whole, until interest rates and prices have settled on a new level. In addition, the number of developments that are ready to invest in are currently decreasing, so this product category will be smaller than is the case in years with busier construction and letting activity. “Against the backdrop of this market environment, we expect that the commercial property transaction volume will be on a similar level as last year,” Neugebauer predicts. “This is a rather acceptable interim goal in these challenging times, but there is plenty of room for improvement in the years ahead.”