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"Exploring attractive opportunities in the current market situation."

Luca Gudewill

Director Research & Investment Strategy of Real I.S. AG

Property investors continue to face big challenges and a completely changed capital market environment. Since 2021 long-term interest rates have risen more rapidly than at any other time in the past 30 years – by 320 base points, from minus 0.5 percent to the current rate of 2.7 percent. This makes the financing of real estate considerably more expensive, with a corresponding impact on expected returns. This also reduces the excess return, or risk premium, of property in comparison with risk-free government bonds. The price discovery phase on the real estate market has not finished yet and market participants – investors and financiers – remain cautious.

Although we do not expect price levels to stabilise before 2024, property investors should position themselves in good time. The decline in prices can present attractive market opportunities and result in higher potential returns – provided that investors look out for fundamental data on real estate and concentrate on categories of use for which demand is stable. One thing is certain: in historic terms, property investment opportunities of this kind rarely come up – the last time was 15 years ago, following the financial market crisis of 2008/2009.

Trend variation between different categories of use and initial rates of return

To identify potential, the market has to be thoroughly explored. The trends vary depending on the categories of use. A comparison between the initial returns at the beginning of 2022 – before the wave of interest rate increases – and the latest figures for the second quarter of 2023 shows that the European logistics sector has seen a particularly strong increase of 120 basis points. According to real estate services company Jones Lang LaSalle, net initial returns now average around 4.6 percent, compared with 3.4 percent at the beginning of 2022. The office and residential segments have also recorded a significant rise in net initial returns across Europe.

Focus on solid rental markets where demand for space is stable

The trend in the rental markets, and in market rents, plays a decisive role in the medium-term performance of a property investment – increasing rents particularly help to bolster cash flow and stabilise the portfolio. Especially countries with solid economic growth boost the prospects for a positive development of the rental market – as a driver of demand for space. Ireland, Spain, Portugal, Luxembourg and Belgium are particularly good examples, with promising forecasts for real growth in the gross domestic product (GDP) in 2023 and 2024 (on average). However, to estimate the trend in the rental markets realistically, category-specific factors have to be taken into account. The reason for this is that there are considerable differences in the fundamental situation of the various asset classes.

Energy-efficient office properties in central locations remain in high demand

The market for office properties varies considerably, with the location and quality of the properties becoming increasingly important. The flexibility of the office spaces and the energy efficiency of the building are important decision criteria for prospective tenants.

The weakness of the economy and the increase in the number of people working from home have resulted in a decline in the demand for space as well as a rise in vacancy rates and a slowdown in rent increases. However, vacancy rates remain at a historically low level. Location plays an increasing role in the rentability of office space, as a determinant of its attractiveness as an alternative to working from home. City centre spaces with good public transport links and sufficient local amenities and shopping opportunities are favoured. It is likely that rents for office spaces in central locations will diverge even further from those in peripheral locations in the future.

However, several tenancy contracts demonstrate that modern offices in central places are in demand despite a difficult market situation. CARIAD, the software company of the Volkswagen Group occupies around 22,000 square metres of space in the office properties be blue and be green in Munich, for instance. Other examples of successful tenancies refer to the renting of space in the Anthémis complex in the French city of Lyon, the Zuiderhof Pavilions in the Dutch capital Amsterdam and the EINS building in Bremen, Germany.

Logistics properties with stable rental growth

The market for logistics properties continues to be attractive for real estate investors, as vacancy rates are low and rents continue to go up. However, the logistics segment has also seen a return to a certain degree of normality, and the surplus demand has fallen owing to the declining need for space among online retailers such as Amazon and Zalando.

Other segments also have potential

Property investors would be well advised also to look at other categories of use. These include city hotels in Europe, of which many are now highly profitable again. Both tourism and business trips have increased significantly again. Bednight volumes have recovered more quickly than expected, and in many cities hotel occupancy rates are back to pre-Covid levels. The high demand has led to higher room prices, making the hotel business very interesting again for real estate investors. We plan to take advantage of the potential in this segment by launching a specialised institutional hotel investment fund and focusing on business and holiday hotels in selected regions.

The residential property market also continues to offer investment opportunities. The demand for residential space is bolstered by the continued low unemployment rates in the euro area. Owing to the skills shortage, many companies are not cutting back their staff numbers – despite the weak economy. At the same time, the supply shortage is constantly worsening and the higher costs of financing home ownership are causing an increase in demand in the rental segment. In addition to traditional residential properties, forms of hybrid living such as student accommodation, microliving and assisted living also have high occupancy rates and offer stability. The residential property market in Ireland also presents great potential. We plan to expand our activities there further with our Real I.S. Ireland Residential Fund, and have already opened an office in Dublin for this purpose. Nine properties in the greater Dublin area and two in Cork with a total investment volume of around 600 million euros are currently part of our portfolio.

Selected retail buildings can also be of interest to investors. Shopping centres and high street shops are seeing a sustained upturn in visitor numbers. However, turnover remains weak overall, so business closures and downward pressure on rents are continuing. Retail parks and grocery-anchored centres also present attractive investment opportunities.


The market correction as a result of the interest rate increase could take some time, but investors should watch the market carefully from now on. When the price correction is over, which is expected in 2024, attractive re-entry opportunities with higher initial returns may arise. However, identifying real return opportunities on the investment market requires a far-sighted approach, and the stability of the rental markets should not be disregarded.

As a complement to the established markets France and Germany, countries like Ireland, Spain, Portugal, Luxembourg and Belgium currently offer an attractive return-risk mix. Demand for the use types ‘logistics’, ‘residential’ and ‘hotel’ is consistently high and rental growth is stable. In the office segment, energy-efficient buildings in central locations are particularly interesting for investors.