German office property prices tumble as challenges loom for investors

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German office properties have seen a significant slump in price alongside a sluggish increase in returns, according to new figures.

Office property prices fell by 5.2% in the last quarter of 2023 - compared to the previous quarter - and 13.3% year-on-year, German banking association vdp said in a press release on Monday.

The numbers mean that Germany's office building market has seen its sharpest drop since 2004.

The picture is less severe when looking at retail property prices, vdp said, which dropped by 9% year-on-year and 3.9% quarter-on-quarter. However, the banking association noted that retail properties have been suffering from a fall in prices for much longer than office properties.

According to vdp, retail rents under new contracts increased by 2.5% yearly - a record since 2019. Despite limited growth in retail rents since 2003, returns on retail properties rose by 12.7% in the last quarter of 2023, breaking previous records.

Returns on office properties also rose 17.5% in the final quarter of 2023 compared to the same period in 2022, vdp said.

Nevertheless, they have so far failed to meet investors' expectations, according to Jens Tolckmitt, vdp's chief executive.

"On top of this, demand for offices remains subdued due to the uncertain economic growth in Germany and the still unclear impact of the working from home trend on office space needed," he added. "So prices continue to depress. Retail properties, on the other hand, are much further along in the cycle, as evidenced by the first increase in rent under new contracts for more than four years."

When asked about his outlook for the property market in the current year, Tolckmitt expressed caution.

"The property market remains in a downturn as we start 2024, and prices continue to drop. It will be some time before property buyers and sellers reach a new price balance, and only then will we see a noticeable recovery in the market," he said.