vdp property price index: Decline in property prices continues

Berlin, May 08, 2024

• vdp index shows price decline of 5.3% for the year

The adjustment process in German property prices continued in the first quarter of this year. The property price index of the Association of German Pfandbrief Banks (vdp) reached 174.7 points. This was 5.3% below the level calculated across all property classes year on year and 0.3% below the level for the previous quarter. Compared with the highest index score to date, reached in the second quarter of 2022, the price correction amounts to 10.3% in the meantime. vdpResearch has calculated the vdp index each quarter since 2010 based – unlike other property indices – on an analysis of actual property transaction data collected from more than 700 credit institutions. In this way, the index tracks price developments on the overall German market for residential and commercial properties, quarter for quarter.

In the first quarter of this year, residential property prices shed 4.3% year on year (Q1 2024 against Q1 2023). Compared with the immediately preceding quarter (Q1 2024 against Q4 2023), the decline amounted to 0.2%. Since the record level achieved in the second quarter of 2022, residential property prices in Germany have fallen by 8.6% to date.

Prices for commercial properties saw a considerably stronger adjustment year on year (-9.6%) than residential properties. Between the second quarter of 2022, when prices reached their highest level to date, and the first quarter of 2024, commercial property prices dropped by 17.2%. The change in prices came to -0.8% between the closing quarter of 2023 and the first quarter of 2024.

“As yet no sign of commercial property prices bottoming out.” Jens Tolckmitt

“The development of prices confirms our prediction that prices will continue to fall – for commercial properties more heavily than for residential properties.”  A quarter-on-quarter comparison indicates that residential property prices are already gradually stabilising, vdp Chief Executive Jens Tolckmitt commented. By contrast, there is as yet no sign of commercial property prices bottoming out. Although the downward momentum has slowed somewhat of late, this should not be over-interpreted given the continued low level of transaction activity.

Residential properties: multi-family house prices unchanged quarter on quarter

The 4.3% decline in residential property prices in the first quarter of 2024 was driven by the development of prices for both multi-family houses and owner-occupied housing. While prices of single-family houses and condominiums were down by a total of 3.9% year on year, prices for multi-family houses dropped by 4.7%. The price level for multi-family houses was unchanged compared with the immediately preceding quarter, whereas owner-occupied housing experienced further, slight price losses, narrowing by -0.4%.

Growth in rents under new contracts for multi-family houses at the beginning of the current year was similar to end-2023. After increasing by 5.8%, the annual rate of change last came to +5.6%. Returns as measured by the vdp cap rate index rose by 10.8% over the year. With that, growth in returns slowed down somewhat for the second consecutive quarter (Q4 2023: +12.9% / Q3 2023: +13.5%).

“Residential properties will remain in short supply in the longer term.”Jens Tolckmitt

Tolckmitt assessed the development in rents as follows: “The rental housing market is under immense pressure. Demand far outstrips supply. For this reason, rents continue to climb – albeit not quite as quickly as in the previous quarters.” Given that building completions still fall significantly short of the political targets, Tolckmitt remarked, residential properties will remain in short supply in the longer term – with corresponding consequences for the development of rents going forward.

Housing in top 7 markets: Slight price growth in Cologne on the quarter

In Germany’s top 7 cities, residential property prices decreased by 4.3% on average compared with the corresponding quarter one year before. This was in line with the overall market level. However, there were differences in the individual rates of change. The most resilient of the top 7 cities in the first quarter of 2024 were Cologne (-3.0%), Düsseldorf (-3.5%) and Stuttgart
(-3.6%). Whereas price corrections in Berlin and Frankfurt am Main were roughly in keeping with the average value, they were strongest in Hamburg (-4.9%) and Munich (-5.3%).

Quarter on quarter, the largest negative rates were recorded in Düsseldorf (-0.7%), Hamburg (-0.6%) and Stuttgart (-0.6%). By contrast, Cologne was the only top 7 city to show a slight uptick in prices (0.2%). The increases in top 7 rents under new contracts in the multi-family housing sector ranged from +2.7% (Stuttgart) to +5.2% (Cologne). The highest year-on-year increases in returns were generated in Berlin and Munich (+10.3% in each case). As an average for the top 7 cities, rents rose by 4.5%, yields by 9.4%.

Commercial properties: office prices down by just under 10%

The property market downswing that has persisted since mid-2022 is having the greatest impact on commercial properties, as price developments show. The 9.6% decline in commercial property prices compared with the corresponding quarter one year before was made up of price corrections in the office sector (-9.9%) and the retail sector (-8.9%). Compared with the immediately preceding quarter, prices in the first quarter of 2024 fell by 0.6% for offices and 1.5% for retail properties.

As in the fourth quarter of 2023, office and retail properties both recorded double-digit growth in returns year on year, as measured by the vdp cap rate index. Thus, yields on offices and retail properties grew by 14.2% and 13.4% respectively year on year, and by 1.3% and 2.6% respectively quarter on quarter.

Growth in rents under new contracts was likewise fairly uniform in both asset classes at the beginning of this year. Between the first quarters of 2023 and 2024, office and retail rents went up by 2.9% and 3.3% respectively. Rents increased by 0.7% and 1.1% respectively quarter on quarter.

Outlook: Commercial property market will remain difficult in 2024

“The commercial property sector is still going through a phase of structural challenges,” Tolckmitt emphasised. He added that, whereas the interest rate environment and the refurbishment requirements according to ESG criteria are having the same impact on both asset classes, individual trends also have to be considered in each case – on the one hand, the unclear consequences of the home office trend in the office sector and, on the other, the steadily growing importance of online retailing for the retail property market.

“We expect commercial property prices to decline further in the coming quarters, too.” Jens Tolckmitt

Looking ahead to the rest of this year, the vdp‘s Chief Executive emphasised: “Even though we believe that, as things stand today, the greater part of the interest rate-driven price corrections is behind us, we expect commercial property prices to decline further in the coming quarters, too.” Tensions on the commercial property market are likely to continue throughout 2024, he said, adding that the market situation is not expected to ease until the beginning of 2025.