Germany’s Real Estate Market: Slow Recovery Forecast for 2025

Germany's real estate sector is expected to see a gradual recovery in 2025 following a challenging period marked by rising interest rates and economic headwinds. According to experts, key indicators of the sector's health improved by the end of 2024, suggesting a cautiously optimistic outlook for the year ahead, reports Reuters.

Despite these improvements, the broader German economy continues to show signs of weakness, casting a shadow over the pace of recovery.

Real Estate Deals and Market Dynamics

International consultancy Jones Lang LaSalle (JLL) reported that real estate transactions in Germany reached €35.3 billion ($36.42 billion) in 2024, marking a 14% increase from 2023. Colliers reported a similar trend, with deals totaling €36.2 billion, a 12% rise. Both firms anticipate further growth in 2025, with projected transaction volumes between €40 billion and €42 billion.

These forecasts signal that 2023 may have been the low point of Germany's real estate crisis. However, experts warn that the recovery will be slow and fraught with challenges.

For years, Germany's real estate market thrived, but a sudden surge in interest rates and construction costs led to bankruptcies among developers and stalled transactions. This crisis, while affecting many countries, hit Germany particularly hard.

Structural and Economic Challenges

The German economy faces significant structural challenges, including:
- Energy Costs: The loss of inexpensive Russian energy has increased operational expenses for businesses and households alike.
- Export Weakness: Germany's reliance on exports has left it vulnerable to global economic shifts, particularly in the automotive sector, where competition from Chinese manufacturers has intensified.
- Economic Stagnation: According to the German Council of Economic Experts, the country’s growth potential has shrunk to 0.4%. Analysts at Bloomberg Economics suggest that annual investments in infrastructure and public goods need to rise by 30%, reaching €160 billion annually (over 1% of GDP) to revive growth.

The combination of economic stagnation and geopolitical uncertainty has kept business sentiment low. December 2024 saw a sharp decline in business activity, with companies expressing pessimism about the months ahead.

Interest Rate Easing and Its Impact

A slight reduction in interest rates has provided some relief to the real estate market. However, economic challenges persist:

- Economic Contraction: Germany's economy shrank by 0.3% in 2023, and slow growth is expected for the near term.
- Investment Headwinds: Despite improved financing conditions, geopolitical uncertainty and pending federal elections could dampen investor confidence in 2025.

Market Outlook for 2025

Key industry players, including JLL and Colliers, predict moderate growth in transactions for 2025. However, volumes will likely remain below historical averages, underscoring the sector's ongoing difficulties.

Michael Baumann, head of capital markets at Colliers Germany, highlighted the impact of geopolitical uncertainty, upcoming elections, and a weak economy on market recovery, stating that these factors "could slow the gradual recovery of investment markets."

The European Commission projects that inflation will fall to 2.1% in 2025 and 1.9% in 2026. Household incomes are expected to recover, driving modest increases in private consumption. These factors, alongside easing monetary policies, could support renewed investments in housing and infrastructure.

Economic Projections

The overall economic outlook remains uncertain:
- Domestic Demand: Expected to drive economic growth in 2025 and 2026.
- Energy Costs: While still above pre-pandemic levels, these costs are anticipated to stabilize, albeit at elevated rates.
- GDP Growth: Predicted to grow by 0.7% in 2025 and 1.3% in 2026.
- Government Debt: Projected to remain stable at 63% of GDP, with a neutral fiscal policy stance.

Despite these positive indicators, high uncertainty continues to weigh on consumer spending and investments. The decline in global demand for German industrial goods adds further pressure to the country’s export-driven economy.

Germany’s real estate market shows signs of recovery, but the process is expected to be slow and uneven. Structural economic challenges, geopolitical uncertainty, and high energy costs remain significant obstacles. While reduced interest rates and increased domestic consumption offer hope for gradual improvement, the sector is unlikely to return to pre-crisis levels in the near term. Continued investment in infrastructure and policy reforms will be critical to sustaining growth in 2025 and beyond.