Key takeaways from Deutsche GRI

Deutsche GRI reflected a European real estate market reshaped by capital discipline, operational execution, and macroeconomic shifts. Opportunity remains available, but increasingly for groups with patient capital, flexible financing, and strong local capabilities.

This cycle differs from prior markets. Investors are no longer underwriting broad appreciation or yield compression; performance now depends on asset quality, execution, financing, and market selection.

“This cycle is not about broad appreciation. It is about disciplined execution, flexible financing, and knowing where capital can still perform.” — Jessica Bell, Managing Director, Capital Markets | EMEA

Residential continues to lead institutional allocation strategies

Residential remained the dominant allocation theme, with several major investors noting the sector represents roughly 50 per cent of portfolio exposure and underwriting targets of 4 per cent to 6 per cent cash-on-cash returns.

Germany’s housing shortage continues to support conviction despite affordability and regulatory pressure. New-build rents in prime cities regularly exceed €25/sqm/month, while subsidised housing requirements in Berlin and Munich can require 30 per cent to 50 per cent of developments at regulated rents near €7/sqm.

Rents across Germany’s top seven cities have increased approximately 55 per cent to 75 per cent over the last 10 to 15 years, outpacing wage growth. Poland was also identified as a preferred market due to stronger growth, EU funding, and NATO-related infrastructure investment.

Office markets remain highly bifurcated

Office discussions showed a sharp divide between prime, highly amenitised assets and challenged secondary inventory. Investors described underwriting only top CBD locations, while prime London rents reportedly rose 15 per cent in Mayfair and 9 per cent in the City over the last year.

Secondary offices continue to face pressure, with participants referencing 30 per cent to 40 per cent valuation corrections and refinancing challenges for non-ESG-compliant assets. This is accelerating conversions, repositioning, densification, and redevelopment.

Financing conditions continue to tighten across Europe

Capital structure discussions remained central. Construction lending has tightened, with senior lenders requiring higher upfront equity, stronger presales, and expanded reletting commitments. Basel III implementation in 2031 is also expected to constrain development lending.

Participants highlighted a disconnect between asset pricing and financing costs. German residential assets often trade at 3.5 per cent to 6 per cent yields, while investment-grade debt exceeds 4 per cent and mezzanine financing is generally double-digit.

Structured equity is therefore becoming more important. Transactions priced around 5 per cent to 7 per cent cost of capital can provide equity accounting treatment while maintaining debt-like economics, making creative structuring a prerequisite for execution.

Scale and operational execution are becoming competitive advantages

Scale and operational integration were recurring themes. One participant highlighted a 500,000-unit platform combining in-house property management, maintenance, tradespeople, and facilities operations to create efficiencies smaller operators may struggle to replicate.

Platform acquisitions remain selective, with investors cautious around legacy land banks acquired during the 2019-2021 pricing peak and more focused on reset land values, scalable platforms, and long-term economics. Operational capability appeared to matter as much as market direction.

Retail resilience remains concentrated in specific segments

Retail commentary reinforced the divergence between defensive formats and structurally challenged corridors. Food-anchored retail was described as resilient, while grocery delivery economics remain constrained by €3 to €4 delivery costs against grocery margins of roughly 2 per cent.

Luxury retail continues to outperform broader high street retail due to tourism demand, flagship-branding strategies, and global spending patterns. Secondary and tertiary corridors continue to decline.

ESG and energy costs continue to influence investment decisions

ESG discussions showed a shift from expectations of a “green premium” toward a growing “brown discount”. Non-compliant assets face refinancing challenges, pricing discounts, and higher capital expenditure requirements.

Energy pricing also emerged as an underwriting consideration, with Germany’s higher long-term energy cost structure relative to the U.S. and China influencing demand projections. These pressures reinforce modernisation, efficiency, and long-term capital planning.

Debt strategies and structured finance continue expanding

Real estate debt is growing as a standalone institutional asset class, especially among insurance and pension capital seeking defensive, income-oriented strategies during volatility.

German open-ended real estate funds remain under pressure. Attendees referenced valuation mismatches, with fund valuations declining only modestly despite broader market corrections estimated closer to 35 per cent, creating potential redemption and liquidity risks.

Together, these dynamics are increasing demand for structured finance solutions, recapitalisations, debt advisory, and cross-border capital strategies.

Positioning for the next phase of the cycle

One clear conclusion from Deutsche GRI was that future returns are expected to come primarily from operational execution rather than broad market appreciation. While investors continue targeting mid-teen returns, outcomes depend on leasing, redevelopment, asset management, and local market knowledge.

For Walker & Dunlop EMEA, these conversations reinforce the importance of structured finance, creative debt advisory, and cross-border capital solutions as European real estate markets reset. The opportunity set remains compelling, but success depends on discipline and execution.

Connect with our team to learn how evolving capital markets are reshaping European commercial real estate opportunities.