In March, the German government approved a constitutional amendment that carves out exceptions to its so-called “debt brake” – a 2009 fiscal rule designed to restrict structural budget deficits.
Defence spending over 1 percent of GDP will no longer be subject to borrowing limits, and €500 billion will be earmarked for infrastructure spending, including climate-related investment. After years of sluggish growth, the reform has sparked hopes of an improved economic performance.
It comes as Germany’s commercial real estate sector struggles to emerge from the doldrums. Since the spike in ECB interest rates in 2022, a collapse in capital values has led to subdued investment and a financing market characterised by overleverage. While the debt brake reform is not viewed as a panacea for Germany’s real estate market, some believe it has potential to support gradual recovery.
Michael Morgenroth – CEO of Caerus Debt Investments, a Dusseldorf-based real estate debt manager – believes the reform has provided a boost to sentiment, but raises multiple questions. “We see a swing in the mood. For example, construction companies will get opportunities to build infrastructure. On the other hand, Germany has been a role model for limited borrowing, so the idea of a large deficit like in the US may concern some.”
Any impact will take time to emerge. In June, Bundesbank president Joachim Nagel said the sharp rise in spending will likely increase GDP, but the central bank’s forecast is for stagnant growth this year, followed by 0.7 percent in 2026 and 1.2 percent in 2027.
Tobias Just, professor of real estate economics at the University of Regensburg in Bavaria, and lead author of its annual German Debt Project study, believes there will be impacts, even indirectly. While he agrees a spike in spending brings inflationary pressure, he says Germany is playing catch-up in public spending as it emerges from recession.
Just points to the prospect of money being channelled into energy-efficiency investment, including in residential real estate, as a boon to the construction industry. Overall, infrastructure spending may also leverage private investment, he adds.
However, until real estate market practitioners know the hard details of government plans, many will reserve their judgment about the potential impact. “It’s still a bit like looking through the mist,” Just says. “People are waiting for news about the exact package of spending.”
Proposed legislation from Germany’s new centre-right-led coalition government has been put forward to accelerate planning approvals – the so-called construction turbo. Until the details are clear, says Just, such proposals will only influence sentiment to a degree.
Morgenroth expects a stronger economy to support confidence within the German banking sector, indirectly impacting real estate. Institutional investors may also be encouraged to provide much-needed equity in German markets.
“Anglo-Saxon investors are currently most active, and that is partly on the back of the release of the debt brake. The view from outside Germany is much more positive than from German investors themselves, which tends to be the case in a crisis.”
Torsten Volkholz – real estate finance partner at law firm Eversheds Sutherland, based across Frankfurt and Hamburg – expects construction companies to benefit, if funds are deployed efficiently across the country. “In recent years, we had a lot of developers failing, and I’d have thought construction companies would be the next to break, but this funding could be their rescue parachute for years to come.”
He adds: “One impact for real estate investors is that the cost of construction could increase further and it’s hard to raise rents by the same proportion.”
Growth catalyst
Some hope for a medium-term boost to German real estate. David Inskip, EMEA head of research within CBRE Investment Management’s insights and intelligence team, describes the reform as a real shift for the German economic model. “We believe it will be a catalyst for economic growth, predominantly in Germany, but with spillover for the rest of the continent.”
Inskip accepts that such levels of spending will take time to deploy and there is a potential for bottlenecks as the defence and infrastructure industries ramp up production. “It’s beginning to impact peoples’ expectations though, and that isn’t without power.”
While Inskip expects “quite a broad impact” on real estate, he argues that confidence and sentiment are crucial to the industry’s recovery. “It’s about bringing those animal spirits back to the market. Seeing a route back to economic growth underpins everything we do and has an impact across real estate sectors.”
Near-term need
Speaking to Real Estate Capital Europe, real estate lenders say tangible benefits to their industry are yet to be felt. But some are hoping for a positive impact. Alexander Oswatitsch – head of real estate debt for DWS, the Frankfurt-based manager – is among them, but sees it as at best a mid-term prospect. “It needs to feed into real GDP growth and then we’ll see changes. In that respect, it’s an exciting outlook and supports the case for Germany, but it will not help us in 2025.”
Despite the promise of better times ahead, German lenders are contending with a difficult real estate market. CBRE reported €14.2 billion of transactions in H1, down 2 percent from H1 2024. Optimists will note it was 14 percent higher than H1 2023. The property adviser noted net initial yields remained stable across all locations and asset classes.
“We’re starting to see the first deals come through, but there is still a bid-ask spread between buyers and sellers, so we are a way away from a healthy transaction volume,” says Oswatitsch.
Germany’s institutional funds have not adjusted valuations as quickly as asset owners in other markets, leading to a reticence to put properties up for sale, Oswatitsch explains. Banks also continue to put off solutions to stalled loan situations, meaning some assets remain in a state of limbo.
“Especially on offices, some banks have extended for two years,” explains Oswatitsch. “It’s getting more difficult for them now, as the regulators are taking a closer look and are asking if prolongations are really justified. That might move some assets to consensual sales in a year or two. But everyone agrees a sale today is not the best thing to do.”
Morgenroth believes owners have written down values, which will spark the transaction market. Restructuring and refinancing is driving dealflow, he says, as well as manage-to-green projects. “I think this year, our lending volume will remain stable, maybe a bit higher, but next year will see more volume, because the market is finding its equilibrium. Sellers are accepting reality more and buyers are finding some comfort and confidence, not just looking for cheap buys.”
Patrick Züchner, CIO of Aukera Real Estate, an Essen-based real estate debt manager, says financing provision varies according to loan size and risk bracket. Volksbanks, the country’s co-operative banks, are under scrutiny from the financial regulator over their legacy exposure, meaning they are less active in their traditional €10 million-€25 million loan size band. Aukera is finding interesting financing opportunities in that size range as a result, Züchner says.
Institutional capital is seen in the market for value-add loans of more than €40 million, with foreign debt funds competing, he explains. Germany’s mortgage banks are also seeking €40 million-plus financings, albeit against core property.
Aukera has viewed financing requests for around €4 billion of transactions since the start of the year, of which Züchner estimates around 40 percent related to German property. “It’s a significant dealflow, but it doesn’t guarantee every acquisition will happen. Some of the requests are for financing for insolvent projects where the existing lender has taken a haircut and institutionally backed sponsors are seeking bridge-to-finalisation.”
Equity missing
According to Hanno Kowalski, managing partner at Berlin-based adviser and lender FAP Group, the main problem for Germany’s real estate market is a lack of equity. Debt is available but at lower leverages, he explains, and developers and those in need of refinancing are increasingly agreeing with lenders on valuations and the viability of business cases. However, new transactions are being held back by sponsors’ inability to bring sufficient equity to the table.
The traditional equity providers, German family offices, are either buying trophy assets outright from distressed sellers, or are steering clear of providing equity against less prime properties. Sponsors are only selectively sourcing US private equity due to its pricing often being too high to fit their business plans. Mezzanine providers are largely out of the market.
“We see way too many situations in which senior financing is in place from a Pfandbrief bank, but at much lower leverage, and the term sheet sits there while the sponsor tries to find an equity partner,” Kowalski says. “In cases, we offer to become the sponsors’ debt joint venture partner or provide the whole loan. That is a solution in an increasing number of cases.”
Kowalski also describes refinancing requests in which sponsors ask for similar terms to the last time they secured financing. “The terms do not reflect the interest rates we have today. Either an equity injection is needed to reduce the loan amount, or the sponsor needs to accept higher rates. A bullet payment structure is an option, but that requires a difficult judgment on the asset value two to four years from now.”
The solution, Kowalski says, needs to come from the market in the form of write-offs. As German insurers accrue more cash, he believes that will lead to more capital for equity funding.
According to Volkholz, lenders are keen to do business. “The mortgage banks are ready. The private debt investors are ready. “But the acquisitions are missing. As rents go up, office space is leased, vacancy drops, it’s a matter of time before transactions come back and financing parties will be ready. The bankers want to still have a role.”
Hope floats
While the release of the debt brake has sparked cautious optimism about the future, real estate finance professionals’ hopes are more immediately pinned on a sector-wide acceptance of recalibrated capital values, and a reopening of the transactional market.
CBRE IM’s Inskip expects managers of German open-end funds to put stock onto the market to manage redemptions in the coming six months. He believes this will contribute to gradually improving the investment market.
He also notes that several European markets posted significant improvements in 2024 and have subsequently paused due to tariff uncertainty. Germany was quieter last year and is now showing signs of catching up. “How much of that is due to improved sentiment and the returning of animal spirits, and how much is due to Germany previously lagging? I’d say it is a mixture of the two.”
The mood in the German real estate financing market remains subdued, albeit slightly improved since last year on the expectation of a pick-up in transactions. But for those trying to do financing business in a real estate sector still undergoing a painful transition, a debt brake reform-backed economic uptick seems a remote prospect.
An eye on the deficit
The debt brake reform is not expected to create an inflationary spike or prompt monetary policy changes
German 10-year Bund yields marked the largest weekly increase in early March on the back of debt brake reform, before falling in early April.
CBRE IM’s Inskip notes that the initial market reaction has since unwound. “Deficit projections by the end of the decade are €600 billion higher than previously, so it’s a big shift. But Germany had a lot of fiscal headroom, so, in our view, it is still a very safe bet for bond investors, and comes with the promise of economic growth.”
While economic stimulus can be inflationary, Inskip says CBRE IM expects eurozone inflation to remain around the 2 percent mark, at the ECB’s target. He points to the deflationary backdrop due to factors including trade uncertainty.
As a result, CBRE IM does not foresee a monetary policy implication of the debt brake reform. “Monetary policy loosening is almost complete anyway – we believe there will be one or two more cuts, and the ECB will be done.”