Learning by Losing: Bridging the valuation gap amid Germany’s real estate rebalance

Stagnant Growth and Sticky Spreads

The foundation of the current market inertia is intrinsically linked to broad macroeconomic challenges. A pervasive economic stagnation currently afflicts Germany, alongside much of Europe, with nations such as the UK and France navigating similar hurdles. 

Within the real estate sector, this stagnation is most visibly manifested as a persistent gap between buyer and seller expectations. A significant bid-ask spread heavily dominates the landscape, with neither side presently experiencing adequate pressure to compromise.

The past context of the German market further complicates the path to recovery, with property rents historically remaining slightly lower than those found in comparable European markets. 

Because local rents were already situated closer to the bottom, there has simply been far less capacity for rental prices to drop drastically enough to attract value-add capital and artificially restart market momentum.

Furthermore, the German valuation system is widely perceived as decoupled from the immediate realities of international capital markets. This structural disparity often results in a 10% to 25% pricing gap when directly compared to stringent IFRS accounting standards. 

This fundamental mismatch actively prevents foreign capital, which strictly demands transparent and globally aligned pricing, from confidently executing transactions in the current environment.

Domestic Doubt and International Interest

A striking divergence in market perception exists between domestic professionals and international players evaluating German assets. 

Domestic investors are frequently characterised by a prevailing focus on political dissatisfaction and internal complaints. This localised pessimism risks becoming a dangerous self-fulfilling prophecy, dragging down overall market sentiment further than is fundamentally justified.

Conversely, international capital views Germany through a significantly more optimistic lens as foreign investors continue to recognise the country as an undisputed economic powerhouse, highlighting a resilient economic backbone that has managed to remain relatively flat despite facing severe energy shocks and deindustrialisation pressures. 

Massive government deficit spending programmes are only just beginning to take effect, which is anticipated to further stimulate the economy. 

Crucially, international observers are attracted to Germany's strong real estate fundamentals, pointing directly to a highly positive supply-demand imbalance. Across multiple core sectors, including residential, the robust demand for quality assets significantly outpaces the restricted supply, presenting a compelling long-term investment case.

Sovereign Stress and Macro Scenarios

The real estate sector currently operates within the overarching narrative of the Western world's sovereign debt crisis. 

With the potential exception of Germany, almost every Western nation is burdened with excessive governmental debt. The only viable pathway for countries to manage these immense debt levels is through a calculated combination of heightened inflation and artificially reduced interest rates.

This macroeconomic restructuring could generate profound implications for global capital flows. A substantial devaluation of the USD is highly probable, a move that would naturally make European assets much more attractive to incoming US buyers. 

Current cost and wage disparities are stark; for instance, a delivery driver in the US earns an average of around EUR 150,000 (USD 180,000) annually, compared to just EUR 60,000 (~USD 70,000) in Germany. Similarly, basic commodities, such as a kilogram of oats, command in the region of EUR 9.40 (USD 11) in the US versus roughly EUR 1 (~USD 1.17) in Germany.

Alternatively, a far less optimistic scenario involves a "Japanification" model, in which a flat population and a persistent lack of fundamental economic growth could lead to decades of economic stagnation across Europe, mirroring Japan's historical trajectory.

Structural Shifts and Cash Flow Demand

Moving beyond macroeconomics, the German real estate industry is undergoing permanent structural changes that have rendered many legacy business models obsolete.

• Office Threats: The traditional office market is currently facing a severe demand shock. The rapid acceleration of artificial intelligence (AI), combined with entrenched work-from-home habits, have placed standard assets under immense threat.
• Capital Rotation: In direct response, institutional capital is rotating aggressively away from offices and reallocating toward residential, retail, and lifestyle-oriented asset classes.
• Prioritising Cash Flow: Investors are increasingly prioritising secure, cash-flowing properties, such as modern supermarkets, which offer strong dividend yields. This consistent income provides vital independence from the precarious timing of market exits.
• Activist Investing: The golden era of passive property investment - simply buying a stable asset and waiting for the broader market to lift its value - is definitively over. Success now strictly requires "activist" investors who actively create value through operational excellence and targeted, individual business plans.

Capital Constraints and Core Chasm

When explicitly comparing today's environment to the 2008 global financial crisis (GFC), stark differences in liquidity management emerge. 

During the previous crisis, loan-to-value (LTV) ratios were dangerously high, frequently hitting 90%. Today, systemic lending is far more conservative, typically hovering around a safer 60% to 65%. 

Because equity investors maintain tangible skin in the game, banks are more inclined to extend loan terms rather than force immediate foreclosures. Consequently, the desperate forced sales that artificially reset market pricing in 2008 are largely absent. 

Historically, German development financing was executed at 75% to 85% loan-to-cost (LTC), making older structures highly fragile during market downturns.

Furthermore, the market is completely starving for traditional core buyers. Large entities, such as multinational insurance companies and massive open-ended funds, are effectively sidelined. 

The rapid devaluation of their vast bond portfolios automatically pushed the relative weighting of their illiquid real estate holdings far above strict internal allocation limits. 

Until these institutions successfully digest their current portfolios and rebalance allocations, a vital source of market liquidity remains entirely blocked. When this capital does return, foreign investors are now routinely demanding internal rates of return (IRR) exceeding 15%.

Learning by Losing?

AI is rapidly transforming how debt markets operate, with bank risk assessments already increasingly automated by sophisticated algorithms rather than human underwriters. 

This technological shift places immense new pressures on real estate operators to provide impeccably high-quality data and operational excellence. Firms that fail to complete their fundamental operational homework will simply fail to secure necessary financing.

Ultimately, the German sector cannot authentically restart without a collective acceptance of financial reality. The industry must collectively embrace the difficult concept of learning by losing. 

Genuine market clearing will only commence when stubborn vendors, heavily exposed banks, and sidelined institutions finally agree to take the necessary write-offs, absorb their historic losses, and adjust their pricing to levels that accurately reflect the new structural paradigm.

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These insights were shared during the Deutsche GRI 2026 C-Circle Gathering, co-hosted by Dentons, featuring contributions from moderator Volker Mergener (Dentons), as well as Bernd Haggenmüller (Ardian), Dirk Brandes (Natixis), Simon Lutz (Peakside Capital), Stefan Zimmermann (4 Friends Investment), and Ulrich von Creytz (DWS).