The outlook for European and global growth became markedly grim in H211, primarily due to the escalating eurozone debt crisis. This is likely to affect the outlook for the German property sector, even if the hard facts do not reflect the sentiment. The latest interviews carried out by BMI with in-country contacts essentially confirm this increased cautiousness with a flat outlook for rents and yields. In November, we lowered our 2012 real GDP growth forecast for Germany from a relatively optimistic 1.3% to just 0.3%, as Berlin and Paris mooted the possibility of a eurozone break-up and business confidence reacted decisively to the downside.

The commercial real estate sector in Germany benefited from strong uptake in 9M11 and vacancy rates have fallen. There is a significant increase in demand for green buildings with high-quality fittings and an efficient use of space. Despite the economic woes and fragile business sentiment, office, retail and industrial property markets appeared not to be paying any notice, with results performing well compared to 2010. Such resilience can partly be assigned to the strong fundamentals underlying Europes largest economy. However, as sentiment worsened and reality began to bite from September onwards, our feelings are that a tipping point may have been reached.

Investment transactions in the retail sector in 2011 were the highest of all the sectors. Notable deals involved US private firms buying into the German retail market, encouraged by reasonable yields and the domestic demand outlook.

Key Opportunities

- Take-up for commercial property in Germany was strong in 9M11, absorbing new supply and reducing vacancy levels across the major cities. A difficult market ahead could be a good time for opportunistic firms looking for good deals, with they can afford to wait for the expected economic pick up beyond 2012.

Key Threats

- The European debt crisis and a hard landing in China are raising the risk of a double-dip recession in the Western world. German property would be affected, in particular the investment area.

- While the consumer has so far not acted to decisively on a cautious mood, a nosedive in post-Christmas sales could be a sign of the year ahead, which would not inspire confidence in investors.