Development of the Economy and the Industry

The European Commission describes the EU economy as faced with a complex and challenging environment. In its fall forecast, the Commission expects GDP growth of 0.9% in the EU and 0.8% in the eurozone for 2024. Nevertheless, the overall conditions for gradual, sustainable economic growth are in place, driven by domestic demand. Employment is strong, real incomes are recovering and financing conditions are easing. Meanwhile, the growth outlook is clouded by the aftereffects of high inflation. This is compounded by mounting geopolitical risks and political uncertainty. The German Federal Statistical Office (Destatis) estimates that the German economy shrank by 0.2% in terms of gross domestic product (GDP) in 2024 compared to the previous year and, according to the Kiel Institute for the World Economy (IfW), it is proving unable to break out of stagnation. There is an alternating pattern of quarters with rising and falling economic output. Overall, only the service sectors are on an upward trend, while the manufacturing and construction industries are shrinking. According to the National Institute of Economic Research (NIER), gross domestic product in Sweden is estimated to have risen by 0.5% in 2024. One of the main reasons behind the subdued growth is the continuing reluctance of Swedish households to spend. According to the Institute of Economic Research, Austrian GDP is expected to have contracted by 0.9%. The global slump in demand for industrial goods is weighing on Austrian manufacturing, value creation in the construction industry is declining, and consumer spending by private households has fallen again. For 2025, GDP growth of 0.0% is forecast for Germany (IfW Kiel), 1.2% for Sweden (National Institute of Economic Research, NIER) and 0.6% for Austria (Institute of Economic Research, WIFO).

According to the German Federal Employment Agency, economic stagnation has impacted the labor market in Germany. Unemployment and underemployment (excluding short-time work) increased in 2024 on average for the second year running. At the same time, however, the number of people in employment in 2024 was up compared to the previous year, putting the figure at a new high. The average unemployment rate based on the total civilian labor force rose by 0.3 percentage points year-on-year in 2024 to 6.0%. The NIER estimates the unemployment rate in Sweden at 8.4% in 2024, which is approx. 0.7 percentage points more than in the previous year. According to national calculations by the Austrian Public Employment Service (AMS), the unemployment rate in Austria in June 2024 was 7.0% and thus 0.6 percentage points higher than in the previous year. Based on respective national definitions, the average unemployment rate expected in 2025 is 6.3% for Germany (IfW Kiel), 8.5% in Sweden (NIER) and 7.4% in Austria (WIFO).

Inflation slowed further over the course of 2024, with falling energy prices playing a particular role in this trend in all three countries. Measured against the respective national Consumer Price Indexes (CPI), the average inflation rate was 2.2% in Germany, 2.8% in Sweden and 2.9% in Austria, based on figures from the national statistical offices. Based on respective national definitions, a CPI increase of 2.2% is expected for Germany (IfW Kiel), 1.7% for Sweden (NIER) and 2.3% for Austria (WIFO) for 2025 on average.

In a quest to make a timely return to its 2% medium-term inflation target, the European Central Bank (ECB) had raised key rates in 2023. The interest rate for the deposit facility, which the ECB Governing Council uses to steer the monetary policy course, rose in several steps to 4.00%. June 2024 saw the ECB begin to loosen the monetary reins somewhat, when it lowered its key interest rate in several steps, most recently in December 2024 to 3.00% and to 2.75% on February  5, 2025. High inflation also prompted the Swedish Riksbank to take further steps to lift its policy rate to 4.00% in the course of 2023. After the inflation rate started to move closer to the inflation target again, the policy rate was lowered in several steps, starting in May 2024, to 2.75% by the end of 2024, and 2.50% on January 8, 2025. Further interest rate cuts by the ECB and the Swedish Riksbank are likely to follow this year. In this overall environment, interest rates for construction in Germany, Sweden and Austria recently fell slightly, but were considerably higher in 2024 than before the interest rate turnaround of 2022.

The real estate market paints a mixed picture: Prices on the residential property market have largely stabilized, with prices on an upward trajectory again in some places. The real estate investment market remained relatively subdued, although transaction volumes in the residential segment have started rising again of late. The situation for project developers was a challenging one. Meanwhile, the overall conditions on the rental market in Germany remain favorable from a landlord’s perspective. Given the combination of high demand for housing and a decline in the number of building permits granted, Savills does not expect the rental momentum to come to a standstill. Stubborn supply shortages and rising rents are also likely to translate into rising capital values. Quoted rents continued to increase across Germany; empirica reports that they were 4.7% higher on average over all years of construction in the fourth quarter of 2024 (new construction 5.1%) than in the same quarter of the previous year. According to DB Research, rents for existing contracts increased by more than 2%. Further rent increases are expected for 2025. According to data supplied by Statistics Sweden (SCB), rents in Sweden rose by an average of 5.0% in 2024. The initial data on rent negotiations for 2025 from “Hem & Hyra,” the member magazine published by the Swedish tenants’ association (Hyresgästföreningen), point towards a further sharp rise in rents. In Austria, rents (including newly let apartments) increased in 2024 compared to the previous year by 6.7% according to the Austrian statistical office. According to RE/MAX, rents not subject to rent restrictions will continue to rise in 2025 due to demand.

House prices had cooled down considerably in Germany, Sweden and Austria since their peak in 2022. The drop in prices in Germany came to a standstill in the course of the year on average. The empirica price index for condominiums (all years of construction) was 0.7% lower in the fourth quarter of 2024 compared to the same period of the previous year. In a quarter-on-quarter comparison, prices were up slightly again, by 0.1%, in the fourth quarter. Other market observers are reporting that prices for existing apartments (Immowelt) and condominiums (Europace) are already up slightly on the prior-year levels on average at the turn of the year. In the new construction segment, the empirica price index for condominiums was up by 2.1% year-on-year in the fourth quarter of 2024. Experts from DB Research, Fitch Ratings and Immowelt expect prices to continue to rise in 2025. According to Svensk Mäklarstatistik, purchase prices for tenant-owned apartments (Bostadsrätter) in Sweden were already 5.9% higher in December 2024 compared with the same month of the previous year. A clear recovery has been emerging since the beginning of the year, which was only briefly interrupted by a slump in the middle of the year and cooled off somewhat towards the year-end. Experts at Swedbank expect residential real estate prices to rise by around 5% in 2025. In Austria, the values of the current residential real estate price index of the Austrian central bank (OeNB) on the basis of new and used condominiums and single-family residences show a decrease in the third quarter of 2024 of 2.2% compared with the previous year. Measured in terms of quarter-on-quarter increases, prices more or less stagnated in the second and third quarters of 2024, with movements of -0.1% and -0.2% respectively. According to RE/MAX, the price trend for condominiums in Austria depends to a considerable degree on their location, with an increase expected in central locations in 2025.

The size of the population in Germany, Sweden and Austria is estimated to have risen again in 2024 and is expected to increase further. A large number of large cities and metropolitan areas are affected by housing shortages. Meanwhile, construction activity is on the decline. Residential construction is in a difficult phase in all three countries due to the combination of higher interest rates, less favorable financing conditions and increased/high construction costs. The GdW estimates that only 256,000 apartments will have been completed in Germany in 2024, compared to 294,400 in 2023. The figure could fall to 229,000 in 2025. The German federal government had set itself the goal of building 400,000 new apartments per year in Germany. As any rapid increase in new construction activity is unlikely according to Savills, homes will remain in very short supply for some time to come. Boverket estimates that 52,300 apartments will have to be built per year in Sweden by 2033. Around 40,000 apartments are expected to have been completed in 2024, a figure that is only likely to total 33,000 in 2025. This means that the additional annual need will not be met. The number of construction starts could, however, rise again in 2025 given the slight improvement in the overall conditions. Following an ongoing decline in the number of building permits granted, the number of completions in residential construction in Austria is also likely to be much lower in 2024 and 2025, according to Bank Austria and Exploreal. Given the sustained high demand for housing, CBRE Austria anticipates a structural undersupply in the coming years, particularly in metropolitan areas.

The German residential investment market grew again in 2024. CBRE put the transaction volume at € 8.7 billion, around 50% higher than in the previous year. While the transaction volume was still subdued in the first half of the year, there was a year-end rally in the final quarter with a volume of € 3.9 billion. According to CBRE, the main trends were sales in the context of refinancing rounds, primarily by listed portfolio holders, and also the sale of project developments, particularly to public housing companies. The core and core-plus risk categories accounted for a share of just over 50% in 2024. The proportion of Value-add and opportunistic investments increased significantly. Prime yields at the end of 2024 were 3.4% or 0.05 percentage points higher than in the previous year. CBRE expects the residential real estate investment market to gain momentum in 2025, with a transaction volume of up to € 10 billion. According to Colliers, properties worth € 11.1 billion were traded across all segments on the Swedish transaction market in 2024, representing a year-on-year increase of approx. 44%. In terms of transaction volume, residential properties were the strongest asset class with a share of 32%. According to CBRE, the Austrian real estate investment market saw a transaction volume totaling € 2.7 billion in 2024, 7% less than in the previous year. The share of the residential segment stood at around 25%. Due to high demand, prime yields in the residential segment fell and stood at 4.25% at the end of 2024, 50 basis points lower than in the previous year. EHL reported in the third quarter that residential real estate remains a popular asset class, especially as far as well-let properties in Austria’s urban centers are concerned.

Housing policy developments in Germany in 2024 included changes to the German Buildings Energy Act (GEG) and to the Federal Funding for Efficient Buildings (BEG). On January 1, 2024, a GEG amendment came into force aimed at increasing the proportion of renewable energies in heating systems and at reducing emissions. At the same time, the BEG introduced a guideline that supports the replacement of fossil fuel heating systems with environmentally friendly heating systems by subsidizing the investment costs involved. After the BEG “Climate-friendly new construction” promotional program had been briefly closed to applicants, the German state-owned development bank KfW started accepting applications for subsidized loans again in February 2024. In October, the “Climate-friendly new construction in the low-price segment” promotional program was then launched to create incentives for the construction of apartments in the lower and middle price segments. The program, which will run for a limited period until the end of 2025, requires properties to meet Efficiency House 55 standards. In March 2024, declining balance depreciation was adopted for apartment construction in the context of the German Growth Opportunities Act (Wachstumschancengesetz). This applies for a limited period to newly constructed residential buildings and apartments, or those acquired in the year of completion provided that construction work starts between October 1, 2023, and September 30, 2029. In December 2024, the German government passed a bill to extend the rent cap. The bill is still, however, being considered by parliament and is not making any progress. With the 2024 Annual Tax Act, the German government introduced a new non-profit housing structure from January 1, 2025, providing support to companies that build affordable apartments and rent them out on a long-term basis. At the end of May 2024, the new version of the EU Energy Performance of Buildings Directive came into force, which, among other things, provides for a reduction in energy consumption in residential buildings. The EU is waiving the obligation to refurbish poorly insulated private residential buildings. The beginning of 2025 also saw the entry into force of the land tax reform and adjustments to housing benefit to reflect price and rent trends. The CO₂ price will also rise from € 45 to € 55 per metric ton. New building regulations will come into force in Sweden on July 1, 2025. In Austria, a rent cap has applied since 2024 that limits the increase in indicative rents, category-based rents and rents for non-profit apartments. This does not include unrestricted rental agreements. A residential construction package adopted in the spring of 2024 is intended to revive the construction industry and provide more favorable conditions for residential construction loans.