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News Release


Rapid growth on the German investment market for commercial property continues in the first six months of 2015

Short commentary including overview tables [PDF]

Charts [PDF]


FRANKFURT, 3rd July 2015 – Nervousness and volatility - two phenomena that have plagued the financial markets in recent weeks. As well as the political turmoil in Greece and the related yet still unknown consequences for the eurozone economy, a particular challenge for investors was dealing with the sharp and therefore unanticipated correction on the bond market. Within a short period of time, German federal bonds increased in June from close to zero to almost 1%. The susceptibility to fluctuations has also increased significantly here. And as if there was not yet enough uncertainty, the suspense continues over the when and how of the impending U.S. hike in key interest rates. This all weighs heavily on the prevailing mood on the financial markets. Is this also the case for the property markets? No: seemingly unfazed by the global and fiscal turbulence, the lights are still green on the German investment market.
“The impending increase in interest rates in the U.S. will mark the end of the global zero interest rate policy, but in our view should not cause a slackening of investor demand for local commercial property,” says Dr. Frank Pörschke, CEO Germany at JLL. He adds: “Nevertheless, the bond markets have shown in recent weeks that the financial markets have become more volatile. However, this has also had no tangible effects for the time being on investment markets, which are sluggish compared to other products. Only financing and loan conditions could be caught in this volatility maelstrom on a selective basis.”
However, the massive bond-buying programme of the European Central Bank now appears to be taking effect. This programme is accompanied by a moderate rise in consumer prices, apparently heralding a turnaround in interest rates. This will be a long process, however, and will take place in several steps so that the interest rate will remain low for at least the next two years. The flow of capital towards the property asset class will therefore remain undiminished. Pörschke comments: “The high liquidity will persist for the rest of the year. The weak euro compared to the dollar will continue to cause capital to flow from the dollar zone towards Germany. In addition, there is unbroken interest from Asian investors so that the challenge in the current market environment - which is clearly dominated by demand - is to identify suitable products that are commensurate with the risks involved.”
Timo Tschammler, Member of the Management Board Germany at JLL, adds: “As well as the turnaround on interest rates and Grexit, the possible exit from the EU by Great Britain was also a much-discussed topic in the recent quarter. We assume here that there is likely to be considerable uncertainty ahead of such a referendum, and the consequences for the London financial market could be very drastic. In the event of a “Brexit”, Paris as well as Frankfurt (as the strongest financial markets on the European continent at present) could benefit from a weaker London. In other words, demand for office space would increase due to the tendency of companies in the financial sector to relocate.” He adds: “In the event of this taking place, the direct consequences for the German investment market would actually be rather positive: if many international investors avoid London in the event of a Brexit and turn their focus more to the continent, this could encourage demand for property investments in Germany.”

Transaction volume double that of the half-year average for 2010 -2014
So far a Grexit, a possible Brexit and rising interest rates have not had any noticeable effect on demand for property. On the contrary: the continuing high interest in commercial property is clearly reflected in the half-year figures. The six-month transaction volume totalled €24 billion and was therefore 42% higher compared to the previous year. It was also double the five-year average of €12 billion (based on half-year results). The second quarter alone contributed around 60% or €14.5 billion to the six-month result. From a historical viewpoint, only the second quarter of 2007 has registered a higher result. That year ended with an all-time record of almost €55 billion.
In the last three months the volume was driven by factors such as the sale of 43 Kaufhof department stores for €2.4 billion. This is the third-largest transaction since 2006. Five other transactions between April and the end of June with a volume of more than €300 million apiece added a further €2.6 billion, demonstrating in somewhat impressive style the theory that “big is beautiful”. A great deal of capital is caught up in the search for attractive investment opportunities. Institutional investors in particular are seeking large investment options as part of the expansion of their own property holdings.
“The overall analysis of all size categories across Germany reveals that what we predicted in the first quarter has already materialised: numerous large portfolio transactions on the market have now been closed,” says Helge Scheunemann, Head of Research Germany at JLL. Accordingly, the share of portfolios increased to 37% (€8.9 billion) in the first half of the year, equating to an increase of 44% compared to the previous year and slightly outperforming individual transactions (+41% to €15.1 billion). Two trends can be observed in the area of portfolio transactions at present: excessive price rises are not evident with property portfolios that have somewhat lower quality stock or locations. On the other hand, a price premium becomes more likely as the quality aspects of a portfolio improve. “These trends will persist into the second half of the year. In this respect we also expect to see a dynamic investment market in the second half that will push the transaction volume for 2015 as a whole to a level beyond €45 billion,” says Timo Tschammler.

Changing of the guard for asset classes: retail just ahead of office
Office property no longer accounted for the highest share of the overall German transaction volume, as was the case in previous quarters. In part thanks to the two billion-euro deals in the first half of the year (Kaufhof and the sale of four shopping centres by Corio to Klepierre in the first quarter), retail property increased its share substantially to 39% (€9.4 billion) and was thus slightly ahead of office property. Distribution warehouses were also a focus point of investors and generated a transaction volume of almost €1.7 billion, corresponding to a 7% share.

Berlin maintains its number 1 position among the strongholds
A geographical analysis of the transaction volume reveals that the property strongholds are still very much in play. A combined sum of almost €13 billion was invested in the Big 7. This corresponds to a share of almost 54%. Despite all expressions of interest in secondary towns and cities or locations outside the Big 7, the share of such locations actually fell from 52% in the previous year to 46%.
“Among the top 20 retail transactions in the first half of the year, only four took place in towns and cities outside the Big 7. This outcome is also ultimately a result of what are only limited investment opportunities for large-volume products above €100 million in smaller markets,” says Scheunemann. Over the further course of the year, the share of the Big 7 strongholds is expected to stabilise at the present level.
Berlin maintained its position as the number one property stronghold among the Big 7 cities. More than €3 billion was invested in the German capital, an increase of 158% compared to the previous year. Investments in Munich amounted to almost €2.9 billion, while Frankfurt registered a volume of almost €2.8 billion.

Foreign capital share increases further
Foreign investors continue to be strongly represented on the German investment market. Investors from the U.S., UK, Canada and France participated in the five largest transactions in the first six months. The largest transaction by a German investor involved the purchase of the Frankfurt Eurotowers by IVG for a German pension fund at a price of around €480 million. Overall, around 59% of the transaction volume related to foreign capital in the first six months (around €14 billion) and represented a further significant increase from the previous year. However, it was noticeable that as before the majority of foreign investors originated from established sources. Activity by Chinese and other Asian investors still tends to be rather the exception than the rule.

First Big 7 city with a net initial yield below 4%
Significant decline in logistics property yields
Yields remained under pressure on the back of the continuing high demand. Or to put it another way: prices are rising further. While investors are increasingly turning to properties with vacancies or in alternative locations (mostly within the Big 7), an end to the pressure on yields for core properties would currently only be mitigated by a substantial increase in the product supply. However, this is not apparent at present.
In the office segment, prime yields fell slightly again in the last three months. Across all Big 7 cities, the average value fell by a further 7 basis points to 4.30%. The decline did not affect all markets equally: the strongest fall took place in Berlin with a decline of 20 basis points to 4.30%, followed by Munich with a drop of 15 basis points to 3.85%. This is the first time that a Big 7 city has seen the net initial yield drop below 4%.
There was also a partial decline in net initial yields in other asset classes because of the large demand. The strong yield compression for logistics property particularly stood out here. In a quarterly comparison, the average prime yield for the logistics regions in all seven strongholds fell by 54 basis points to 5.52%. This leap is borne out by several completed transactions and is a result of the search by investors for an attractive yield. Compared to commercial buildings or office properties, yields for this asset class are still around 120-160 basis points higher.
“An end to the price rally is currently not foreseeable. But the further the yields fall, the more it behoves investors to watch interest rate developments. There is no clear picture here for the remainder of the year; the financial markets fluctuate between interest rate rising factors and a new run on security-based investments. Amid all (legitimate) fears of an interest rate rise, it must not be forgotten that this will be a very slow process and that rising interest rates are also a sign of economic recovery. And when this recovery manifests itself, it should have a dampening effect on the feared increase in yields in the form of rising rents,” comments Helge Scheunemann.