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News Release


German commercial property investment market heads towards record transaction volume

Press release including overview table [PDF]

Charts [PDF]


FRANKFURT, 2nd October 2015 – Will the base rate be raised or not? The development of interest rates had rarely been subject to so much interest and speculation ahead of a meeting by the US Federal Reserve as before the recent meeting in September. And no, the change in interest rates failed to materialise. The Fed will meet again in December for a further discussion on interest rates. Pressure is growing, and now it is reasonable to assume that there will be a marginal rise in the interest rate - the first since 2006. However, what implications would such a step have for the investment markets?
According to Dr. Frank Pörschke, CEO Germany at JLL: “The investment needs of institutional investors such as pension funds continue to rise sharply worldwide. Property has also increasingly become a focus of interest. In addition, the continuing low interest rate remains a driving force for the enormous investments requirement of all institutional investors. Whatever the decision is on US interest rates, we do not expect to see a slowdown in demand for property investments in Europe and certainly not in Germany as a result of this move.”
Pörschke added: “Apart from that, the increased willingness of banks to lend and the generally positive environment on the financing side continue to provide positive support for any investment interest.”
In Europe, the interest rate will not change in the short term because the economic situation, although improving, remains fragile. And Germany with its stable financial basis and robust economic development is benefiting in particular from the continuing low interest rates, at least in the case of a highly leveraged asset class like property.
“We do not expect to see a significant rise in the historically low interest rates in the foreseeable future. In any case, even a moderate rise would not substantially change the current overall picture because capital values would be supported by the positive influence of rents,” said Pörschke. He added: “The latter is often forgotten in the discussion about rising interest rates, because a rate increase comes with an improvement of the economic base, and this in turn can have a positive effect on rental price development.”
The consequences of this development are also reflected by the investment activities in the period to the end of the third quarter of 2015. From January to September, a total of around €38.2 billion was invested in commercially used property in Germany - an increase of 50% compared to the already very good result in the previous year. The third quarter alone contributed €14.2 billion or at least 37% to this result.
“For 2015 as a whole, we expect a transaction volume of approx. €55 billion. This would then not only represent a sixth successive year of growth while being significantly higher than the 10-year average of around €29 billion, but would also mark a new all-time high on the German investment market,” said Pörschke.

Large transactions remain in demand
The high transaction volume in the third quarter is all the more remarkable because for the first time this year, no single transaction above €1 billion contributed towards the result. However, institutional investors from both the domestic and foreign markets continue to seek large-volume assets or portfolios. In the first three quarters of the year, the top 10 transactions amounted to a combined €7.7 billion and accounted for 20% of the total transaction volume. The number of transactions above €100 million is also a clear indicator of the investor appetite for large deals. While 49 deals above €100 million were registered by this point last year, this figure has notably increased this year to reach 79 deals by the end of September.
The overall share of portfolios fell slightly during the last three months, but is still around a third of the volume. Compared to the previous year, portfolio transactions increased by 64% to €12.6 billion. The structure of the portfolio regarding the quality of locations and buildings remains the most important aspect determining the successful sale of a portfolio. Any weaknesses in this respect could quickly push down the calculated price. Potential buyers make very careful checks, and despite the high pressure to invest and strong competition are not prepared to accept all price expectations of buyers.
Individual deals accounted for 67% of the transaction volume in the recent nine-month period. Compared to the previous year, the volume grew by 44% and therefore slightly underperformed the market as a whole.
Office is again the preferred asset class ahead of retail

Although the four largest transactions of the year fell into the retail asset class, office properties have again moved into the number one position in terms of usage types. Approx. 40% (€15.2 billion) relates to this asset class, followed closely by retail with a 35% share (€13.3 billion). This already covers three quarters of the transaction volume in Germany; the remaining share of approx. 25% largely consists of hotels and mixed-used properties (8% share apiece) and warehouses/logistics properties (7%).

Berlin establishes itself as the investment ‘hotspot’
The desire and search for sustainable and primarily large investments continue to propel investors towards the big cities. In this respect, activities are largely focused on the property strongholds; almost €21 billion was invested altogether in the Big 7. This corresponds to a share of almost 55%. Out of the top 20 individual investments in the first three quarters, only four took place in cities outside the Big 7.
“The willingness to take on bigger investment risks is on the rise, but in our view is in no way leading to a significant price increase in secondary locations or for secondary properties that would become a source of concern in the event of a possible interest rate increase”, said Timo Tschammler, Member of the Management Board Germany at JLL. He added: “A careful inspection of the quality of both the location and property is and remains the key to a positive return and should not be overlooked no matter how great the pressure is to invest.”
Among the Big 7, Berlin has been able to maintain its position as the number one property stronghold in impressive fashion with 83% growth compared to the previous year and €1 billion more than both Munich and Frankfurt (see from page 5). In relative terms, Cologne achieved the strongest growth in a 12-month comparison: although the actual volume of €980 million comes bottom of the Big 7 ranking, the Cologne transaction volume has nonetheless doubled.

Foreign capital share increases further …

Germany has now established itself as an international trading centre for commercial property. Foreign investors are very active and account for around 54% of the investment volume. Furthermore, 16 of the 20 largest transactions in the year to date come from foreign capital sources - both on the buyer and the seller side. With these 16 transactions, property with a volume of €9.4 billion was sold, while property worth €8.8 billion was acquired. Among the buyers, most capital originated as before from North America and France.
Tschammler comments: “The current low level of return in Germany is not discouraging foreign investors from making a possible investment in German commercial property. As well as direct property transactions, we are also seeing increased interest primarily among investors from the Asian region in indirect investments or equity investments.”

… and yields continue to fall

There was again no change in the underlying trend for property yields during the third quarter. When change does happen, the net initial yields know only one direction: downwards. There are currently no signs of an end to the price rally for core properties. While the combination of good basic economic data, low interest rates and availability of credit remains in place, nothing will change.
In the office segment, the prime yields fell further over the last three months. The aggregate average yield for the Big 7 markets fell by a further 8 basis points to 4.22%. The decline did not affect all markets to the same extent. The strongest decline again took place in Berlin with a drop of 20 basis points to 4.10%. Thus the yield in the German capital has fallen by 50 basis points within a year and reflects the significant rise in demand for office investments. Further declines also took place in Hamburg (15 basis points to 4.15%) and Munich (10 basis points to 3.75%).
Apart from shopping centres (here the yields stagnated at 4.40%), net initial yields fell in all other sectors. Acquisition costs increased by 15 basis points for retail parks, specialist stores and logistics property in a quarterly comparison. For commercial properties within city centres, the average yield for the Big 7 was only 3.84%, down 8 basis points since the end of June.
“By the end of the year, we expect yields to fall further in all asset classes by up to 20 basis points. In 2016, the rise in prices should continue but then slow down. As we also expect rents to increase further, office capital values over 2015 as a whole will increase by more than 11% across all Big 7 markets,” said Helge Scheunemann, Head of Research Germany at JLL.