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News Release

Frankfurt

The German commercial investment market topples 2007 record in 2015 with sixth consecutive increase


​Short commentary German including overview table [PDF]

 

FRANKFURT, 7th January 2016 – After many discussions and the virtually self-propelling conjecture ahead of the recent Federal Reserve meeting in December, the actual act of raising interest rates was a relatively painless affair. The excitement also quickly subsided in the immediate aftermath. The financial markets seemed well prepared and had adjusted themselves to this interest rate move. At the same time, the increase in U.S. interest rates by 25 basis points represented a turning point and ended a seven-year “zero interest rate policy” phase. The positive U.S. economic data meant that the rate increase was justified and comprehensible, but it nonetheless remains to be seen how the financial markets will react to the further drifting apart of U.S., European and Japanese interest rate policy. In particular, no increase in interest rates is expected in Europe before the end of 2017.
 
“The continuing low level of interest rates is still the main driving force behind the enormous investment requirements of all institutional investors. At the same time, there is an increasing focus on property. The still rapidly growing investment requirement of institutional investors worldwide, such as pension funds and insurance companies, is also clearly reflected in the property asset class in Germany. And we also do not expect to see a significant increase in the historically low level of interest rates in the foreseeable future. In any case, even a moderate rise would hardly change the overall picture. The extreme focusing on the level of interest rates tends to be exaggerated anyway,” said Dr. Frank Pörschke, CEO of JLL Germany.
 
In 2015, the commercial transaction volume increased for the sixth time in succession to reach a new record level of €55.1 billion. Compared to 2014 this represents a further increase of almost 40%. The fourth quarter alone contributed almost €17 billion or over 30% to the annual result and marked the strongest quarter for sales in the past 5 years. Investors from the domestic and foreign markets continue to favour large-volume assets or portfolios. Thus the top 10 transactions of the year accounted for a total volume in excess of €9.8 billion (18%). Outstanding individual transactions included the sale of “Quartier am Potsdamer Platz” for a purchase price of about €1.3 billion, followed by the Frankfurt office properties Trianon and Eurotower. Portfolio transactions were largely dictated by retailers and company takeovers, led by the Galeria Kaufhof portfolio with a purchase price of about €2.4 billion and followed by the office property portfolio of Deutsche Office for about €1.7 billion that changed hands as part of the acquisition by Alstria.
 
“Based on the generally positive fundamental data and the still attractive financial framework, 2016 could also be a positive year for the commercial investment market with the transaction volume for Germany as a whole again reaching a high level. It is not unlikely that the volume will again exceed €50 billion. Whether that will be achieved depends on how the increasing global risks of various kinds can be overcome, and whether the capital flow will move in the direction of North America following the interest rate hike in the U.S.,” commented Timo Tschammler, member of the Management Board at JLL Germany.

 
Above-average increase among portfolios - office property is the most sought-after asset class
 
Around 65% of the commercial transaction volume related to individual transactions in 2015. In terms of absolute figures, the increase was 30% year-on-year and thus slightly underperformed the overall market. In contrast, the portfolio volume grew by a much stronger rate of almost 60% to €19.2 billion.
 
Around 41% (almost €23 billion) related to the office property asset class, followed by retail with 31% (€17 billion). These two categories thus already account for almost three quarters of the transaction volume in Germany. The remaining share is largely distributed among mixed-use properties (almost 10%), hotel properties with 8% and warehouse/logistics with at least 7%.

 
Berlin beats all records – above-average increase in demand outside the property strongholds
 
At the end of the year, the transaction volume in the German capital amounted to more than €8 billion. “A high volume such as this has never before been registered by a German city. Around a quarter of the investments in the seven large German metropolises were therefore carried out in Berlin in 2015, with an 84% increase in the volume compared to the previous year,” said Tschammler. The other Big 7 cities also registered positive growth figures. After Berlin, Stuttgart, Düsseldorf and Cologne recorded the biggest increases. The transaction volume across all seven strongholds amounted to €31 billion, which was 35% higher compared to 2014.
 
However, the large cities were not alone in determining the market development. On the contrary: investments outside the Big 7 increased by an above-average rate of 43% to €24 billion compared to 2014. “The willingness to take on more risk is therefore on the rise. Core investments still account for around half of the market volume, but the absolute transaction volume for opportunistic, value add or core plus investments increased by more than €5 billion to over €28 billion,” said Tschammler.

 
Foreign capital dominates
 

Germany has established itself as the de facto international marketplace for commercial property. Foreign investors account for more than half of the investment volume. The majority of the invested capital originates from North America, the UK and France. Foreign capital also dominated the biggest transactions in 2015. Of the top 10 transactions, domestic buyers accounted for only three. A similar arrangement was also found on the seller side. In this respect, there is a fairly balanced picture between German and foreign investors with regard to increases in and reductions of their German property holdings. “As things stand there is no observable trend to indicate that investors from particular countries are significantly increasing or decreasing their holdings,” said Tschammler.
 
 
Continuing yield compression and rising capital values
 
The yield situation was again unchanged in the recent quarter. In almost all segments we observed further - although moderate - falls in yields. In the office segment, the prime yield fell by a further 7 basis points compared to the previous quarter; the average for the Big 7 is 4.15%. Hamburg followed Munich by breaking through the 4% barrier, with a current yield of 3.90%. After remaining relatively stable over a long period, yields for properties in secondary locations or for properties with partial vacancies or short remaining leases are also now showing some movement. The gap between these and prime rents depends on the micro location and specific property character and ranges from 75 to 240 basis points. The range is still fairly wide, but also shows that suitable yields are also still achievable in the Big 7 for less risk-averse investors.
 
In the retail segment, the prime yield for shopping centres fell by 15 basis points in a quarterly comparison to 4.25%, while yields for retail parks, specialist stores and commercial properties in city centres each fell by 10 basis points. Warehouses and logistics properties also registered an increase in prices, and the average prime yield for the Big 7 regions is now only 5.27%.
 
“For 2016 we expect to see further yield compression for top office properties by a maximum of 10 basis points. The bottom should then have been reached. The yields of other asset classes could fall even more sharply in contrast. For logistics properties, prime yields of 5% are to be expected. In the retail property segment, the direction is also downwards because of the disparity between strong demand and a shortage of supply,” said Helge Scheunemann, Head of Research at JLL Germany.

 
Conversely, office rents have increased slightly again. As a consequence, the office capital values for the Big 7 increased over the year by 11% on average. Since the low point at the end of 2009 following the onset of the global financial crisis, the capital values for prime office properties have therefore increased nominally by almost 50% overall. Secondary locations have also benefited from increased demand from investors but also from the steadily rising rents. In this segment, capital values have increased by 38% since the low point in 2009. “Prices should continue to rise in 2016, but growth will slow significantly across the Big 7 to 3%. That admittedly is then no heady gain because what should actually constitute the core of a property investment, namely the contribution of rental income to the value development, will be reflected in the coming years,” said Scheunemann.
 
Scheunemann added: “The German investment market does not still open up attractive market entry opportunities for all investors, and for many it may already be considered too expensive. However, this perception should not be generalised. This is because on one hand it does not apply everywhere or for every product, and in relative terms property yields are still attractive compared to other investments.”