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News Release


Zero interest rates and sustained flow of capital in a fragile environment - the commercial property investment market in Germany makes a solid start to 2016

​Press release including overview table [PDF]

Charts [PDF]


FRANKFURT, 4th April 2016 – The global financial markets proved better able to digest the hike in US interest rates at the end of last year than many had feared. In contrast, the surprise interest rate reduction in the eurozone by the ECB at the beginning of this year caused more butterflies in the stomach, although the central bank revealed nothing more than a failure of the monetary policy to date. A further decrease is now no longer possible: interest rates are at zero. To put it another way: those with money are being penalised. How “desperate” the ECB has now become in its efforts to stimulate the economy is also highlighted by the recent idea to distribute so-called “helicopter money” to households. The money stockpiled with banks could be provided directly to each household - as if it were dropped directly from a helicopter - in order to kickstart the economy. Certainly, for banks and financial institutions the situation has become more challenging. At the same time, investors are under increasing pressure to invest abundantly available capital at a profit. A year ago it was, so to speak, implicit that material assets, especially products with a high level of borrowings such as property, would profit from this situation. This continues to apply. “However, it appears that there is a greater need than ever before for prudent and rational trading by market players in the current market situation. And the current attitude of investors to not respond to all price expectations of sellers also seems all the more plausible,” said Dr. Frank Pörschke, CEO Germany at JLL.
Pörschke added: “The situation is similar with oil prices. In the past it was also the case here that a low price was hailed as an indirect recovery plan. Now, a further decline is regarded more as a negative signal.”

Optimists continue to prevail

Diverse opinions and prevailing moods also characterised the recently ended MIPIM event. Assessments of the investment markets, which are at an advanced stage of their cycle, ranged from: “we are further increasing our activities” to “the markets are highly competitive and challenging”.
“The optimists still outnumber the pessimists. However, investors are accepting higher risks in view of an increasingly scarce supply, meagre yields and favourable financing conditions. This also includes a relaxation of the single-minded focus on traditional asset classes and the increased contemplation of alternative sectors such as care homes, student accommodation and micro apartments,” said Timo Tschammler, member of the management board Germany at JLL. Tschammler added: “We also observe an enhanced interest in project developments. However, banks are still somewhat reluctant to finance such projects. This reluctance in turn mitigates the risk of investors setting their sights on speculative developments with possibly insufficient pre-letting ratios and exorbitant prices. This would undoubtedly indicate an unhealthy development.”

Transaction volume reaches €8.2 billion in Germany - large transactions are still absent
In the first quarter of 2016 the transaction volume in Germany for commercially used properties reached €8.2 billion, which equates to a 14% reduction from last year. The first few weeks of a year are traditionally dominated by the signing of a backlog of transactions that were not possible to close before the end of the previous year. That the period of January to March 2016 was still the weakest quarter since Q2 2014 is not attributable to a slippage in demand; there was simply a dearth of major transactions. Thus it was only possible to close 13 deals above €100 million with a total volume of approx. €2.1 billion in the first quarter, of which eight were portfolio transactions. Included here was the largest transaction of €280 million that involved the sale of Baywa-Zentrale in Munich to a special fund of Wealth Cap. Institutional investors such as insurance companies or pension funds continue to seek products with a volume of €100 million and above - although in the face of a glaring supply shortage.
“For 2016 as a whole we are still currently expecting a transaction volume in the order of about €50 billion. The scarcity of products and meticulous risk assessments by both banks and investors will prevent a situation where “anything goes”. Therefore the transaction volume could be slightly below last year’s level by the end of the year, which would tend to be seen in a positive light given the overheating risks already described,” said Timo Tschammler in comments on the investment scenario. Tschammler added: “Quality is a frequently cited attribute and this still applies in 2016. The prolonged phase of “cheap money” in particular must make us more aware of this important market criterion, because a weaker focus on quality combined with correspondingly high purchase prices would be regarded as critical.” It is currently not foreseeable that an “AB” (prime city, secondary location) will become an “AC” (prime city, tertiary location). In the latter case, the marketing of good properties in their own right is difficult or even impossible if the micro location or the quality of tenants is not 100% convincing. “The situation is similar with regard to the marketing of portfolios: quality will be paid for, but it becomes difficult if there is any deviation from this, and the portfolio mix must then be revisited by the seller,” said Tschammler.

Disproportionate decline in portfolio volume – office properties remain the most sought-after asset class

In the first quarter of 2016 single asset transactions accounted for almost 80% of the commercial transaction volume. This was again considerably larger than the relative share at the end of 2015. In absolute terms, the decline compared to the previous year was only 3% and was therefore well below the overall market decrease. In contrast, the portfolio volume showed a much sharper decline of almost 39% to €1.7 billion.
Around 47% (about €3.9 billion) related to the office property asset class, followed by retail with a 20% share (€1.7 billion). The remaining volume was distributed among warehouses/logistics properties with at least 10% of the volume, mixed-use properties (almost 8%), hotels with 7% as well as “other” and development sites that together accounted for almost 9% of the volume. The “other” group largely includes care homes, which are increasingly coming to the attention of investors as an alternative asset class. “We note that an increasing number of investors are attempting to diversify their portfolios as broadly as possible in their efforts to derive an attractive overall yield. That can mean a geographic spread of assets as well as a distribution among several asset classes,” said Helge Scheunemann, Head of Research Germany at JLL.

Transaction volume in the Big 7 fell by an above-average rate – compared to steady demand outside the strongholds
At the beginning of the year the transaction volume in the Big 7 amounted to €4 billion, which is about 22% below the volume for the first quarter of 2015. This also represents a much stronger decline compared to the average trend in Germany. The absence of large transactions was extremely apparent here. Accordingly, the volumes were also at times much lower in Berlin (- 43%), Frankfurt (- 59%) and Munich (- 15%). Since big-ticket transactions mostly take place in these three markets, the situation was not helped by the fact that Düsseldorf, Hamburg and Stuttgart each achieved a higher transaction volume. The rivalry among the top Big 7 cities continues unabated: at the end of the first quarter Munich regained the number one spot as the top-performing city and exceeded the €1 billion threshold with almost €1.1 billion.
The transaction volume outside the Big 7 was relatively stable at around €4.2 billion. “This confirms the trend observed at the end of 2015 that investors are also increasingly searching for attractive interest-bearing investments in other regions. The downturn in the Big 7 should not hide the fact that demand remains intact, but it is becoming more and more difficult to find an adequate product in these markets,” said Scheunemann.

Proportion of German investors increases further
The proportion of foreign investors fell to below 40% by the end of the first quarter. The transaction volume generated by domestic investors therefore increased again. There was little change in the origin of investors, on the other hand. As before the majority of invested capital originated from North America, the UK and France. “The interest of foreign investors in German commercial property remains at a high level. However, it is not yet apparent, and nor is there any proof, that the interest and demand from investors have further increased in Germany solely because of the forthcoming EU referendum in the UK,” said Scheunemann. He added: “In addition, we noticed two further trends among foreign investors at the beginning of the year. On one hand, they are acting more as independent players because they have become much better acquainted with the markets and their characteristics after a phase of market testing. On the other hand, fewer “new entries” are making an appearance - that is, investors that want to invest for the first time in Germany. The lack of high-quality stock is fuelling interest in so-called forward deals in which a project in the construction phase is sold to a final investor before completion. We are currently registering increased demand for such investment products particularly from German investors.”

Temporary respite in downward trend in yields – but bottom not yet reached
The pressure on yields continued at the beginning of the year, and this will continue to be the case throughout 2016. Conversely, the further reduction in returns on government bonds means that the distance to prime yields remains at an historic high and - purely based on this comparison - is also attractive. In the first three months of the year we did observe a temporary respite here. The average value of the office prime yield for the Big 7 fell only slightly and now lies at 4.13%. This is the smallest decline in yields for the last six quarters.
In terms of yield development it was also a quiet quarter in the retail segment. No change was registered for shopping centres (4.25%), specialist retail products (5.25% for retail warehousing parks  and 5.50% for retail warehousing solus units ) or high street units (3.75%). Warehouses/logistics properties, on the other hand, registered the strongest decline in yields among all the asset classes in the recent quarter. But even here the picture was the same as in other asset classes: the average prime yield for the Big 7 regions was unchanged at 5.27%. 
“Since an expected further decline in initial yields will be accompanied by a moderate rise in rents, prices are also set to increase in almost all asset classes during the year, especially as it will likely be the case in 2016 that investor interest will again be considerably higher than the willingness of owners or portfolio holders to sell. Against this background, we expect to see an increase in office capital values by almost 5% overall in 2016 as a whole,” said Scheunemann.