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News Release

Frankfurt

Commercial property investment markets caught in crossfire between pressure to invest and Brexit impact at halfway point of 2016


​Press release including overview table [PDF]

Charts [PDF]

 

FRANKFURT, 4th July 2016 - There is no doubt that Brexit will leave its mark on Europe both from an economic and a political standpoint. Some research institutes have downgraded their already weak growth forecasts. “However, a great deal will depend on how much time the exit process will take, how the two-year exit process will be managed and what status the United Kingdom will eventually have,” said Dr. Frank Pörschke, CEO of JLL Germany. Pörschke added: “In the short term, the financial markets in Germany will also remain nervous. Thus the monetary policy of the European Central Bank will de facto prevail in the coming years. Depending on the progress of the negotiations, the Central Bank will not only continue its policy of cheap money but also potentially extend it further through the expansion of the bond-repurchasing programme. In this respect, it can be assumed that the current low interest rates will prevail for the next three to four years. Because as well as Brexit, it is also wise to keep a close eye on the myriad risks that are as yet unresolved. A particular risk for Europe as well as Germany is the sluggish growth in emerging markets and especially China. A hard landing in China would have several major negative implications for Germany’s export-based economy, translating into significantly lower growth rates.”

 
Transaction volume in Germany loses momentum in the first half of 2016 compared to last year
 
After registering a weak first quarter compared to the corresponding period of 2015, the transaction volume settled at a similar level in the second quarter of 2016. In the first six months as a whole, the total transaction volume for commercially used property in Germany amounted to €18 billion. This was 25% lower than in the previous year, primarily because the supply of properties was far from adequate. “By the end of June there was still no evidence that this situation was brought about by a drop in demand. It is clear, however, that transaction processes are lengthy and that properties are examined very closely. While this is nothing new, it cannot be stressed enough given that the current market environment continues to fuel discussions about a property bubble,” said Timo Tschammler, member of the Management Board at JLL Germany. Tschammler added: “In our view, sellers are now only initiating sales processes for those properties and portfolios that have good marketing potential in terms of building quality, occupancy level and location.”
 
Large transactions are still in demand. In the first half of 2016, the number of transactions equal to or larger than €100 million amounted to a total of 29 and thus accounted for almost a third (€5.8 billion) of the overall transaction volume in Germany. 
  
Tschammler: “It remains to be seen what consequences Brexit will have on the investment market in the second half of the year. On one hand there are early indications that Asian investors are reviewing their entire European investment activities. They tend to look at Europe in its entirety, and Germany could therefore also be affected by a decline in demand from this region.”
 
He added: “On the other hand, it seems possible that the lack of clarity and certainty in the UK will prompt investors to focus more on Continental Europe, whereby capital flows could also then be diverted to Germany. This complex and conflicting situation means it is extremely difficult to provide a reasonable forecast for the year as a whole. However, the €50 billion that was predicted at the beginning of the year now seems an unrealistic target in view of the half-year result, even though a few large transactions are currently going through the sales process.”
 
In the first six months of this year, foreign investors slightly increased their business activities in Germany during the second quarter. However, their share of the overall transactions volume is likely to be well below 50% for the first half-year period. Foreign investors only slightly outweigh domestic investors in big-ticket deals of €100 million and above. In terms of investor origin, the UK, USA and France remain the usual sources of capital. 

 
Sharp decline in portfolios – broad spread of players and asset classes
 
While the number of portfolio deals increased again somewhat in the second quarter, around 72% (€13.1 billion) of the commercial transaction volume related to individual deals in the first half of 2016. Portfolios accounted for only €4.9 billion, representing a decrease of 43% compared to the first half of last year.
 
Some 17 portfolio transactions with a value in excess of €100 million apiece took place in the first half of the year. These sales accounted for 73% of the total portfolio volume. A noticeable feature here was the broad spread of investments: all asset classes were represented in the top 10 including hotel portfolios, retail parks, specialist retail stores and care homes. Portfolio investors also came from a wide field and included traditional institutional investors such as insurance companies as well as private equity funds. This situation reflects the diversified investor profile on the German market as well as the desire and necessity to achieve the broadest possible base across all asset classes for each portfolio.
 
With regard to the asset classes, office properties accounted for about 42% (approx. €7.6 billion), followed by retail with 23% (€4.1 billion). The remaining shares are distributed among hotels with almost 12%, storage and logistics properties with a 10% share, mixed-used properties (approx. 5%) and other asset classes and development plots with a combined share of 7%.
 
“Office lettings markets are currently in good shape and provide a solid basis for investments in the office property asset class. They are also of increasing interest to investors that are prepared to accept higher risks with regard to location and occupancy levels,” stressed Tschammler. He added: “It is especially the case for office properties that a regular cash flow from rental payments is of increasing importance to investors because this is the only way to ensure good revenue streams in future. Against this background it is imperative for investors to focus on tenants, users and their requirements.” In this context it is also important to question whether traditional ways of thinking can be maintained here. “Numerous investors are already asking themselves this question: what is more sustainable, a traditional 10-year lease contract with a bank or a five-year contract with a business centre operator?” said Tschammler.
 
 
Transaction volumes decline in equal measure in the Big 7 and outside the strongholds – Hamburg proves to be a positive exception
 
In the first quarter of the year the transaction volume outside the Big 7 was unchanged compared to the previous year. However, as was also the case in the Big 7 the volume declined by 26% in the first six months. By the end of June the transaction volume in the Big 7 amounted to €9.6 billion. Only one city was able to buck the trend: in Hamburg, the transaction volume increased by 10% to €2.1 billion. As a result, the northern city topped the ranking of the Big 7 for the first time. The other strongholds registered declines of between 12% in Stuttgart and 53% in Cologne. Even Berlin, which has reported plenty of success stories in previous quarters, saw its transaction volume decline by a third to just over €2 billion - which was still a very good result compared to the five-year average (€1.56 billion).

 
Strong yield compression – will “3” be the new “5” for office properties?
 
Following a temporary respite in yield performance in the first quarter of the year, the months from April to June were marked by strong yield compression. In the office segment, the net initial yield for the Big 7 fell on average below 4% for the first time. The actual average rate is 3.93%, a decline of 20 basis points compared to the first quarter and also the strongest yield compression within a quarter since 2000. Thus the price structures of office properties are coming ever closer to those of typical high-street retail properties in prime city locations. Here, average prime yields in the Big 7 are 3.70% following a further, albeit slight, decline (by 5 basis points). This was also true of other retail products: yields for shopping centres and retail parks fell by 15 basis points respectively to 4.1% and 5.10%, while individual specialist stores held firm at 5.50%. Logistics and storage properties registered no change following some sharp reductions in yields in the last few quarters: in the Big 7 logistics regions, the average yield remained at 5.27%.
 
“There are no indications that this upward trend in prices will come to an end in the short and medium term. It will certainly continue at least until an end to the ECB’s zero interest rate policy is in sight,” said Helge Scheunemann, Head of Research at JLL Germany. He added: “The Brexit vote has created precisely those factors that have again deferred the ending of loose monetary policy for an indefinite period. Combined with the resulting uncertainty, this is pushing investors towards safe haven assets such as property, with a particular focus on typical core properties in the Big 7.” This development is clearly reflected by the DAX 30: at least, shares in property company Vonovia increased in a one-week period. Although Vonovia is a residential property company, such a development nonetheless indicates that investors are now veering more towards defensive and conservative investments. This applies both to indirect equity investments as well as direct investments in commercial properties.
 
The strong yield compression within the first six months has left its mark on office capital values. In a one-year comparison, values grew by a healthy 14% across the Big 7. In the second quarter alone, values increased by 6.9% and thus represented the strongest quarterly growth since the end of 2006. “Based on our prediction that yields will drop a further 10 basis points by the end of the year and will be accompanied by a 3% increase in prime rents, two-digit capital value growth of almost 12% is also expected for this year. This will again outperform last year’s figure,” said Scheunemann.