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News Release

Frankfurt

German investment market ends year with extraordinary strong fourth quarter 


​Press release including overview table [PDF]

Charts [PDF]

 

FRANKFURT, 5th January 2017 – Monetary policy and political risks were two factors that shaped 2016, and will continue to define global events in 2017. “Disruptive” has always been a characteristic of digitisation, but can now be safely applied to describe political developments in view of the almost daily rhythm of discernable alarm signals. With elections looming in Germany and France, as well as the uncertainties related to Brexit and the relatively unpredictable behaviour of the new U.S. president, politics could play an even more significant role. In the midst of these upcoming decisions on which political direction to take, both the Fed and the ECB are responding with monetary policy measures that are virtually impossible to predict. While the Fed has already signalled a change in its zero interest-rate policy with a hike in U.S. base rates last year, the European Central Bank is still grappling with a continuing weak economic situation, the ongoing bank crisis - which has also been further exacerbated in Italy - and low inflation in the Eurozone. A number of as yet unanswered questions are already hovering over this year, fuelling yet more uncertainty. And (financial) markets do not like uncertainty. In the past, a loss of confidence has repeatedly acted as a trigger for interest rate rises (eg the discussion about Eurobonds). Even though stock markets usually recover quickly from political shocks, the overall political climate is currently on uncertain ground.
 
“According to all fundamental market indicators, property markets will continue to flourish nonetheless. This unprecedented interest in real estate - at least in our part of the world - is very likely to continue, regardless of which sector,” said Dr. Frank Pörschke, Member of the EMEA Management Board, CEO JLL Germany. Pörschke added: “The property asset class has gained considerably in maturity and autonomy. It is an indispensable part of every professional investment strategy and forward-looking portfolio, whether it takes the form of a direct investment or an indirect investment via a fund or shares. At the same time, property is of great relevance to private investors as a vehicle for retirement provisions in times of uncertainty such as these.”
 

2016 transaction volume ranked in third place
 
Following six years of consecutive growth (2010-2015) and a record volume in 2015, it seemed unlikely until well into December that the transaction volume on the German commercial investment market would reach the €50-billion mark. However, an unusually strong final spurt involving numerous large individual and portfolio transactions ensured that the year ended on a high note. Thus the 2016 transaction volume of €52.9 billion was only about 4% lower compared to 2015 and was ranked third behind 2007 (€54.billion) and 2015 (€55.1 billion) in the long-term statistics. “Whether the growing insecurity gave the market a final push and brought forward the signing of transactions remains a matter of speculation. It is also not proven if there was a significant shift in the flow of capital from the UK to Germany,” said Timo Tschammler, Member of the Management Board at JLL Germany.
 
“The historically low interest rates are still the driving force behind the enormous capital investment requirements of all institutional investors. However, it is becoming increasingly challenging to find adequate products to satisfy this need. This essentially applies to all asset classes used for commercial purposes. The fact that the transaction volume was lower last year compared to the previous year is ultimately due to this supply shortage,” emphasised Pörschke.
 
Last year brought little change in the structure of the transaction volume in terms of single asset and portfolio deals compared to 2015. Individual transactions again accounted for 65% of the volume, but the purchase prices for four of the five largest portfolio transactions in 2016 amounted to more than €750 million each. It is to be noted, however, that large transactions were of marginally less significance in 2016. The 103 deals above €100 million amounted to a total sum of over €25 billion and still accounted for almost half of the overall volume, but this was slightly down on 2015 when three-digit-million-euro transactions accounted for a share of over 50%.
 
“Looking ahead to 2017, this year will be shaped by the political environment to an almost unprecedented degree. A number of elections are pending that could upset the political party landscape in countries such as France, the Netherlands or even Germany. Against this backdrop, it remains to be seen what repercussions this will have for the future economic development of the U.S. and European markets in particular, and how the central banks will ultimately react,” said Tschammler. He added: “The era of zero interest rates at least appears to be over. As inflation rises and yields increase on the bond markets, investors will again turn their attention to other financial market products, especially government bonds. Thus the capital pressure on property will ease somewhat. Germany retains its label as a ‘safe haven’, and still offers good investment opportunities in view of its relatively strong economic and real estate market data. In this respect, it is certainly possible that the transaction volume could again reach between €45 billion and €50 billion in 2017.”

 
Slight dip in demand in the Big 7 — Frankfurt reclaims its position as the investment capital
 
In 2016, Germany’s seven largest investment markets (Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart) accounted for a combined share of around 56% of the total German transaction volume (€29.6 billion). Although the volume was about 5% lower compared to 2015, the relative share was nevertheless unchanged. The €3.3 billion Office First Portfolio, whose office properties are mostly located in the Big 7, had a positive impact here. “By implication, this indicates that at least €23 billion was invested outside the established investment markets — around €1 billion less than in 2015,” said Helge Scheunemann, Head of Research at JLL Germany.
 
Either Berlin or Munich led the Big 7 ranking during 2016, but at the end of the fourth quarter Frankfurt was able to reclaim its position as the investment capital in impressive style. A number of large transactions were successfully completed before the end of the year with almost €7.3 billion invested, which was 20% more than in 2015. Munich was in second place with €6.4 billion and an increase of 11%. The German capital Berlin only then emerges in third place with a volume of almost €5 billion. This represents a 38% decline compared to 2015, although that was admittedly an outstanding (record) year. While both Düsseldorf (-24%) and Cologne (-12%) registered a decline in their respective investment volumes, Hamburg recorded a 14% increase to at least €4.8 billion and Stuttgart saw a 7% rise to at least €2 billion.

 
All asset classes feature on the shopping lists of national and foreign investors
 
Office property remained the preferred asset class of investors in 2016 and accounted for around 45% (about €24 billion) of the overall volume, followed by retail buildings with a 23% share (€12 billion). Industrial/ogistics properties and hotels each accounted for a share of about 9%, whereby real estate used for logistics purposes achieved a new record result of €4.7 billion. Mixed-used properties accounted for around 6%. The remaining 7% of the volume related primarily to investments in special properties such as nursing and old people’s homes. “There has been a noticeable rise in demand for properties that are used for less well-established purposes as investors seek attractive and more lucrative alternatives from which they can expect a higher yield. For instance, far more was invested in nursing and old people’s homes than in 2014 and 2015 combined,” said Scheunemann.
 
“Across all asset classes, the German property market has lost none of its attractiveness for foreign investors. In fact, these investors have even stepped up their activities here and have expanded their real estate portfolios,” stressed Timo Tschammler. Their share of the commercial transaction volume now stands at 45%, which is slightly above the average for the past five years (43%).


Further yield compression with increasing capital values
 
The strong market demand has in turn brought about a further decline in initial yields over the year. In 2016, the average prime yield for office property in the Big 7 fell by 59 basis points to 3.56%. “This is the strongest yield compression within one year during the last 10 years,” said Scheunemann. In addition to this further compression in yields, rents also increased again in 2016. Thus office capital values in the Big 7 increased by 20% on average during 2016. “In 2017, the upward trend of prices will probably slow down significantly to about 7%. Rental price growth and a realistic estimate of growth potential will be all the more important for investors,” said Tschammler.
 
Yield compression also affects the other asset classes, although to a lesser extent. Strong demand combined with a significant shortfall of good products had a particular impact on retail warehousing parks. Here, initial yields fell 35 basis points to 4.90%. Yields for retail high street buildings in city centres dropped 24 basis points and now stand at an average of 3.51% across the Big 7. Yields for shopping centres also declined by 25 points to 4.00%. Yields for warehousing solos units, on the other hand, fell only slightly by 5 basis points (to 5.45%). Investors have also proved to be aggressive on prices for industrial/logistics properties — a reflection of the record transaction volume achieved in this segment. Averaged over the Big 7 logistics regions, the yield fell by 26 basis points year-on-year to 5.01%.

 
No fundamental change in investment strategy
 
Investors have not made any fundamental changes to their investment strategy despite the higher prices, although their willingness to accept risk has risen slightly. “Certainly in the case of office properties, investors have extended their search radar and are also tending to consider good properties in the secondary locations of top cities. Yields are also falling in these areas as a consequence. However, the gap between these and prime yields is still wide enough to cushion the higher risk involved,” noted Timo Tschammler.
 
More than 80% of the capital invested in office properties went to one of the Big 7, which by implication means that purchases in this asset class were more modest in other markets - also partly due to the limited supply in these locations. “But this also indicates that market players are not prepared to take on all risks. The rather conservative stance of banks towards the provision of finance also acts as a further regulatory force on the market. The increasingly stringent regulation of the supervisory authorities limits the lending of credit to finance investments other than classic core products,” said Tschammler.