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News Release

Frankfurt

The best first quarter of a year ever recorded - German commercial property investment market continues to grow at a rapid pace


​Press release including overview table [PDF]

Charts [PDF]

 

FRANKFURT, 5th April 2017 – All remained quiet on the interest rate front during the first quarter of 2017. At the last meeting of the governing council in mid-March, the ECB also neither undertook nor announced any changes in monetary policy. This means that the schedule determined in December 2016 and the continuation of the bond purchase programme will be pursued at least until the end of 2017. The situation with regard to inflation provides one argument in favour of this expansive monetary policy. Some experts had already warned of sharp increases in the rate of inflation, but price rises in the EU were initially halted because energy base effects on price trends expired. However, higher rates of inflation - combined with positive economic data - in recent weeks brought about some movement in government bond yields. For example, yields of 10-year German government bonds increased to almost 0.5%. “Since inflationary trends are declining again, however, we do not anticipate a further significant increase in yields. At the same time, fluctuations cannot be ruled out. Over the course of the year, much will depend on the ECB’s view of its monetary policy and what statements it will make with regard to policy normalisation, what further upsets will occur on both sides of the Atlantic, and what the outcome will be of upcoming elections in the two European heavyweights France and Germany,” said Timo Tschammler, CEO of JLL Germany.
 
Tschammler added: “In the event of a further increase in government bond yields, in real estate terms it remains to be seen on one hand whether or not institutional investors would increasingly return to the bond market. While this would weaken investment demand on the property markets, we believe the markets would be able to absorb this effect. This is because some of the pressure would also be taken off real estate yields, particularly for core properties. Furthermore, this would in no way be linked to a complete abandonment of the property asset class. On the other hand, rising interest rates also help lessen the risk compared to property yields. This effect is strengthened if property yields also fall at the same time. Indeed, the gap between yields fell from around 330 basis points to around 300 during the last three months. Nevertheless, this is still an attractively high figure by historical standards.”

  
Transaction volume amounts to €12.6 billion
 
In any case, the German commercial property investment market got off to a strong start in the first quarter of 2017 and was able to maintain its rapid pace of growth. The transaction volume in the first three months amounted to a total of €12.6 billion. “In terms of the volume, this is the best first quarter ever recorded and also represents almost 60% growth compared to the first quarter or 2016,” said Tschammler. Particularly worth noting here is the fact that this result was achieved without the help of a single deal in the billion-euro range. The largest deal in the quarter concerned the sale of a nationwide logistics portfolio for around €975 million, followed by transactions all below €300 million. “In contrast, we saw an unusually high number of deals between €50 million and €100 million. Transactions in this category amounted to around €3.2 billion,” said Helge Scheunemann, Head of Research at JLL Germany.
 
“The general paucity of products on the German market that has been increasingly lamented in recent weeks and months is a situation we are unable to corroborate at present. Although demand continues to outweigh supply, and the transaction volume could have been higher still if more products had been available, sellers are increasingly exploiting the positive market conditions to sell off properties,” said Tschammler. He added: “It is also always important to note in this context that not all products traded on the market find a buyer. Security, detailed examination and solid financing remain the hallmarks of the German market, which has been on a steady upward trend since 2010 without any signs to date that this trend is about to be reversed or has been misguided.”
 
In the first quarter of 2017, there was little change in terms of the distribution of the transaction volume between individual and portfolio deals compared to the previous year. Individual deals accounted for around 72% of the volume, with portfolio transactions responsible for the remaining 28%. The top 10 deals are split equally between individual and portfolio deals with five apiece. However, year-on-year growth in portfolio transactions was much higher: the volume more than doubled.

 
Above-average growth in the Big 7 – strong momentum on the Rhine
 
The seven major German investment markets, Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart, accounted for around 46% of the overall transaction volume in Germany (€5.8 billion) in the first quarter of 2017. Although the volume increased by 44% compared to the first quarter of 2016, the below average growth caused the relative share to fall by 5 percentage points. In other words, towns outside the top 7 cities increased their share of the German transaction volume in the past 12 months. “This was due to transactions in the three-digit-million range in the recent quarter. However, it remains to be seen if this current situation will take hold in the coming quarters and thus signal an increased willingness to take risks,” said Scheunemann.
 
There was another change in the ranking of the Big 7, with Munich resuming its leading position as Germany’s investment capital. Around €1.6 billion was invested in the Bavarian state capital, representing a 47% increase compared to the first quarter of 2016. Berlin was close behind with €1.5 billion. It is no coincidence that both cities each accounted for three of the top 10 transactions. However, Cologne and Düsseldorf made the biggest jumps in a 12-month period. Here, the transaction volumes increased by almost 260% to €610 million and 108% to €520 million respectively. In contrast, the volumes fell significantly in Hamburg and Stuttgart. The absence of large-volume deals was particularly noticeable in both cities.
 
“In the case of all analyses it should not be forgotten that they are just a statistical snapshot of a quarter. Numerous portfolios and individual properties from all asset classes are in or close to the marketing stage, and rankings and shares could still change during the year. However, in our view the Big 7 will continue to dominate large-volume transactions particularly in the office sector. And despite the increased prices, there will be no “run” on properties outside the established markets. At the same time, we expect to see growing interest in real estate outside the top cities due to the higher yields that are achievable,” said Scheunemann.

 
Is logistics property set to overtake retail?
 
Office property has again been hugely popular with investors this year. Around €5.2 billion was invested in this asset class - or 41% of the overall transaction volume in Germany. Retail property was next with an 18% share (€2.3 billion), followed by warehouse/logistics property with a 16% share (€2 billion). Capital invested in the latter sector increased significantly by 140% compared to the first quarter of 2016. The loss of momentum in stationary retail lettings seems to have left its mark on the investment market. “ An end to long-term rental growth seems to have been reached in many cities. While e-commerce is having a negative impact on the performance of retailers, the effects are more positive for the logistics segment with new requirements for location and spaces,” said Scheunemann. Mixed-use properties, with combinations of office and retail space or office and residential space, account for around 11% of the transaction volume, with hotels generating 9%. The remaining 5% relates to development land or special properties.

 
Pressure on yields continues unabated
 
 
The strong demand ensured that initial yields also fell further at the start of the year. The average prime yield for the Big 7 fell by 9 basis points from the fourth quarter of 2016, and by 66 points year on year, to 3.47%. Thus office properties are more expensive than high street retail properties for the first time, with retail yields averaging at 3.48% across all seven strongholds.
 
“We do not expect to see a reversal of this trend at least until the end of the year. Office properties will become more expensive and yields will probably fall by a further 15 basis points. Coupled with the expected growth in rental prices, this will also result in new record levels for capital values. For instance, a square metre of prime office space in the seven strongholds will cost €10,500 on average by the end of the year, an increase of 11% compared to 2016,” said Tschammler. In the meantime, prime yields in all Big 7 cities now have a three before the decimal point, and the continuing pressure is felt in all office markets where the vacancy rate is heading towards 4% or below.
 
Aside from office properties, yield compression is only affecting warehouse/logistics properties, albeit in a somewhat weakened form. Yields dipped below 5% for the first time and reached 4.91% on average for all seven logistics regions. Yields for individual specialist stores fell by 5 basis points to 5.40%, while shopping centres and retail centres respectively fetch 4.00% and 4.90% as before.