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German commercial property investment market close to historic highs
Commentary including overview table [PDF]
FRANKFURT, 4th October 2017 – Experience has shown that political conflicts tend to have only a temporary downward effect on stock markets. That certainly proved to be the case after the recent German parliamentary election. After briefly posting negative figures, the German DAX index immediately returned to positive territory. Although the election result means that the formation of a new government is expected to be a tedious and protracted affair, at least the fact of Merkel’s re-election had been generally anticipated. From a business and economic perspective, the message is loud and clear: we cannot now rest on our laurels, matters must not be allowed to grind to a halt. Urgent issues such as the future of Europe, structural reforms of the employment market, immigration, energy policy and digitalisation must form part of the government agenda, and this requires a stable and effective government to be in place as quickly as possible. For now, the financial markets have put the political elections in Europe behind them, and appear to have emerged relatively unscathed. From a financial perspective, far more relevant issues include Brexit, President Trump’s use of Twitter as a political platform, and the interest rate policies of the Fed and the ECB. Property investors are also focusing on these topics. In a recent survey of German investors conducted by JLL, the majority of respondents cited Brexit as the political event with the greatest influence on the German property market, with expected benefits and stimuli for continental Europe and especially for Germany. This is expected to lead to rising investor demand and higher prices. The respondents cited interest rate policies or the current interest rate as the second most relevant issue. According to many investors, a reversal on interest rates in Europe is not apparent or expected in the near term. “Property yields therefore remain under pressure. As long as the current spread remains between property investment returns and government bond yields, investments will also remain at a high level on German property markets. At the same time, the United States is a frequent focus of attention. Here, the Fed has already announced further hikes in the interest rate, so that the interest rate gap is increasing between Europe and the United States. The question is, to what extent and how quickly the pressure will increase on the ECB to also adjust interest rates in Europe,” said Timo Tschammler, CEO of JLL Germany. He added: “But as long as this does not happen – and the continuing low inflation rates in the eurozone still provide the right conditions for interest rate hikes – the level of interest rates also remains the driving force for the German investment market.” Transaction volume increases significantly compared to the previous year The German commercial property investment market broadly maintained its strong momentum during the summer months. Although the investment volume in the July-September quarter was somewhat lower on a quarterly basis at €12.8 billion, the number of transactions did not signal a slowdown in demand. The fact remains that suitable products are still in short supply. This is also reflected in the results of our September survey: almost half of all respondents intend to increase their property portfolios on balance in the next 12 months, while a further almost 40% want to keep their assets. For the overwhelming number of investors we surveyed, the main stumbling block is still the shortage of available properties. In the first nine months of 2017, the total transaction volume in Germany amounted to €38.6 billion, which represents an increase of 19% compared to the previous year and is also the second-best result for a nine-month period since 2007. “At present, there is no reason why this development should not continue into the fourth quarter. In view of this fact, we are forecasting a full-year transaction volume of €50 billion to €55 billion. It will be interesting to see whether the record result of €55.1 billion achieved in 2015 will again be reached in 2017,” said Tschammler. Largest individual transaction of the year took place just before end of quarter – portfolio transactions make disproportionately large contribution to the result The largest transaction within the assessed quarter, as well as the largest individual deal in the year to date, took place at the end of the quarter and concerned the sale of the Sony Center in Berlin to a Canadian pension fund for around €1.1 billion. The second-largest deal in the third quarter involved the sale of 11 hotels to a globally active fund manager in a portfolio transaction worth €465 million. In the first three quarters, this deal managed to achieve fifth position. In general, the trend of buying portfolios has continued this year with seven of the ten largest transactions relating to portfolio deals, accounting for a combined volume of €5.4 billion or around 14% of the transaction volume in Germany. In view of this, it is not surprising that portfolio transactions increased disproportionately by 25% compared to the previous year. As well as the top 10 transactions, a further 17 individual and portfolio deals with a volume of €200 million or more apiece have been completed this year to date. “An increased number of deals transacted by institutional investors from the Asian region was observed in the first six months, but this trend did not continue into the third quarter. However, this group of buyers is still interested in the German market. We expect to see further deals above €100 million by the year-end,” said Tschammler. Slight increase in risk with regard to geographic focus Between January and end-September, the seven major investment strongholds Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart accounted for about €20.4 billion on aggregate. This represents an increase of 19% compared to the previous year. It also further consolidates a trend that was evident in the first half of the year: investors are also increasingly considering locations outside the metropolitan areas. The transaction volume outside the Big 7 reached €18.2 billion and was only around €2 billion below the volume recorded in the established markets. The increase in the volume over a 12-month period was also at a similar rate of just below 19%. However, the disparities between the different asset classes remain the same: as before, almost 70% of office transactions (based on the volume) took place in the Big 7. Berlin remains the undisputed investment capital The total investment volume in Berlin increased by as much as 74% to €5.9 billion compared to the previous year. In the third quarter alone, four transactions with a volume of €200 million each were registered in the German capital. “We don’t often see that in one city within a quarter,” said Helge Scheunemann, Head of Research at JLL Germany. Munich was in second place with €4.1 billion (+25%), followed by Frankfurt am Main with €3.3 billion. The banking metropolis currently presents a mixed picture. A strong performance in the lettings market contrasts with an investment market that has registered a year-on-year decline of 7%. “However, the outlook for the near term remains positive. Numerous investors expect events relating to Brexit to have a positive influence on investments in Germany and particularly in Frankfurt,” said Scheunemann. Apart from Frankfurt, Hamburg also experienced a significant decline in the transaction volume (-27%). Big-ticket transactions have so far been absent from this market, with the largest transaction in the recent quarter involving the sale of the Kaiser-Galerie for about €170 million. Retail property regains second place There was also little change in the popularity ratings of different asset classes in the third quarter. Office property remained in first position and also further increased its share compared to the first half of the year. Around €17.3 billion was invested in this asset class (45%). Retail property, which maintained its market share at a reasonably stable level (19%), was able to reclaim second place from logistics property. The underlying trend of significantly higher investor demand for logistics space remains in force, as also reflected by the development of yields. At the same time, the “mistrust” in the sustainability of bricks and mortar retailers does not (yet) appear to be very pronounced; purchase opportunities that arise, although very few, are exploited. “The transaction volume for retirement and nursing homes has been rising steadily, and accounts at least for around a billion,” said Scheunemann. Yields start moving in earnest again Following a brief pause in the second quarter, the prime yields fell again in the three months to end-September. It is difficult to predict whether yields have now reached a plateau. “However, we have noticed increasingly stronger expectations that rental prices will rise, particularly for office properties. Given the very robust economy and the expansion plans of many companies, the very positive overall outlook of the consumer markets is improving further, with positive consequences for price development,” said Timo Tschammler. The average prime yield for office properties in all seven strongholds stood at 3.39% at the end of the third quarter and was a further eight basis points below the value recorded for the second quarter. By the end of the year, we expect to see a further decline to 3.24%. In Berlin, it’s possible that yields could fall below another key threshold: for the first time, a “2” could come before the decimal place in a German office property stronghold. Combined with the expected rental price growth, a double-digit percentage increase in the capital value could again be achieved in 2017 for the third year in succession. “As already anticipated at the half-year point, the yield curve for logistics properties is also sloping sharply downward and has now reached an average of 4.70%. By the end of the year, we expect to see a further decline by around 20 basis points to an estimated 4.50% on average,” said Helge Scheunemann. There is notable discrepancy between supply and demand for commercial properties in city centres. As a result, there was again a need for a downward adjustment in yields here. The average prime yield for the Big 7 is now only 2.96%, with a slight downward tendency in the coming three months. On the other hand, net initial yields for individual specialist retailers and for shopping centres are stable at 5.40% and 4.00% respectively. “With regard to retail parks, prime yields fell by a further 20 basis points to 4.70% due to strong investor interest. We also expect to see a further slight compression here by 10 basis points before the end of the year,” said Scheunemann.
CEO of JLL Germany
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Head of Research at JLL Germany
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