German residential investment market demands staying power

Investors seek investment opportunities – capital inflow from insurance companies drives German residential construction

April 03, 2019

FRANKFURT, 3rd April 2019 – It seems as if the German residential investment market has run a little out of steam. In the first quarter of 2019, the transaction volume amounted to about €4.0 billion (24,000 residential units), which equates to only 45% of the year ago volume and is also 14% below the five-year average. If prices had not risen by about 4% compared to last year, the reduction in the transaction volume would have been even greater. Prices for second hand properties now exceed €2,100/sqm for the first time, while project developments are currently priced at €4,400/sqm.

The residential investment market is also suffering from a shortage of products, not a lack of interest among investors. Never in the last ten years has the largest transaction within a quarter been smaller: Swedish residential property owner Akelius sold a portfolio with about 2,900 residential and commercial units to Deutsche Wohnen. In total, only 14,500 units changed hands in the top ten transactions by investment amount. A year ago, the figure was more than 37,000 residential and commercial units, and this was not only because of the Buwog acquisition (27,000 units).

“Transactions that were supported by JLL, such as Agora or Carus, show that the structure of portfolios has to be adapted in increasingly more detail to the specific risk profiles of buyer groups. There are now few widely diversified portfolios on the market,” said Dr. Konstantin Kortmann, Head of Residential Investment at JLL Germany. Kortmann added: “The dilemma of many residential investors is that the residential property markets in many German regions need new housing space and the large housing groups want to exploit this momentum and grow further. However, the supply of portfolios and single assets is very limited and is being further reduced through political intervention by municipalities in the housing market.” The latent support of some political players for the Berlin citizens’ initiative, “Deutsche Wohnen & Co enteignen”, also jeopardises Germany’s biggest advantage in terms of location, namely the legal certainty of property for investors. That’s because only legal certainty for investors provides a solid foundation for solving the housing shortage.

The continued practice of the arbitrary exercise of municipal pre-emptive rights, which is not only evident in Berlin but also increasingly in Hamburg and Munich, reduces the appetite to create new housing. This also has implications for the construction of new housing because of strong competition from other uses in cities. “The municipal building land models stipulate that up to 30% of rent-controlled apartments must be built as soon as a construction project is subject to a development plan procedure. In central areas, this restriction means that the commercial use of available plots is increasingly attractive, particularly as commercial landlords are not subject to cap limits,” said Kortmann.

Even though listed housing groups are experiencing slower growth, they are still accumulating more assets than other groups. They invested €900 million net in German residential property. German special funds as the repository of institutional capital emerged as the second-strongest group of investors with capital growth of almost €700 million.

Despite the criticism of housing market policy, the public sector’s role on the residential transaction market should not be underestimated. Municipal housing companies are not only among the top three net investor groups with a net investment in existing properties of almost €640 million in the first quarter, but they also invested a considerable amount in new developments (€140 million). The biggest injection of capital into forward deals came from German special funds. Almost €380 million was invested in new developments, while a further €230 million came from insurance companies. “Thus insurance companies are the drivers of German housing construction, either directly or indirectly as they account for a large part of the capital inflow into the special funds already mentioned,” said Helge Scheunemann, Head of Research at JLL Germany.

Despite the headwind from political and social players, Berlin remains by far the most important German residential investment market in terms of location. About €1.1 billion was invested in the German capital, followed by Hamburg (€390 million) and Düsseldorf (€320 million).

 “Looking ahead to the rest of 2019, immense challenges on the housing market will continue to determine the transaction volume. Even if some larger portfolios change hands during the year, the transaction volume is not expected to exceed €17 billion by the end of the year. This means that the overall result would be in line with the five-year average,” said Kortmann.