Capital pressure keeps recession at bay

Property remains a pillar of strength even during the crisis-ridden year of 2020

January 08, 2021

FRANKFURT, 8th January 2021 – In addition to the coronavirus pandemic, which overshadowed everything last year, at least two other events stirred up emotions as well as entire societies, politics and economies in 2020: the United States presidential election and the final completion of the Brexit negotiations. When the new US president takes office on 20 January 2021, future dialogue with what is still the largest economy in the world should be conducted in a greater spirit of cooperation and dependability. The European Union and the United Kingdom also reached an agreement on Brexit shortly before the end of 2020, ending the seemingly endless debates and bringing clarity to Europe’s political and economic affairs.

“There is now light at the end of the tunnel, especially for the export-oriented German economy that is geared towards an effective global trade,” said Jan Eckert, Head of Capital Markets at JLL Germany, Austria, and Switzerland. Eckert added: “However, the general climate will remain unstable for now in view of the current coronavirus-related lockdowns in many countries. That is why governments and central banks around the globe will try to stimulate their economies with a combination of extremely low interest rates and massive spending programmes. The economic stimulus packages on both sides of the Atlantic will only be scaled back once the spread of infections has been contained. Nevertheless, central banks will keep interest rates at the current very low levels because a sustained economic stabilisation must first take hold in order to prevent setbacks. In this respect, it remains to be seen how effective this cocktail of low interest rates and rebounding economies will be. Catch-up effects in terms of investment and consumption spending by consumers and the corporate sector, with at least a temporary rise in interest rates, cannot be ruled out.”

“Looking back over 2020, it can be said that real estate has proven to be a stable investment for private and institutional investors. However, there is a question mark over whether this will remain the case in 2021,” said Eckert. The investment expert added: “However, we also expect to see a solid cash position on investment markets in 2021. Having said that, the extrapolated rental price growth from the pre-Covid-19 period, especially in the office and retail sector, is unlikely to be reflected in the pricing of transactions. The current demand from tenants and their willingness to pay rents, along with rising vacancies, has created a certain amount of scepticism among investors and a reluctance to evaluate potential. However, we are optimistic that the general economic data will improve in the second half of the year to such an extent that companies will resume relocation and expansion plans and thus halt the trend of falling lettings take-up.”

Transaction volume falls only slightly compared to the previous year

The lively activity on the German investment market, which was already evident at the end of the third quarter, continued into the last three months of the year. “The total transaction volume in the ‘crisis year’ of 2020 amounted to about €81.6 billion (including Living) and was therefore only 11% lower compared to the previous year,” said Eckert. Helge Scheunemann, Head of Research at JLL Germany, added: “Nevertheless, a glance at the individual quarters reveals that while the traditional year-end rally was noticeable, it was less dynamic.”

Although the transaction volume for the period from October to December amounted to €23.2 billion, accounting for over 28% of the annual figure, it did not come close to the volumes achieved in the fourth quarter of 2019 or the first quarter of 2020, both of which were unaffected by the pandemic. It is noteworthy that more deals were generated in 2020 compared to 2019, with over 1,700 single-asset and portfolio transactions. The average invested volume therefore remained at a constant level of around €48 million. However, the analysis also reveals that large transactions in the three-digit million range fell significantly by 35% in terms of volume and the number of deals, although this was more owing to a low supply in this segment than to a lack of interest from buyers.

“Capital pressure helped keep a recession at bay,” said Scheunemann, with reference to the investment market in 2020. He added: “Combined with the low interest rates, the ongoing capital pressure remains the driving force for property investments. In addition, numerous institutional investors have increased their respective property quotas, thereby generating additional demand. Portfolios were in particular demand, with around €37.6 billion invested in portfolio sales or company takeovers, which was 7% more than in 2019.”

Core investments in particular are still performing well. Even though prices continue to rise, such products are finding a sufficient number of buyers. “On the other hand, with value add and core plus products, the following maxim applies for now: wait and see. This is because it is proving more difficult to find buyers. There are often disagreements over pricing between seller and buyer, or the banks do not provide financing. In this regard, banks are taking a fundamentally more restrictive approach. They are imposing higher equity requirements and demand corresponding pre-letting rates for projects, which is becoming increasingly difficult to achieve in view of the weak demand on the office lettings market,” explained Eckert.

Living registers highest transaction volume - investments in office property picks up again – logistics establishes itself as a valuable asset class

There is less appetite for risk at present, and the focus in terms of segments is increasingly on crisis-resistant assets (Living, logistics, core-offices, retail properties with grocery stores). “In addition, there is heightened interest in alternative types of use such as data centres or healthcare properties. These are and will remain niche areas, and are not an option for all investors,” said Scheunemann.

At around €25.2 billion (31%), the majority of the invested capital went to the Living asset class with the largest single-asset transaction of the year: the 90% takeover of the Adler housing group by Ado in the first quarter. Office properties were a close second with a 30% share (€24.5 billion). “The year-end rally was particularly noticeable here. Some 41% of the annual volume was generated in the last three months alone, including the sale of the Silver Tower and the trading centre in Frankfurt for a total of around €1.2 billion,” said Scheunemann. He continued: “Is this a sign of full confidence in this asset class? Or is it simply taking advantage of good buying opportunities? From our point of view, the answer will only become apparent as 2021 unfolds, when companies make the decision to implement hybrid working models, with very different results depending on the industry and company, and when the current slump in demand on the lettings markets at least begins to bottom out. But one thing is clear: the office will live on. More home offices or remote working does not necessarily lead to fewer square metres in office buildings. High-quality fittings and feelgood factors are also becoming more important. This move to improve quality will at least keep office property prices stable. For selected prime locations, we even expect yields to fall further.”

Prices of sought-after logistics properties are also continuing to rise. More than €8.7 billion was invested here in 2020, which was €2 billion more than in 2019. As a result, the share of this asset class increased to 11%. The volume even just eclipsed the previous record from 2017. “This is partly owing to stable user markets over the medium and long term as well as the reinforcement of structural trends such as digitisation and growth in online trading. The trend towards more online shopping strengthened further in the recent quarter and is driving the demand from retailers and e-commerce providers for regional and local distribution centres. We estimate that for every billion in additional online sales, a further 70,000 sqm of logistics space is required. The biggest deal of the year turned out to be the acquisition of a Germany-wide portfolio with 14 properties by AEW Europe from Patrizia AG, for over €500 million,” said Scheunemann.

Mixed-use properties or portfolios are becoming increasingly popular with investors, accounting for a share of over 10% and investments of €8.5 billion. “They fulfil investors’ desire for differentiation and are a reflection of the trend towards “working, living and consumption” under one roof or within an interconnected neighbourhood,” said Eckert.

However, the environment in the hotel and retail property segments will remain challenging well into next year. In particular, the increased travel restrictions and the latest lockdown measures are clearly affecting companies in these sectors. Alternative uses are being sought for the properties in question and are supporting the trend towards hybrid buildings. Hotels account for just 2% of the total transaction volume, at around €2 billion. The transaction volume for retail property reached €10.4 billion in the full year, which was only 5% lower year on year. There is a strong differentiation within the sector, which is also corroborated by the current, very positive retail sales figures from the Federal Statistical Office for 2020. As before, specialist markets, retail centres and supermarkets and discounters accounted for the biggest share of €5.7 billion.

Transaction volume falls in the Big 7 cities; only Hamburg registers growth

The Big 7 cities (Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich, and Stuttgart) accounted for a total transaction volume of almost €40 billion. This represents a 49% share of the overall volume for Germany and is 25% lower compared to the previous year. Thus the relative loss increased again in the fourth quarter of the year, which points to rising interest in products and investments outside the established strongholds. This is also reflected in the figures: €41.7 billion was not invested in one of the Big 7, representing a year-on-year increase of 7%.

Hamburg remains the only one of the seven strongholds to register growth compared to the previous year. Around €5.6 billion was invested here, 24% more than in 2019. In all other cities, investments fell by between 18% in Düsseldorf and 57% in Stuttgart.

Prime yields show further differentiation

The last three months of the year also brought few changes to yields, with still only isolated cases of rising returns. “This mainly concerns the sectors and areas where, because of the pandemic, there is a loss of rent risk and value adjustments are to be expected as a result,” explained Scheunemann. He added: “There is evidence of a slight upward trend in yields for central commercial buildings. Here, the average prime yield in the Big 7 is 2.91%, which is seven basis points higher than a year ago. Returns for the absolute top properties in the very best locations should at least remain stable in 2021, while we expect yields for all other products to increase further. This is likely to be more pronounced the longer stationary retail that is not of systematic importance remains closed. This also applies to shopping centres, whose prime yields increased by 35 basis points to 4.85% over the course of 2020.”

The picture is completely different for “other” retailers that are still open. Here, the returns are still under pressure: for discounters, yields fell further to 4.60%, which is 20 basis points lower than in the third quarter. Supermarkets are even more expensive, with prime yields still at 4%.

The average office prime yield stood at 2.81% by the end of 2020 and is therefore 12 basis points lower compared to the end of 2019. "In all strongholds except Berlin, the peak values fell slightly again in the past twelve months and reflect investor demand for fully let core properties. We do not see an upward trend here either for 2021. On the contrary, if demand remains high, yields could even fall by another 10 basis points,” said Scheunemann.

As expected, logistics properties registered the biggest jump in yields in 2020. In a 12-month comparison, the yields fell by 37 basis points to an average of 3.38% across all Big 7 regions, with a further decline expected in 2021.

Eckert said: “What is the conclusion? Overall, the property investment market survived 2020 largely unscathed in spite of the crisis. External financing has become more challenging, and banks are forced to withhold more capital to provide for greater levels of risk. This reduces the potential to finance particularly risky commitments. With regard to investor demand, the differentiation that has already begun between asset classes, as well as within asset classes when considering the individual risk of an investment, will continue in 2021. But thanks to the high capital pressure and the low level of interest rates, investors will continue to seek investment opportunities in the German real estate market.”


[1] The transaction volume includes office, retail, logistics and industrial property, hotels, land, specialist property, mixed-use property and the Living asset class with multi-family houses and residential portfolios with10 residential units or more and 75% residential usage, sale of company shares (without a stock market listing), apartment blocks, student accommodation, retirement/care homes and clinics 


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