Commercial residential investment market exceeds forecasts after achieving €18.7 billion in 2018

Political measures unsettle institutional residential property investors

January 07, 2019

FRANKFURT, 7th January 2019 – The continuing strong demand from occupiers and investors produced an above-average result on the German market for commercial residential property investments* in 2018 compared to the five-year average (€16.9 billion), with a total transaction volume of €18.7 billion and 131,200 traded residential units (2017: €15.7 billion and 130,700 units). This exceptional result was achieved despite new regulatory and bureaucratic measures that saw investors facing more stringent conditions last year. Higher transaction volumes have only previously been achieved in 2005 (€19.8 billion) and 2015 (€25.2 billion).

Since the number of traded properties and portfolios fell slightly, while the number of traded units increased only by a small amount, last year’s growth was almost entirely owing to higher property prices. Compared to the previous year, the average cost for a residential unit increased almost 20% to €142,000 or €2,200 per square metre. Five years ago, prices were 70% below this level.

Dr. Konstantin Kortmann, Head of Residential Investment at JLL Germany, commented on what the market can expect in 2019: “Even if developers, municipal housing companies and large housing companies build more new housing, it is likely that the overall transaction volume will fall. Sustained price growth and the tendency to invest more in special segments such as micro apartments and student accommodation will not fundamentally change that. However, a transaction volume in line with the five-year average at about €17 billion should be achievable.”

Apart from the largest transaction of the year, the acquisition of Buwog in Austria by the German housing group Vonovia including around 27,000 German units for a purchase price of approx. €2.9 billion including liabilities, only three other portfolios with more than 4,000 residential units changed hands. More than 90% of the transactions involved fewer than 800 residential units and generated close to €10 billion overall.

The acquisition of Buwog alone ensured that listed housing companies again accumulated the highest asset volume, investing a net amount of some €3.6 billion. “These companies will only be able to retain their leading position in future if adequate large portfolios or companies come onto the market,” said Konstantin Kortmann. However, this is not expected to be the case because market consolidation in Germany is now at an advanced stage. “Further growth can either be achieved through investment on international markets — a path that is already being taken by some listed German housing groups — and/or development of the existing portfolio,” added Kortmann.

In this respect it is also necessary to concentrate more and more on small individual transactions that hold their value. Pension and special funds are active in this segment. Last year, they primarily focused on medium-sized and small transactions, and together with public housing associations were able to claim positions 2-4 (€4.9 billion overall) in terms of asset generation. Residential property developers also generated a considerable transaction volume. As the most active group of sellers, they offloaded around 20,000 units for a total market value of almost €5 billion, corresponding to an increase of 40% compared to the previous year. However, most of this growth was attributable to price growth per unit.

The commercial residential investment market continues to be dominated by national investors. Less than a quarter of the capital came from abroad, and included the transaction carried out by Danish pension fund PFA and investments by British and U.S. investors, amounting to a combined €2.2 billion. This means that foreign activity declined in 2018 compared to the previous year and was broadly in line with the last five years.

The pressure to borrow is much higher among German investors, particularly among pension and insurance funds, because of the continuing low interest rate policy of the ECB. “Current prime yields of 2.7% in the Big 7 are also better than low-risk government bonds for these conservative investors that invest for the long term,” said Helge Scheunemann, Head of Research at JLL Germany. Investments with initial yields of well below 3% could also be a good asset due to the expected rental growth in properties that are currently let below the market price.

“The increasing regulation and intervention by state and local government collide with the evershrinking supply on the commercial residential investment market,” said Konstantin Kortmann. The introduction of rent caps in previous years was aimed at limiting rental growth, and in November 2018 the grand coalition agreed on further stringent measures that are now to be implemented in the 2019 legislative process. In particular, the scope to increase rents through the apportionment of refurbishment costs is to be more restricted.

“In addition to these more stringent measures, some cities took a more proactive approach than in previous years to the pre-emptive right of purchase for properties,” said Kortmann. This was especially the case in Munich and Berlin. In the Bavarian capital, 300 residential units in the Century portfolio were acquired by the GWG München housing association. As a result the original buyer, the Danish pension fund PFA, which hired Domicil as its asset manager, is now only able to call part of the portfolio its own. Kortmann added: “The municipal pre-emptive right is exercised even more frequently in Berlin. A legal construction is being used that aims to prevent the acquisition of around 700 units by the original buyer Wohnen SE, whereby pre-emptive rights of the tenants are used but the residential units are then passed on to the municipal housing company, Gewobag. Berlin is a pioneer in Germany with regard to the exercise of pre-emptive rights in specially protected areas with a preservation statute, but other municipalities with a tense housing market such as Hamburg are following suit by adopting this practice for the remunicipalisation of properties.”

Kortmann added to his point by saying: “Faced with the strong growth in prices, which is particularly evident in major cities, elected political representatives are taking action at all levels. In addition to the housing summit held by the federal government in September and more stringent rent caps, municipalities are becoming increasingly active participants on the investment market. However, the planned measures to increase housing subsidies should actually be able to produce a positive effect for tenants as rents will be reduced for households with lower incomes. Additional tax depreciation options could also help to increase the new supply of housing.”