Demand for real estate reaches new heights

New transactions record on the German investment market at the end of the ‘property decade’

January 06, 2020

FRANKFURT, 6th January 2020 – The last decade will rightly go down in history as the “property decade”. The positive development on the investment market not only continued in 2019, but culminated in an explosion of deals in a year-end rally that had been almost inconceivable in terms of its form and dynamism.

“The market is able to look back on an upswing that has now endured for ten years. Even the ever-present risks have not stopped the run on German property, despite the bitter reality of geopolitical conflicts, the global trade dispute and Brexit, terror, war and the flight of people. Regardless of these facts, even small positive signals in the dispute between China and the United States, for example, or the definite irreversibility of Britain’s exit from the European Union triggered such a motivational effect that transaction and investment processes which initially appeared uncertain were in fact realised,” said Timo Tschammler, CEO of JLL Germany.

Tschammler added: “On the basis of the low interest rates, it seems that property has become virtually the only investment option for institutional investors. And an increasing number of investors from Germany and abroad are gradually restructuring their portfolios and increasing the property component.”

Over the next five years, German government bonds with a volume of over €800bn will expire and will have to be reinvested. The previous interest rate on these government bonds was around 3% on average, which is significantly higher than the current rate of return. “Some of this capital should be invested in real estate, meaning that demand on the German investment market will remain high in the next few years,” said Helge Scheunemann, Head of Research at JLL Germany. According to the latest PwC/ULI survey, more than half of European investors surveyed want to further expand their real estate holdings in 2020, and German real estate will play a central role here. “Because of its federal structure and continuing economic and political stability, Germany is again well placed to be at the top of shopping lists for international and local investors this year,” said Tschammler.

Transaction volume with best year ever

The spectacular end to the year ensured that the German investment market[1] achieved a new record result. The fourth quarter alone registered an unprecedented €34bn, which has never been achieved in any previous quarter (the former record was set in Q4 2016 with €26.5bn). In the last three months of the year, 73 transactions in the three-digit-million or even billion-euro range were completed. “As a result, the total transaction volume including Living amounted to €91.3bn in 2019, with 187 transactions beyond the €100m mark,” said Scheunemann.

While the transaction volume was still broadly in line with the previous year at the end of the third quarter, it is now risen by a more significant rate of 16 % compared to 2018. “It had not been expected that this quantity of transactions would be completed at the eleventh hour, and the ensuing result significantly exceeded our forecast. At first glance the sheer number of transactions also seems to disprove the thesis that there is an insufficient supply of property and that the so-called ‘wall of money’ cannot be satisfied,” said Tschammler. He added: “The argument that there is a glaring supply shortage still basically applies because the 21 large-scale transactions, each with a volume of over €500m, accounted for almost €23bn or around a quarter of the total volume.

 

This extreme concentration of demand is exceptional and, in addition to direct investments, the route via the capital market is thus becoming increasingly important for investors. Investments in companies or the acquisition of equity stakes offers an attractive and worthwhile alternative way of securing property assets in times of short supply. Indirect investments accounted for a total of circa €12bn.”

The sale of Dream Global’s property assets to Blackstone topped the transaction list at the end of the year. The proportion of German real estate was around €3.2bn. Overall, single-asset transactions accounted for 62% of the total volume (€56.2bn). Portfolio sales continued to gain ground, boosted by the aforementioned company takeovers, and reached an annual result of €35bn, an increase of 24% compared to the previous year.

Office property attracts most demand, although alternative asset classes are becoming more desirable

Office property and property for residential purposes continued to dominate the German investment market in 2019. Around 40% of the transaction volume flowed into the office asset class and a further 24% into the Living category. In view of the increasingly challenging search for high-yield properties, however, greater emphasis is being placed on alternative asset classes such as healthcare facilities or nursing homes.

Retail property dropped to an historically low share of 12%. “There was a particular absence of large-scale shopping centre transactions. In contrast specialist retail products, especially large food retailers, are still in high demand among investors. In principle, however, retail property continues to be viewed critically and the structural change here is in full swing,” said Scheunemann.

Logistics halls accounted for a share of 7%. A higher share would have been expected in view of the dynamic e-commerce sector, but here there is simply a lack of new buildings and thus investment products.

Mixed-use property (no dominant asset class) is becoming increasingly popular with a 10% share of the transaction volume. “The combination of multiple uses in a building or district reflects the trend towards the increased interlinking of life, work and leisure and helps investors to diversify,” said Scheunemann.

Transaction volume in the Big 7 provides mixed picture – Munich grows by 65%

Considering the, at times, enormous pressure on capital for investors, it comes as no surprise that the Big 7 still accounts for the majority of the transaction volume. Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart generated a total volume of €52.6bn, which was 14% higher compared to 2018. This volume also represents 58% of the capital invested in German property.

“This value is in line with the average for the past five years and once again demonstrates the particular importance of the seven cities as destinations for national and international capital,” said Scheunemann. On the other hand, it should be noted that the performance of each city varies considerably. Berlin remains the undisputed leader with €15.8bn and an increase of 46% compared to 2018. Thus the German capital alone accounts for 30% of the capital invested in the Big 7. Munich is in second place with €10.9bn and 65% growth compared to the previous year, followed by third-placed Frankfurt with €10bn and a 14% decline. Four property strongholds experienced a decline in the transaction volume, and this was particularly marked in Hamburg with a drop of 24%. “The increasing concentration on the three cities Berlin, Munich and Frankfurt is certainly not a surprise and illustrates the enormous demand primarily for large-scale properties. Apart from a few exceptions, such opportunities in Germany are mostly available in these three markets,” said Scheunemann.

However, it is also a fact that cities outside of the Big 7 can offer attractive opportunities. After all, around €38.7bn was invested in these markets in 2019 — 17% more than in 2018. The individual volumes are significantly smaller here, which is particularly noticeable in the office property sector. Nevertheless, such investments outside the Big 7 can yield a return depending on the investment strategy. Here, however, an essential factor is how future-oriented and innovative the respective market is. The biggest transaction of the year outside the Big 7 took place in Erlangen, where Union Investment acquired an office property from Siemens Real Estate.

"Since on one hand the product shortage in the established property strongholds will not change significantly in the next few years, and on the other hand the purchase prices in some cases have already reached levels that will make it impossible for some investors to invest in the Big 7, there is likely to be a moderate increase in the future investment volume in secondary cities,” said Scheunemann. Germany offers high potential for diversification due to its federal structure and numerous innovative cities containing high levels of talent. In the Big 7, vacancies do not act as a deterrent given that the letting markets remain robust. On the contrary, there is still the potential here to increase rental prices. “Provided that they have sound market knowledge even of areas outside central CBD locations, investors can in some cases benefit from significantly stronger increases in rental prices. Local investors are likely to have a certain advantage here over their foreign competitors,” said Scheunemann.

Yields in both office and logistics segments continue to compress – retail parks are now more expensive than shopping centres

In the fourth quarter of 2019, the strongest asset class in terms of transactions continued to experience a moderate decline in yields for top products in the best locations: the average office prime yield for all seven strongholds was 2.93%, which was down slightly compared to the previous quarter. In a 12-month comparison, the yield was 18 basis points lower. For 2020, JLL currently assumes that prime yields will level off at this point.

For products or locations outside the prime and core areas, yields could continue to compress in the coming year. The distance to the prime yield, which was between 20 and 140 basis points in 2019 depending on the location and quality of the property, will thus narrow. In combination with the higher rents, capital values of office properties in the Big 7 continued to grow in 2019 with an average rise of 12%. In 2020, this growth should weaken to 4% due to the expected stabilisation in yields.

The strongest dynamic in yields is still evident in the logistics property segment. The initial yield continued to drop, reaching 3.75% in 2019. Yields have fallen by more than 240 basis points since 2014, and the distance from the office yield is at its lowest level ever with 82 points. “The strong demand for logistics property, combined with the benefits of a loose monetary policy, should continue to put downward pressure on yields in 2020,” said Scheunemann.

Scheunemann added: “Capital value growth rates for logistics properties also averaged 12% in 2019, again driven by the strong yield compression. Here, investors can expect to see further positive growth rates in 2020. The differentiation in retail yields that has already begun will continue in 2020.”

Yields for centrally located commercial buildings have remained stable in the Big 7 and averaged 2.84% at the end of 2019. In the meantime, lower returns are now being accepted for top retail parks that act as local suppliers (4.2%) than for premium shopping centers (4.5%). For the latter, the upward trend (an increase of 60 basis points since the low point in mid-2018) in yields in recent quarters will take firm hold.

 [1]The transaction volume encompasses  office, retail, logistics and industrial property, hotels, land, special property, mixed-used property and the Living asset class with multi-family buildings and residential portfolios including at least 10 residential units and with a residential use of over 75%, the sale of company shares with the acquisition of a controlling majority (without a stock market listing), apartment blocks, student housing, retirement/care homes and clinics.

 


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