German investment market still significantly higher at the end of the first six months
Biggest stimulus package in Germany’s history brings liquidity and trust
FRANKFURT, 6th July 2020 – Liquidity and trust are two terms that have shaped both the financial and investment markets in recent weeks and months. “Politicians and central banks have pumped huge amounts of money into the market to maintain liquidity at companies. The aim was and is to restore trust through these supporting measures. That’s because trust is a prerequisite for bold as opposed to more hesitant investment activity, and for the avoidance of a lockdown by investors, users and consumers,” said Helge Scheunemann, Head of Research at JLL Germany. The largest economic stimulus package in Germany’s entire history to date was put together in a concerted action, equating to around 4% to 4.5% of the gross domestic product. The package consists of four large blocks: aid for consumers, companies and municipalities, and investment in the future. “The massive increase in government debt that accompanies this measure appears necessary because of the sheer scale of the crisis, and is also justifiable in view of the continuing low returns of German government bonds,” said JLL Germany’s chief researcher.
Even though the economy, boosted by the financial aid, is slowly getting back on its feet, market participants anticipate a delayed impact on the property market. “The financing environment will remain appreciably difficult until at least 2021. In the coming months, the economic impact of the pandemic on financial backers could become more tangible and more pronounced, such as in the form of non-performing loans,” said Scheunemann.
The development of the investment and rental markets will therefore be crucial for assessing the value of property as loan collateral. “Temporary rent arrears or even the complete deferral of rental payments are currently having a significant impact on pricing. This uncertainty paralyses the market. In any event, the value of property will be influenced far more in future by the different business models of users,” said Scheunemann. Who would have thought it possible that a company like Deutsche Lufthansa could be on the verge of bankruptcy, with a corresponding impact on the properties it uses? In contrast, real estate occupied by public bodies, food retailers, drugstores or health and research will certainly be valued differently.
Transaction volume in the first half of 2020 still well up on previous year – financing remains challenging
At first glance, the bare figures appear to provide a somewhat encouraging picture and would certainly generate different headlines in “normal” times and under “normal” circumstances. However, the cautious mood and the enormous discrepancy between transaction volumes in the first and second quarters bring little cause for celebration. In the first half of 2020, the transaction volume reached €42.5 billion and exceeded the previous year’s result by 31%. In the first three months, growth was more than 80%. The entire year will benefit from this first quarter, which will also remain an exception in 2020. The period from April to June therefore also have to be assessed in this context: their contribution to the half-year volume is 35% — proof that the coronavirus pandemic and its consequences have also reached the investment market.
“Of particular note is that while company acquisitions and investments dominated the first quarter, hardly any transactions of this type took place in subsequent months, also undoubtedly a result of the uncertain development and volatility on the stock markets,” said Scheunemann.
The rampant volatility is reflected in the statistics: the share of portfolio transactions fell sharply to around half of the volume in the second quarter. Nevertheless, in the first half of the year the volume increased significantly compared to 2019, reaching €24.4 billion. Single-asset transactions contributed 43% or €18.1 billion of the total volume. The largest transaction in the second quarter was the sale of 86% of Godewind to Covivo for around €1 billion, including properties. The largest single transaction took place in Munich, where around €240 million was paid for an office and commercial park.
There is an enormous amount of liquidity in the market, however, and numerous institutional and private investors are seeking attractive investment opportunities. As is so often the case in times of crisis, demand is increasingly focused on the core segment. “But not every property that was labelled as ‘core’ before the crisis is still classified this way. Products with long-term rental contracts and stable tenants, preferably government tenants, are in greater demand than ever. There will be no price discount for such properties, and indeed the opposite tends to be the case here,” said Scheunemann. In contrast, demand is falling for value-add products or project developments that are being constructed on a speculative basis or that do not yet have (sufficient) pre-letting quotas.
“Financing for core products remains stable, and banks and insurance companies continue to be active capital providers. The cost of financing has increased by around 30-70 basis points, but in relation to the lower returns for government bonds financing terms are almost the same as before Covid-19,” said Scheunemann. He added: “In contrast, the capital costs for value-add properties and project developments have increased significantly more on average by 100-200 basis points. And in the case of large-volume transactions, financing takes much longer to arrange than before the crisis. In particular, many lenders are checking the willingness of tenants to pay or existing losses of rent.”
Scheunemann added: “At this point in time, the forecast remains mixed. On the one hand, some sales processes are continuing or are starting up again, and some larger transactions could be completed in the next two quarters. On the other hand, as the year progresses the situation will remain difficult for the retail (with the exception of food retail) and hotel asset classes, which have been particularly affected by the crisis. As banal as it may sound, the fact that travel remains limited hinders the completion or continuation of some transactions. As long as the entry restrictions for people from certain countries are maintained, transaction activities will only function to a limited extent and predominantly at national level. Against this background, we expect to see a volume of around €70 billion for 2020 as a whole. This would represent a decrease of almost a quarter compared to 2019,” said Scheunemann.
Living remains the strongest asset class
At the end of the first half of the year, the Living asset class maintained its leading position as the sector with the highest transaction volume. From January to the end of June, around €14.7 billion (of which €4 billion in Q2) was invested in German residential portfolios, student accommodation, micro-apartments or retirement and care homes. This sector increased its share of the total volume to 35%, illustrating the strong demand for such properties even or especially in times of crisis. The importance of this sector was further underlined by the entry of the second property company (Deutsche Wohnen) into the DAX. We should also not forget that Vonovia has recently become the sixth-largest listed housing group in the world.
Office properties that were traded in the first half of the year accounted for a significantly lower share of 22% or €9.4 billion, which includes the largest transaction described above (the takeover of the Godewind office properties). The sale of an office complex in Berlin for around €400 million in the first quarter represented the largest single-asset office property transaction. In the subsequent three months, the largest transaction was the sale of a developer’s property to an insurance company in Munich for around €240 million. However, large-volume transactions in excess of €100 million have so far been rare. By the end of June, only 28 transactions in the three-digit-million range had been registered. Thus the number of deals in this segment has halved compared to the last two quarters of 2019. Mixed-use properties or portfolios are of much greater relevance. The proportion of such transactions, in which no specific type of use can account for more than 75% of rental income, is now 16% (€6.7 billion).
Retail properties account for a 14% share (around €6 billion). Specialist stores, retail parks, supermarkets and discounters account for €3.5 billion or more than 58%. As seen in the residential asset class, such properties are proving to be resistant to the crisis. The higher sales revenue in this segment should also have a positive impact on demand for property during the remainder of the year. In this segment, it is still the case that adequate products are in short supply. “It remains to be seen whether or not the reduction in value-added tax from 1st July will bring shoppers back to the high street. At least for bricks-and-mortar retailers, the wearing of masks and social-distancing rules tend to act as a deterrent, and turn shopping into more of a duty than a pleasure,” said Scheunemann.
Hamburg achieves biggest increase among the Big 7 – demand outside the strongholds is rising
The Big 7 cities accounted for a total volume of around €18 billion, equating to a 42% share of the total German transaction volume and corresponding to a 4% increase compared to the same period of last year. The transaction volume grew particularly strongly in Hamburg, rising by 83% to almost €3 billion. Properties from national portfolios also contributed to this growth. Thus Hamburg was ahead of Frankfurt (+26%), Düsseldorf (+23%) and Munich (+17%). Berlin remained the top city in terms of volume, however. Here, property worth €5.1 billion changed hands. At the same time, the German capital also suffered a significant double-digit decline (-24%) in a 12-month comparison – as was also the case in Cologne (-27%) and Stuttgart (-41%).
“It’s interesting to note that the trend towards greater regional diversification has accelerated. A year ago, 46% of the total German transaction volume took place in cities outside the Big 7, but this percentage has now increased to 58% — and that with a higher volume in absolute terms,” said Scheunemann. Around €25 billion was invested in markets outside the big cities. Scheunemann added: “Given the supposedly more defensive and risk-averse investment strategy of investors, this development seems surprising at first. However, this result is also partly attributable to the large M&A deals in the first quarter. For example, the Adler residential portfolio acquired by ADO Properties is primarily focused on locations outside the Big 7.”
Yields are slowly becoming more differentiated
Prime yields remained in robust form after the first six months. This at least applies to the office and logistics asset classes, and in some cases to retail properties as well. With an average office prime yield of 2.91% for the seven strongholds, the price level is even slightly lower than three months ago, and 15 basis points lower in a 12-month comparison. “German real estate proved to be remarkably resilient in the past three months, when the coronavirus pandemic was in full swing,” said Scheunemann. Although the number of transactions is falling, the crisis has not yet brought about a decline in investor demand. “Large private equity investors continue to accumulate huge amounts of capital, while Asian investors in particular are also intensively exploring the German market. In short, when it comes to security, trust and stability, the German investment market remains an attractive investment location in some areas. Ultimately, the completion of a deal is not the only important factor when determining the price; the number of offers in a bidding process and the price level established in these processes also support the stability of yields. The picture is similar for logistics properties, which are currently benefiting enormously from growing demand in the e-commerce sector. Here, the prime yield remains at 3.75%, which 15 basis points below the previous year’s figure,” explained Scheunemann.
In retail, returns are becoming increasingly differentiated. While specialty store products with a food retail focus, local supply centres and hardware stores are still experiencing strong investor demand, the structural problems experienced by shopping centres and central commercial buildings can now be seen in the development of prices. The average yield for stationary retail properties located on the high streets of the seven strongholds rose slightly by three basis points to 2.87%. Although shops have been able to re-open since May, this is far from being a return to normal, and it will be difficult or even impossible to catch up on lost sales. As a result, bankruptcies have increased, particularly in the textile sector, and vacancies are evident in city high streets. The average prime yield for shopping centres increased again, rising 55 basis points over the past 12 months to 4.75%.
"In the remaining months of 2020, we expect to see a similar development to that described for the first half of the year: no change in office, specialist retailer and logistics yields. In contrast, we anticipate a further increase in shopping centre yields,” said Scheunemann.
 The transaction market includes office, retail, logistics and industrial properties, hotels, land, special property, mixed-use property, and the Living asset class with multi-family units and residential portfolios with more than 10 units and 75% residential use, the sale of company shares (without a stock market listing), apartment blocks, student accommodation, retirement and care homes and clinics
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