German investment market still unaffected by pandemic at the end of the first quarter
Even property markets will not be immune
FRANKFURT, 6th April 2020 – Just a few weeks ago, all market participants were talking about a continuation of the property market boom. That was before the coronavirus began its grim journey. Since then, this has all turned out to be empty talk. A return to a new normality that will be required once the pandemic is over will take patience and time. Yet after only one week of lockdown in Germany, there were already calls for a relaxation of the confinement measures because almost all business sectors were complaining of massive cuts. “The fact is, a recession will come. And in contrast to the financial crisis of 2008/2009, the real economy is also significantly affected this time. How long will it go on for? It’s hard to predict. It will only be possible to provide information on this in the next few weeks and months, when all the effects of the pandemic have become apparent and government rescue packages are in place,” said Helge Scheunemann, Head of Research at JLL Germany.
Scheunemann added: “The support packages launched by governments and central banks worldwide will undoubtedly have an impact, and will help to maintain liquidity and capital flows. Flooding the market with money may be the only option right now to alleviate the crisis, but it’s not possible to foresee the long-term consequences for investors and lenders. At the very minimum, there are fears that the risk of inflation will increase significantly in the long term.”
While the US central bank has bought securities worth a trillion dollars in the past two weeks and is pushing ahead with its ‘whatever it takes’ measures, the European Central Bank has also pumped a further €750 billion into the market in addition to the €360 billion in existing bond purchases. “However, it is doubtful that this will keep even a partially functioning market running. Although the low interest rate will likely remain cemented in place for many more years to come, it is at least questionable whether the banks will be willing to provide the usual volume of borrowings in such an uncertain environment. A sufficient equity component is more important than ever. Attractive investment opportunities could arise over time, especially for investors whose debt ratio does not exceed 50% to 60%. Here, we will certainly see some Asian investors waiting for such an opportunity,” said Scheunemann.
Transactions volume remains unaffected in the first quarter of 2020
In the first three months of the year, the effects of the Covid-19 crisis had yet to be felt. Numerous processes and transactions had already been initiated or were in the final stages of negotiation, so that a “deal freeze” or a slump in the investment market is at least not yet apparent in the figures. “Nevertheless, March is likely to have been a turning point and the effects will probably become evident at the end of the second quarter,” said Scheunemann.
Under normal circumstances, at this point we would report that a new record has been achieved. The total German transaction volume amounted to around €28 billion (€18.3 billion for commercial real estate and €9.7 billion for residential property) in the first quarter of 2020. Compared to the same quarter of the previous year, this corresponds to a massive increase of 82%. Included in the figures are some very large company takeovers and investments (such as Adler’s almost 90% investment in Ado in the residential sector or Aroundtown’s 77.8% stake in TLG), which amount to a total of €11.3 billion. But even without these indirect real estate transactions, it would still have been a very strong quarter. More than 20 direct single-asset deals above €100 million also took place, mostly in the office sector.
“Owing to the current situation, it is not possible to provide a reliable forecast for the full year. However, looking beyond all the negative aspects, we can make some significant observations,” said Scheunemann:
- A number of institutional investors still want to invest in property
- We are still seeing several (high-priced) offers for certain products, especially office products
- Core products are in particular demand during a crisis
What’s next for the German investment market? The majority of owners and investors surveyed for the newly developed JLL-Thermometer assume that transaction activity on the property investment market in Germany will lose momentum. At the same time, 48% of investors say they are sticking to their transaction targets for 2020. These assessments provide a first indication of how the year will progress, as did recently published statements by numerous institutional investors that they want to maintain investment activity. The main obstacles are the lack of real current market values combined with the inability to view properties in person, which makes pricing more difficult, as well as the increased restrictions on credit from banks. “The property market, which is so strongly geared towards personal contacts, is yearning for confinement measures to be relaxed. It remains to be seen whether digital viewings will become fully accepted. For top properties without the need for renovation or a renovation backlog, this may still be the most possible and acceptable option,” said Scheunemann.
Overall, single-asset transactions currently account for only 39% of the total volume (€10.8 billion), a slight decrease compared to the previous year. Portfolio sales have increased significantly, boosted among other things by the aforementioned company takeovers. Their quarterly result amounts to around €17 billion, an increase of over 300% year-on-year.
Office property share is falling – diversification and risk awareness among buyers is rising
Office property transactions in the first quarter of 2020 accounted for a much lower share of almost 18% compared to 2019, although this is qualified by the mega-corporate takeovers classified as mixed use. Nevertheless, around €5 billion was still invested in this asset class. More than twice as much was invested in the Living asset class. Investors paid more 10.7 for residential portfolios, student housing, micro apartment or retirement and care homes. “Even though the latter is under special observation due to the current coronavirus pandemic, property that is linked to health in the broadest sense, for example medical supply centres and medical centres, should become of even more interest to investors in future,” said Scheunemann.
Retail property accounted for a slightly higher share of 15% compared to the previous year (around €4 billion). Retail stores, retail parks, supermarkets and discounters accounted for well over half, or as much as 80% in terms of the number of transactions. “Recent events have illustrated the importance of providing the population with everyday goods, making this segment fairly immune to the crisis. Initial results show that retail revenue is currently growing strongly in this sector. Property also benefits from this, and will attract further corresponding demand in the course of the year,” said Scheunemann.
Logistics property accounts for around 8% of the volume. This type of property provides a somewhat mixed picture for the past three months. On the one hand, logistics companies affected by the disruption in global trade have reduced warehouse capacity (industry and automotive). On the other hand, online retailers and companies in the food industry are desperately seeking warehouse capacity that is available at short notice. For example, Edeka, Aldi and Rewe alone have signed new lease contracts with a volume of around 1 million sqm in recent weeks. Retailers are primarily looking for small to medium-sized warehouses on the outskirts of large cities and, above all, flexible lease terms. In the immediate future it remains to be seen whether a) the positive user demand will continue and b) investors will also be interested in such properties as an investment product.
The remaining types of use account for around €6 billion, with mixed-use properties and portfolios accounting for the vast majority (€4.9 billion). This also includes hotels, which represent one of the most severely affected asset classes owing to the massive and ongoing travel restrictions. “The fundamental interest of investors is still there, but disrupted cash flows and low utilisation rates make pricing almost impossible at the moment, and this situation will continue at least for the next two quarters,” said Scheunemann.
Among the Big 7, Munich and Frankfurt show the strongest growth
In aggregation across all seven strongholds, around €11.5 billion is attributable to these large markets. This represents more than a 40% share of the total German transaction volume and corresponds to an increase of 31% compared to the same quarter of the previous year. In Munich and Frankfurt, the volume increased very significantly by 125% to almost €1.5 billion and 117% to around €2.4 billion respectively. Hamburg and Düsseldorf also registered growth. The transaction volume in Berlin remained at a high level, while Cologne and Stuttgart experienced declines of 15% and 44% respectively.
The transaction volume outside of the established markets also increased significantly in the first quarter. Around €16.5 billion was invested, an increase of 148% compared to the previous year. This significant growth is primarily attributed to the heterogeneous regional distribution of traded portfolios and company acquisitions. In addition to these transactions, a few single-asset and portfolio transactions in the €100-million range took place, especially in the logistics and retail segment. “Should investors pursue a more defensive investment strategy in the coming weeks and months, we expect transaction activity to lose momentum outside the core markets,” said Scheunemann.
Yields remain stable for almost all asset classes
“Yields in almost all asset classes were unchanged in the first three months of the year. Certain asset and risk classes were still under some pressure during this period, but owing to the developments in March, pricing is currently far more difficult. It will be a while before realistic prices emerge,” said Scheunemann.
Office prices remained at a high level in the Big 7, with an average office prime yield of 2.93%. This is 13 basis points lower in a 12-month comparison.
In the stationery retail category, the average yield is 2.84%. With shop closures and a ban on selling products, the transformation process that has been underway for some time is now picking up momentum. Online trade is seen as a winner in this crisis and is increasing its share of sales, even in the food sector. Local supply centres (supermarkets, retail parks with food retail tenants) are also benefiting from this trend and continue to attract investor interest. Yields currently stand at 5.00% for specialist stores and 4.20% for retail parks. Shopping centre yields are at 4.65%, which is 55 basis points more than 12 months ago.
“The next few weeks and months will be critical in terms of where yields are headed. At this point, we are not anticipating any significant upheaval or distress sales. Most financing arrangements in recent years should have been very sound. However, yield development will depend on how long this crisis is set to last and how deeply it will affect the real economy. For now, the most important task is to provide even more precise property-specific risk assessments than before, especially with regard to the tenant structure. In this context, the extent to which commercial tenants make use of the option to defer rent will also be important,” concluded Scheunemann.
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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