German residential investment market - quo vadis?

Decline in transaction volume to three quarters of the previous year’s level

July 04, 2019

FRANKFURT, 4th July 2019 – The decrease in the transaction volume on the German residential investment market* in the first half of 2019 cannot yet be attributed to the general political climate but is still primarily owing to the shortfall in supply. By the end of June 2019, the transaction volume amounted to €8.1 billion and was thus equivalent to only three quarters of the volume that was recorded in the same period of last year. The result was also 12% below the five-year average. Although a mega deal was registered again for the first time since the acquisition of Buwog by Vonovia, involving the resale of the BGP portfolio with 16,800 residential units to ZBI/Union Investment for €2 billion, the total number of transactions fell by more than 17%. Small and medium-sized deals dominated the market. Almost 40% of all transactions were between €20 million and €100 million in size.

“The mood on the German residential investment market has reached its nadir. Residential investors and portfolio owners have for some time already been facing a level of political interference that goes far beyond a proportionate regulation of rental housing markets,” said Dr. Konstantin Kortmann, Head of Residential Investment at JLL Germany. Kortmann added: “After the introduction in recent years of rent control measures in several German cities that limit rental price increases to 10-15%, rental caps are currently being trialled in Berlin.”

From January 2020, residential rents should be fixed for five years with retroactive effect from June 2019. “Regardless of possible and not yet specifically defined exceptions in the case of shortfalls and the legal effectiveness of such a law, the political signals have placed residential investors on high alert, and not only in Berlin. Instead of implementing structural, legal and financial measures to support housing construction and the development of infrastructure between the worst affected cities and their immediate and wider surrounding areas, prohibitions are being imposed,” said Helge Scheunemann, Head of Research at JLL Germany. Kortmann added: “The long-term effects of a rental cap can be observed in countries such as Portugal, the United Kingdom and France. Here, the rental housing markets are not functioning at all and property prices have exploded as a result of this policy in recent decades. Quo vadis, then, the residential investment market in German states?”

The number of investors domiciled in Germany has reached a new high of 90% of the invested capital. Even though international investors are also involved in many investor categories such as special funds or listed housing companies, it seems that Germany is currently no longer at the top of the investment wish list for foreign investors. At present, investment vehicles from Luxembourg represent the strongest foreign investor group with around €350 million, followed by Israeli and US investors (€160 million and €90 million respectively). “In our discussions it has become clear that foreign investors are reflecting on two things: on one hand, the political discussion about a further tightening of regulation and on the other hand the supply shortage in the cities. The latter issue translates into rising prices, although in an international comparison prices are still low in absolute terms,” said Kortmann.

For the first time in many years, open public funds now top the ranking of net investors as a result of the BGP transaction: they invested more than €2 billion net in residential property. Special funds, partly bolstered by money from pension funds, are ranked second with a net investment sum of €1.2 billion, followed by the communal, non-profit housing associations with more than €750 million net in residential property assets. This means that listed property companies are no longer among the top three investors for the first time in years. “Not only are they finding it increasingly difficult to acquire the right properties and portfolios in Germany at reasonable prices, but they are also facing strong socio-politically motivated headwinds in the form of pre-emptive rights, expropriation initiatives and political regulatory pressure,” commented Kortmann. It is not yet possible to predict the extent to which these trends will affect the investment activities of large listed property companies.

Despite all the political discussions, Berlin remains the only market with a transaction volume above a billion euros, even though the volume has declined by almost 15%. A total sum of €1.5 billion was invested in Berlin residential property. The German capital was followed at a considerable distance by Frankfurt (+5% to €700 million) and Hamburg, which lost more than a quarter of its transaction volume (€550 million).

The decline in prices for existing properties to about €1,850/sqm (-15% compared to Q1 2019) and for project developments to €4,150/sqm (-2% compared to Q1 2019) is at this point merely an extreme outcome caused by trading in poorer quality buildings in secondary locations, particularly in the second-hand property sector — a phenomenon brought about by rising sales prices and building costs. “The concept of economic efficiency has prompted a rethink among project developers: many developers are currently contemplating selling projects before completion or even sites that are still in the development phase. This is being driven particularly among smaller market players by the fact that manufacturing capacity is exhausted and an earlier exit is therefore being sought,” said Scheunemann. Kortmann added: “Other developers want to reduce their sales risk and secure the inflow of liquidity in advance while there is still demand for residential development sites. Political measures such as the location of social housing on the site are also taking effect here. “Both make it more difficult to find solutions and prepare for construction, and thus complicate the creation of more housing. On the other hand, buyers would see an opportunity to secure land or projects without having to take on the high planning risk for new developments.

Kortmann concluded: “The outlook for the coming six months will largely be determined by the key political players. We expect that a further intensification of the debate, especially at the regional government level in Berlin, will also have an impact on investment activity in Germany as a whole. Investors will keep a very close eye on developments and in particular will reassess any further engagement in Berlin. We do not expect the transaction volume to exceed €16.5 billion in 2019, not least because of the continuing excess demand from tenants and investors. This would represent a 5% decline compared to the five-year average.”

* Sale of residential portfolios and student housing with at least ten rental units and 75 % rental use as well as the sale of company shares with the acquisition of a controlling majority without a stock market listing.

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