German residential investment market in surprisingly robust form
Strong demand from institutional investors comes amid high level of legal uncertainty
FRANKFURT, 2nd October 2019 – The German residential investment market regained lost ground in the third quarter of 2019, registering sales of €6.4 billion from the exchange of 42,000 residential units. Following a significant year-on-year decline (-27%) in the first six months, the transaction volume increased by 56% compared to both previous quarters (each with about €4.0 billion). Total investments for the first nine months of the year amounted to €14.5 billion, which was only slightly below the year ago figure and even exceeded the five-year average by 15%. Dr Konstantin Kortmann, Head of Residential Investment at JLL Germany, said: “The result already equals 78% of the entire volume for last year (€18.6 billion). At the same time, the current combination of strong institutional demand and favourable financing conditions, as well as a shortage of supply and high legal uncertainty, provides scope for various scenarios to evolve and makes forecasting difficult. However, the transaction volume for 2019 as a whole could come close to the previous year’s volume, and €18 billion is absolutely realistic.”
In particular, the result was made possible by three transactions that accounted for a combined share of 42%, including two involving the ADO Group:
- Adler Real Estate increased its investment to a share of 33%, acquiring 7,800 residential units of the ADO Group.
- At the end of September, the Berlin-based municipal company Gewobag Wohnungsbau announced it would acquire around 5,800 units in the Berlin districts of Reinickendorf and Spandau from the ADO Group for a total of €920 million.
- The ZBI-Group is the new owner of more than 6,000 residential units, which it acquired from Deutsche Wohnen for about €615 million.
Apart from these three large transactions, in the first three quarters the German residential market was largely dominated by small and medium-sized transactions with fewer than 800 residential units.
The proportion of investors domiciled in Germany reached around 89% in the first nine months of 2019. This indicates that international investors have been far less active this year (11%) compared to the average for the past five years (23%). The most active foreign investors on the German residential investment market originated from Luxembourg (€430 million), Switzerland (€410 million), the USA (€230 million) and Israel (€160 million).
“Overall, it is becoming apparent that the German housing market requires detailed knowledge of the local property markets because of increasing regulation. The escalation of the housing policy programme in Germany, which has provisionally culminated in the Berlin Senate Administration’s draft bill on rent caps (Mietendeckel) in Berlin, has considerably increased the degree of legal uncertainty and, despite all fundamental factors such as excess demand, has made investors, especially those from abroad, more cautious,” said Kortmann. Helge Scheunemann, Head of Research at JLL Germany, added: “According to our recent survey, some market players, regardless of the business field, would make adjustments to their long-term business strategy. These include a switch to other asset classes or markets and/or a temporary halt to investment. This particularly applies to portfolio owners whose incentives to invest are being further undermined by the gradual lowering of the ‘modernisation charge’ [the rate by which rents can be raised after carrying out refurbishments].”
This situation also became apparent from an analysis of the accumulation and reduction of residential property assets. Primarily owing to the two large transactions, the municipal non-profit housing companies were able to position themselves in second place following the accumulation of assets worth almost €1.7 billion, behind the listed housing companies (€2.3 billion) but ahead of special funds (€1.4 billion).
In addition, it was particularly noticeable that the proportion of foreign sellers increased further to 48% compared to the previous year (37%). Konstantin Kortmann: “Whether we will see any further major shifts and more shedding of residential assets over the course of the year largely depends on the future development of the housing policy debate. Foreign investors in particular will be closely watching the legal situation concerning the rent cap bill.” Kortmann added: “At the same time, the recent transactions in Berlin involving the ADO Group indicate that prices are stable, which was not politically intended. In the whole discussion on rent caps it has apparently been forgotten that when demand increases, with urbanisation a key cause, the shortfall in housing cannot be reduced. There is still a huge housing shortage in Berlin as well as in other cities.”
The Berlin market remained the most important German residential investment location in the third quarter of 2019 with a transaction volume of about €3.1 billion, followed by Frankfurt am Main (€1.3 billion) and Hamburg (€0.8 billion). Overall, the majority of transactions (> 90%) took place in the Big 8 (Berlin, Cologne, Dusseldorf, Hamburg, Frankfurt, Leipzig, Munich, Stuttgart) or their surrounding areas. This is also reflected by the development of prices for existing properties. Here, there was a break in the downward trend that was evident in previous quarters. The average price for second-hand buildings in 2019 to date increased by 7% year-on-year to about €1,960/sqm. The average price for newly developed properties exceeded €4,300/sqm for the first time, corresponding to an increase of around 4%. “Fortunately this part of the market, which is the only area that is not under pressure, is performing well in terms of the transaction volume. Given the increase in construction and land costs, it comes as no surprise that prices are rising here. Higher prices are also absolutely essential for an investor who wants to generate an adequate return on their investment,” so Kortmann.
 Sale of residential portfolios and student housing with at least 10 units and 75% residential use as well as the sale of company shares with the acquisition of a controlling majority without a stock market listing
 The JLL survey on the Berlin rent cap with specific questions on the general housing policy programme was published on October 7
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