German residential investment market reaches the 20bn euros mark
Shifting landscape on buy- and sell-side signals increased momentum for 2020
FRANKFURT, 6th January 2020 – The residential investment market ended 2019 with a remarkable result: the transaction volume generated from investments in residential property and portfolios reached €20bn, exceeding forecasts (€18bn), the previous year’s result (+7%) and the five- and ten-year averages (by 16% and 56% respectively). The German residential investment market has now achieved growth for the fourth year in succession. The 2019 result also represents the second-highest transaction volume since records began, beaten only by the result for 2015 (€25bn).
A total of around 130,500 residential units changed hands in 2019, which was broadly in line with the previous year (-1%). “This clearly shows that the increase in the transaction volume compared to 2018 was entirely owing to price growth,” said Dr Konstantin Kortmann, Member of the JLL Strategy Board and Head of Residential Investment at JLL Germany. Helge Scheunemann, Head of Research at JLL Germany, added: “At present, around €153,300 per unit or €2,300 per sqm is paid for a residential investment, which is almost 8% more than in the previous year and about 55% above the five-year average. In addition, prices for new developments have increased by 9% compared to 2018, reaching €303,300 per unit or €4,600 per sqm.”
Both quarters in the second half of the year made a significant contribution to the very healthy result. Indeed, €5.5bn (27,900 units) was registered in the last three months. “The current market situation, with strong demand from institutional investors on one hand and a high level of legal uncertainty owing to the political discussions about issues such as rent caps or expropriation on the other, brought about more portfolio shifts in the past six months and thus created stronger momentum on the investment market,” said Kortmann.
Kortmann added: “The abovementioned development is also evident when analysing moves to build up or reduce residential property assets. In particular, the non-profit housing companies increased their buying activity in the second half of 2019. Public pressure for greater state intervention in the German residential property market has prompted municipalities to considerably expand their activities on the housing market. Over the past year, the non-profit housing companies increased their investments by almost 100% compared to the previous year, amounting to €2.4bn in total.” For example, one of the largest transactions in the fourth quarter concerned the sale by Deutsche Wohnen of a Berlin residential portfolio with about 2,180 units to the Degewo housing association.
“Owing to the legal uncertainty surrounding the Berlin rent cap, adjustments have been made on the Berlin residential investment market that are now reflected in an increased number of traded units. Some players have retreated from the market and are selling stock, while others are keeping a watching brief. Some are reallocating investments in their portfolios, and others have stopped all investments. Overall, the supply has increased as a result,” said Scheunemann. This increased supply was partly responsible for the fact that the volume grew to €3.7bn (up almost 19% compared to the previous year). The Berlin investment market has thus set itself further apart from other cities, and also accounts for an equally high percentage of the total transaction volume in Germany. Next by some distance are Frankfurt, which registered strong growth of 87% (to €2.4bn), and Hamburg with an increase of 29% (to €1.2bn).
In addition to the largest transaction of the year, which concerned the resale of the BGP portfolio with 16,800 units and a purchase price of around €2bn, four further portfolios with more than 4,000 residential units changed hands, including the acquisition of residential units by Adler Real Estate and Berlin-based Gewobag Wohnungsbau from ADO group and the purchase of residential units from Deutsche Wohnen by the ZBI group. Overall, however, smaller deals dominated the market. More than 90% of the transactions (around €9.4bn) consisted of fewer than 800 units.
On the buy-side, open ended funds were the most active asset builders with a volume of around €2.9bn, closely followed by special funds (€2.8bn) and the non-profit housing companies mentioned above. Project developers represented the strongest group of sellers (+12% compared to the previous year), selling 15,700 units for a total transaction volume of almost €5.1bn. Next by some distance were asset/fund managers with a total transaction volume of €1.9bn.
For some years now, the advance purchase of units in project developments has been a popular alternative to residential properties with running rental income, especially for special funds. Forward deals amounting to a total of €5.5bn were completed in 2019, corresponding to 6% growth compared to the previous year or a whopping 66% above the five-year average. Special funds alone generated total assets of €1.7bn from forward deals (+13% compared to the previous year), followed by pension funds (€0.6bn, minus 50%) and property companies (€0.5bn, plus 74%).
It can also be expected in 2020 that events on the residential investment market will be shaped mostly by competition among financial investors in a low interest environment as well as developments in the housing policy debate.
Despite the political uncertainty and widespread yield compression on the residential investment market, strong drivers can also be identified on the demand side. In particular, these include the high yield spread to alternative investments as well as increased portfolio restructuring by institutional investors. For example, German pension funds are further increasing the proportion of real estate investments.
On the other hand, adjustments to corporate strategies are also bringing a high number of sellers to the market. “The main reasons for this are the maturity of funds, the long-standing trend of adapting portfolios to the financial environment, and the tendency of some investors to move away from direct residential property holdings and towards indirect investments — using specialised service providers,” said Kortmann. In 2020, this is expected to bring about further significant shifts on the buy- and sell-side, creating stronger momentum with a corresponding effect on the transaction volume. This could also be further boosted by the record level of so-called “dry powder” — stockpiled capital that is desperately seeking investment opportunities. “Against this background, we expect this year’s result to be in line with or slightly above the level of the five-year average (€18.7bn).”
 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
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