Good start to a challenging investment year - Commercial transaction volume of €12.3 billion at previous year's level
Press release including overview table [PDF]
FRANKFURT, 5th April 2018 – The global economy continues to boom, and Germany now finally has a government again. Despite all this, business sentiment has deteriorated and a general sense of unease is beginning to spread. There are various reasons for this. On one hand, there is clearly some disharmony within Germany’s governing body only a few days after the formation of the grand coalition. Then came the surprisingly strong wage growth in the US, with rising inflation rates as a consequence. For investors, this resulted in the risk of faster rising interest rates and a slowdown in the economy. This first storm, which caused turmoil on the stock markets at the beginning of February, has now subsided. However, a storm of an entirely different magnitude is building up at the end of the quarter. "Protectionism and increasing nationalism have been identified by us as a political risk for years. Now it's getting serious. Trade war fears are becoming a reality, triggered by President Trump’s announcement of trade tariffs for certain industrial goods from Asia and Europe. Although the implementation of tariffs for Europe was initially averted, the move has given markets and investors a fright, while tit-for-tat tariffs have started between China and the US with unforeseeable consequences for the global economy," said Timo Tschammler, CEO of JLL Germany.
Timo Tschammler continued: “Although the uncertainties have increased, and we expect volatility every now and then over the course of the year, the economy in Germany should nevertheless continue to develop positively. Inflation should also increase slowly and not exceed the magic limit of 2%, thus putting no pressure on the central bank to adjust interest rates earlier than planned. As a result, a gradual and slow exit from the zero interest rate policy will continue."
Accordingly, interest rates on government bonds will also increase at only a slow rate over the course of the year. Real interest rates — that is, after the deduction of inflation — will remain in negative territory for some time to come. Yet even without a formal increase in interest rates, interest rates hikes in Europe have already begun. Capital market rates are edging up, not least in response to the end of the ECB's bond-buying programme. "This melange of positive economic data, increasingly sceptical sentiment and rising interest rates will make 2018 a challenging year for all players," said Timo Tschammler.
The following challenges have to be overcome:
- Interest rates remain low, but investors should (re-)orient themselves in the context of a changed interest rate landscape.
- Purchase prices continue to rise, irrespective of the underlying financial data. With bond yields rising at the same time, the risk premium for property investments is reduced.
- Capital investment pressure remains huge and it is still difficult for many investors to find adequate products.
- The economic fundamentals remain intact and form the basis for further well-performing consumer markets. “However, if inflation increases suddenly and interest rates subsequently rise sharply, the economy could cool off faster than expected,” said Helge Scheunemann, Head of Research at JLL Germany.
Transaction volume just below the previous year’s level
The transaction volume on the German commercial property market reached €12.3 billion, which is similar to the level recorded for the same period of the previous year (minus 2%). “As always, the first quarter cannot be taken as a reliable forecast, but the number of transactions suggests that we can again expect to see a very active and dynamic investment market in 2018. In Germany as a whole, we expect a transaction volume of around €55 billion for the full year. The environment for investments still appears to be good and, coupled with the positive economic data, long-term investors are focusing on further rental growth and are not deterred by the current high prices and poorer financing conditions,” emphasised Timo Tschammler.
Strong demand for office property in the Big 7
No billion-euro transactions materialised in the first three months of the year. Nevertheless, the ten largest deals in the quarter amounted to around €2.9 billion, corresponding to almost 25% of the quarterly result. As was already evident at the end of last year, the largest deal concerned a pan-European portfolio transaction consisting of a total of 18 logistics properties in Germany. A South East Asian investor paid around €500 million for this portfolio. A further seven transactions for above €200 million — all individual transactions — took place in Hamburg, Munich and Frankfurt. Six of these seven transactions were for purely office properties, ensuring that the share of this asset class increased significantly to 53%. At almost €6.5 billion, office property not only remains the undisputed investor’s favourite, but also achieved the highest transaction volume ever recorded for a first quarter. Retail property was again in second place, despite the significant reduction in this segment’s share of the transaction volume to 14% (with only two transactions with a value of more than €100 million). In contrast, the strong investor demand for logistics property also looks set to continue in 2018. The lack of product availability prevented an even higher volume from being achieved. Nearly €1.5 billion and 12% of the transaction volume were invested in the period from January to March.
Further increase in demand in the Big 7
The seven property strongholds in Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart accounted for an aggregate volume of about €8.6 billion by the end of March 2018. This represents an increase of 47% compared to the first quarter of the previous year and a share of 70% of the total German transaction volume. "The often supposed trend of investors turning to locations other than the established cities in search of more attractive returns cannot be confirmed, at least not at the start of 2018. Only two of the registered 24 individual transactions in the range of €100 million or more did not take place in one of the Big 7 cities. Whether this indicates the direction that investors will take in 2018 cannot yet be said with any sense of certainty, but for the moment it shows a firm commitment of investors to risk aversion in terms of possible letting issues and better opportunities for potential resale after the expiration of planned holding periods,” said Helge Scheunemann.
Meanwhile, the interplay at the top of the table continues regardless. Munich is now again the top investment destination by some margin, with a transaction volume of €2.4 billion (corresponding to an increase of 48%). This is followed by Frankfurt (+73%) and Berlin (+3%), with virtually the same volumes of €1.56 billion and €1.5 billion respectively, and Hamburg with €1.4 billion. The Hanseatic city also registered the strongest 12-month increase among the four cities with growth of 135%. The percentage annual increase in Stuttgart was twice as high. With a transaction volume of almost €700 million euros, Stuttgart was able to push Düsseldorf (€650 million) into fifth place.
Similar to last year, the share of foreign capital accounted for about half of the transaction volume in the first quarter of the year. In four of the five largest transactions, foreign investors were active on the buyer side, while German investors acted as the seller in four out of five of these transactions. And as for Asian investors? They have been reluctant to take part at least in the first quarter of the year, appearing as buyers in only two of the 29 transactions worth over €100 million.
Yields continue to decline slightly
“In which direction are yields tending to go? In view of the persistent yield compression and the now apparent end to the zero interest period, this is one of the most interesting questions in the current market climate. There is still no clear answer. The pressure on investors to invest as a result of the continuing massive inflow of capital into this asset class still outweighs the risk of a short-term rise in interest rates,” said Scheunemann. As an example, recently published figures from the German Insurance Industry Association (GdV) show that for insurance companies, the capital investment volume doubled by €30 billion in 2017 compared to 2016, but the property quota was virtually unchanged at 3.7 %. In contrast, the proportion of listed debt securities, which include government and corporate bonds, rose to 18%. This is surprising given the very poor returns, especially on government bonds. "These figures, however, clearly highlight the additional yield pressure that could also have arisen in the real estate sector if even more capital had found its way into the property asset class," said Helge Scheunemann.
At the end of March 2018, the average prime yield for office properties across all seven strongholds stood at 3.26%. This was almost unchanged from the previous quarter but 21 basis points below the value recorded for the first quarter of 2017. Only in Munich did the prime yield decline by 10 basis points in the current period to 3.20%. Central commercial buildings in the top shopping locations of the big cities remain a very rare investment product. Against this backdrop, yields across the Big 7 declined by three basis points to 2.93% on a quarterly basis. The net initial yields for individual specialist stores and retail parks also fell again slightly and are now 5.20% and 4.50%, respectively. Yields stabilised at 3.90% for well-positioned shopping centres that are aligned with their respective catchment areas. As in the last quarter, the biggest drop in yields was evident in the logistics property segment. Here, prime yields fell by another 10 basis points within the last three months to only 4.40% at present.
"Despite the slight increase in returns on government bonds, property yields should remain on a slight downward trend until the end of the year. Thus, the positive yield gap is slowly narrowing and it is to be expected that prices will reach their peak. However, a strong direct correlation between long-term government bonds and property yields cannot be established. Only when capital market interest rates are on a sustainable upward trend should property yields also reach a turning point. However, in terms of performance it remains to be seen what countermovement will be triggered by the continually rising rental prices, because it must not be forgotten that rising interest rates are often accompanied by a positive economic development, with corresponding positive consequences for rental price development,” commented Timo Tschammler.