German commercial residential investment market closes 2017 with third-best result of the last 10 years
Press release including chart [PDF]
FRANKFURT, 4th January 2018 – The commercial residential property investment market in Germany ended 2017 in very good shape. The transaction volume for residential properties and portfolios reached €15.7 billion*, which was almost 15% above the previous year’s level, virtually equal to the 5-year average and 40% above the 10-year average. After the standout year of 2015 and the slightly stronger result in 2013, this therefore represented the third-best result in the last 10 years. Around 129,200 residential units changed hands. Investors were much more active in the second half of the year compared to the first six months (€5.9 billion), with a transaction volume of €5 billion in the third quarter and €4.8 billion in Q4.
In 2017, 83% of transactions were attributed to portfolios with fewer than 2,000 units. In other words, the market was significantly influenced by smaller transactions. Ten transactions involving more than 2,000 units accounted for 17% of the total volume, at €2.7 billion. As a result of the increasingly smaller lot sizes, the average transaction size decreased even further compared to the previous year. On average, just under 300 residential units were traded per transaction. That is only half the average of the last five years.
Dr. Konstantin Kortmann, Head of Residential Investment at JLL Germany, said: “The reason for this development, which has been evident for some time, is the further adjustment of portfolio strategies. The adjustment, streamlining and specialisation of portfolios, forward deals, but also the increased acquisition of mixed-use buildings are factors that are currently influencing the activities of market participants.” The residential property investment expert added: “This streamlining of portfolios is largely being executed by large listed housing companies that are aligning their entire portfolio with their overall investment strategy and their management infrastructure. Buyers of these portfolios and properties were predominantly specialised asset and fund managers, which further optimise these portfolios in terms of yield. These optimisation sales totalled approximately €1.7 billion in 2017.
For some years now, the advance purchase of project developments has represented an opportunity, especially for German special funds, to invest in an alternative option to buildings with regular rental income. “In total, forward deals worth €4.1 billion were completed in 2017. That is a quarter more than in 2016 and more than double the five-year average,” said Helge Scheunemann, Head of Research at JLL Germany. He added: “The funds use capital from long-term pension fund investors in order to give them an opportunity to buy project developments. Also not to be underestimated are municipal housing associations and cooperatives as buyers of new housing projects. Across Germany, this type of buyer acquired residential projects with a value of more than €0.5 billion in the Berlin, Frankfurt/Rhine-Main and Cologne areas.”
Last but not least, interest is growing in mixed-use neighbourhoods where the risk is distributed over several usage classes. These include the development of residential high-rise buildings with hotel, retail and office units as well as entire city neighbourhoods.
Konstantin Kortmann: “This trend among investors of using mixed-use properties with a significant residential share to diversify their strategy is relatively new. To what extent a global urbanisation trend is taking shape here, or whether this is simply to do with the lack of single-use properties, will become apparent over the next two to three years. For example, in East Asian city centres, mixed-use properties are already perceived as an established asset."
These different strategies have resulted in further increases in prices for both existing properties and project developments. For example, an average of €100,000/unit is payable for existing portfolios — which is 20% more than in 2016 without quality adjustments. The increase in project development prices is less pronounced with a rise of 12% to €260,000/unit, although this is from a higher base and with a better comparability of properties. In view of the tendency of residents in metropolitan areas to move to cheaper locations in the surrounding areas, and given the already high rental levels in German cities in conjunction with strong tenant protection measures, buyers expect rental price momentum in new building projects to ease somewhat and prices to rise more slowly. In particular, critical questions are asked about the sustainable achievability of the initial rents in the second or third letting.
With regard to the acquisition and sale of residential property assets, German special funds and large listed companies or residential REITs competed head-to-head here in 2017. The latter won this race with net asset growth of about €2.6 billion euros — €100 million more than the special funds. Project developers created the most value, with about €6.4 billion in net revenue from project developments.
Regionally, the same picture emerges as in previous years: Berlin stands alone at the top with a transaction volume of €3.6 billion and thus accounts for almost a quarter of the total volume in Germany. Compared with the previous year, the German capital achieved an increase of 25%. Hamburg (€1 billion, +56%), Düsseldorf (€820 million, +112%) and the Ruhr region (€650 million, +21%) follow suit. At 15%, Hamburg boasts the largest share of international capital in transactions with a regional focus. At national level, about one quarter of the capital invested comes from abroad, which is at a similar level to the previous year. The top investors were Israeli investors with an investment volume of €1.4 billion, followed by investors from Switzerland (€840 million) and France (€700 million).
What was already indicated at the end of last year could intensify in the current year: the expansion of large residential property investors into other European countries. For example, Vonovia has agreed to acquire Austrian housing group Buwog. With a total portfolio of about 50,000 apartments in Germany and Austria, this acquisition is worth about €5.2 billion, with a German share of approximately €2.9 billion. Following the conwert acquisition in early 2017, this means that Vonovia's second transaction on the Austrian market is already underway. Other companies such as Patrizia have been using some of their funds for several years to invest in other countries including Scandinavia or Spain.
Konstantin Kortmann: "For the transaction market in Germany, such developments mean that even German residential property investors are becoming increasingly familiar with practices and price levels abroad. The continuing reciprocal expansion of foreign investors into Germany, the ongoing boom in project developments and price increases for existing portfolios could lead to a repeat of last year’s transaction volume of around €14 billion-€15 billion in 2018. "
* Sale of residential portfolios and halls of residences with at least 10 units and 75% residential use as well as the sale of company shares with the acquisition of majority control or a stock market listing.