Mega deal enables commercial residential investment market to achieve above-average transaction volume
Press release including chart [PDF]
FRANKFURT, 5th April 2018 - The commercial residential investment market* made a strong start to 2018 with the signing of a mega deal – which came after 12 months without a single transaction above €1 billion. A major residential market player has struck again with Vonovia’s takeover of Austria-based Buwog in a deal that was announced last year and completed this year. The approx. €2.9 billion that was paid for the German part of the portfolio boosted the overall transaction volume to €7.1 billion (48,000 residential units) in the first three months. Only in 2015, when transactions reached a record level of €11 billion, has a higher first-quarter volume been registered. This year's quarterly result already accounts for nearly half of the transaction volume of the entire previous year. Comparisons with previous results are also correspondingly favourable, with an increase of 109% compared to the same period in 2017. The five-year average for first quarters was also exceeded by a factor of 2.4 (an above-average result was achieved here even without the Buwog acquisition), while the 10-year average was surpassed by a factor of 1.5.
Five transactions including between 1,000 and 2,500 residential units apiece proved to be a solid foundation for the overall high volume: these deals alone accounted for one-quarter of the total transaction volume, and also highlight which types of assets are currently being sought. “Investors prefer a homogenous portfolio profile that aligns perfectly with their respective investment strategy. They tend to focus less on bringing in properties with different economic parameters, regardless of whether these would have an improving or worsening effect on the overall portfolio. This is because only a homogeneous product can be used to identify clear opportunities, implement business plans and ultimately justify the high prices,” said Dr. Konstantin Kortmann, Head of Residential Investment at JLL Germany.
This investment specialisation was also demonstrated by the sale and acquisition of three micro and student apartment portfolios at the start of the year. This transaction also saw two international investors enter the German micro apartment market: the sovereign wealth fund of Singapore (GIC) and US investor Harrison Street. “At over € 1.4 billion, this market has already reached an unprecedented level. It is our expectation that micro apartments will become established as a separate asset class over the course of the year,” said Helge Scheunemann, Head of Research at JLL Germany. Another trend that has been observed for some time due to the scarcity of products will also continue: the sale of project developments. With 29 out of 101 transactions, forward deals account for about 30% of the total volume (full-year 2017: 25% of transactions; five-year average for first quarters: 14%). "Due to the continuing high demand for housing, especially in urban areas, this increasing share is a sign that supply is being expanded in response to the imbalance between supply and demand and rising prices. I am confident that this trend will continue over the next few years,” said Scheunemann.
Buyers of German residential real estate are predominantly German companies. Over 80% of the capital invested came from the domestic market. The top three countries to invest foreign capital were the US (€570 million), Singapore (€350 million) and the UK (€220 million). “The advantage that German investors have is their excellent market knowledge. International bidders often have difficulties with aspects such as the structure of the housing market with low ownership rates, tenant protection and local housing markets,” explained Kortmann. However, at least in the first three months of this year, Berlin proved to be the exception: for the first time, more capital (two-thirds of the total of €1.1 billion) flowed into the German capital from foreign than from German investors. The Frankfurt-Rhine-Main region ranks second in the regional analysis of the commercial residential investment market. With a transaction volume of €650 million, the 40% share generated by international investors was also significantly higher than in previous years. “It is worth noting here that private equity funds are back with a new strategy,” said Kortmann. After having tended to be among the net sellers in Germany during the last seven years, they are now buying up residential stocks in Berlin, Frankfurt and Hamburg.
Due to the acquisition of Buwog by Vonovia, listed housing companies remain the buyers with the highest accumulation of residential property assets (of €2.8 billion). Without this mega deal, however, asset accumulation would only amount to €85 million, not €2.8 billion. “The companies are increasingly experiencing difficulty in expanding through portfolio purchases. The perfect product eludes them,” said Kortmann. In the current market situation, they are left only with the option of international growth, as demonstrated by Vonovia in Austria, for example, or portfolio development, including the purchase of project developments. “With regard to project developments, the companies face intensive competition from banks, insurance companies, pension funds and German special funds. These investor groups built up more than €1.7 billion in the first quarter and are able to pay high prices because of their long investment horizons. They regard residential property as a substitute for fixed income investments with limited risk, such as sovereign bonds,” said Konstantin Kortmann. The residential investment expert added: “This development highlights one of the main drivers of the residential market: As long as interest rates within the eurozone do not increase significantly, the stable German housing market will remain an attractive investment target for long-term oriented investors owing to its predictable rental income and low new construction volume. Taking into account specific housing products such as micro apartments, which are particularly interesting for international investors, it can be expected that the transaction volume will again exceed €15 billion in 2018. Even though tradable portfolios will remain scarce, price levels will continue to rise.”
* Sale of residential portfolios and student residences with at least 10 units and 75% residential usage as well as the sale of company shares with the acquisition of a controlling majority without an IPO.