Property remains rock solid in turbulent times

There are signs of another strong year for the German investment market

October 02, 2019

FRANKFURT, 2nd October 2019 – “Order”. After almost gaining cult status, it remains to be seen whether the familiar cry from the Speaker of the House of Commons will ultimately become the word of the year. It is nevertheless the case that numerous examples of current political and economic turmoil can now be associated with this word, and not just the sometimes tumultuous scenes in the British lower chamber of parliament.

In political terms, it seems that the world has been spinning out of control for some time. So far, the central banks have to some extent been able to prevent any seepage into the economy through their monetary policy measures, although these are by no means uncontroversial. For instance, the US Federal Reserve has already cut interest rates again, and the European Central Bank (ECB) is also trying to use monetary easing to boost business investment and penalty interest to stimulate bank lending. To all intents and purposes, the markets will remain dependent on the central banks for the time being. Interest rate hikes can probably be ruled out until at least 2021, with all the positive and negative implications for borrowers on one hand and investors on the other. The prolonged period of low interest rates with correlated negative interest rates for parking money is a particular concern for institutional investors. In recent years, attempts have been made to offset returns with an increase in investment risk, but the mood has changed in recent months in the light of the economic situation. The appetite for risk has decreased significantly and there is an increasing focus on security. However, investment strategies are becoming much more complex and complicated as a result. The more that bonds become unavailable as investment vehicles, the more that alternative investments, including real estate, come to the fore. Timo Tschammler, CEO of JLL Germany, pointed to the positive aspects of this complex situation. “Institutional investors seem to be well prepared and risk management is working, so a potential recession will not come as a shock and catch them unprepared if such an event arises — a very significant difference from the situation in 2007-2008.”

Best third-quarter transaction volume[1] of all time – interest in company investments rises significantly

“Exogenous disruption? High prices? The strong demand in the extremely active third quarter appears to illustrate that almost nothing seems to affect the German investment market. Including the Living segment, the transaction volume for the first three quarters reached a total of €57.3 billion by the end of September,” said Timo Tschammler. This is broadly in line with the previous year (+1%). A series of large-volume deals between July and September made a particular contribution to this strong performance. Timo Tschammler: “Five of the ten largest transactions in 2019 took place in the third quarter. Stronger investor interest in company investments was particularly noticeable in the recent quarter. These equity transactions alone accounted for more than €4 billion, equating to about a quarter of the total transaction volume for the period from July to the end of September. Investments in companies certainly fulfill the definition of a real estate investment and, in view of the prevailing product shortage, seem to be a real alternative for investors bringing an adequate return.”

“The transaction volume of €25 billion for the third quarter of 2019 has only previously been exceeded by the record result for the last three months of 2016, at €26.5 billion. In other words, there has never been a better Q3 result. The average third-quarter volume for the five years from 2014-2018 amounted to only €16.8 billion,” said Helge Scheunemann, Head of Research at JLL Germany.


Foreign capital sources only accounted for just under a third of the volume in the first nine months of 2019. This represents the lowest share generated by foreign investors since 2013. Four of the five largest transactions in the year to date — all of which were billion-euro deals — were carried out by domestic players.

The sale of property for more than €2.5 billion from the so-called Millennium Portfolio, a mixed-use portfolio with office, retail and residential properties, was at the top of the transaction list. Generali sold the portfolio to Commerz Real.

Overall, single-asset transactions accounted for 60% of the total volume (€34.2 billion). Portfolio sales gained some ground in the third quarter, boosted partly by the company acquisitions mentioned above. Such deals generated a volume of about €23 billion in the first nine months, equating to a year-on-year increase of 4%.

“Overall, the German investment market remains extremely dynamic, and there are no signs that activity will slacken during the final quarter given the transactions that are already close to completion. In view of this current dynamic, a transaction volume of €75 billion for the year as a whole certainly seems realistic,” said Timo Tschammler.

Transaction volume in the Big 7 remains at previous year’s level

The aggregated transaction volume for the Big 7 was almost identical to last year, rising by 2% to €31.7 billion compared to the corresponding period of 2018. On one hand, this illustrates the particular significance of these major cities as an investment target for national and international capital. On the other hand, it should also be noted that Berlin alone accounts for €11.8 billion or almost 40% of the volume, while four of the property strongholds (Düsseldorf, Frankfurt, Hamburg and Cologne) even registered a decline.

“Given the political debate in the German capital about rental regulations, this exceptional result, which reflects growth of 71% compared to 2018, may come as a surprise. However, it also indicates that investors still have faith in Berlin’s market forces and do not assume that the sometimes drastic drastic regulatory proposals will be implemented in this way,” said Timo Tschammler.

Frankfurt is in second place with a transaction volume of €5.6 billion, which puts it ahead of Munich. However, the market in the Bavarian capital performed strongly in the period from July to September. After experiencing a sharp decrease year-on-year in the first six months, Munich achieved 5% growth in the third quarter. “This is certainly also owing to the fact that office completions in Munich picked up significantly in the previous and recent quarter, bringing new and attractive investment products to the market,” said Helge Scheunemann.

Investment activity outside the established locations also increased in the third quarter. The total volume of around €25.6 billion euros included a dozen transactions that exceeded €100 million.

Number of traded properties falls – interest in mixed-use transactions rises

The relative shares of the individual asset classes are a mirror image of the previous quarter. As before, office properties still account for a share of around 36% (€20.7 billion), followed by Living with 27% (€15.8 billion). Investors are seeking major investment opportunities especially in the office sector, and it is therefore no wonder that 48 office transactions above €100m (single-asset and portfolio transactions) were completed in the first three quarters. At the same time, both this analysis and the assessment of all office transactions reveal a 14% decline in the number of traded properties compared to the previous year. “And this trend ultimately applies to all asset classes. Fewer but larger transactions were carried out,” said Tschammler. Scheunemann added: “There is also another persistent trend: investors are increasing their efforts to diversify their portfolios. This is clearly reflected by the share of mixed-use single assets or portfolios, which now account for 10% or €5.6 billion. This asset class includes all transactions in which none of the uses accounts for more than 75% of rental income. This applies in particular to the transactions in which shares of companies were acquired.”

The retail asset class was in third place with a share of 13%. Although buyers have again been found for some shopping centres in the last nine months, the overall environment remains challenging. The investment market in this segment benefits primarily from the strong demand for specialist stores and retail parks, which account for almost 40% of the total capital invested in retail property.

Office and logistics yields reach new lows – shopping centre yields continue to rise

The average yield for the Big 7 fell below the 3% threshold. At the end of the third quarter, a “2” stood before the decimal place for the first time, with the yield now positioned at 2.97%. Compared to the previous year, the prime yield for the Big 7 fell by 23 basis points. “An end to this historical yield compression has still not yet been reached, and we expect to see a further slight reduction to 2.95% by the end of the year. The development of property yields is and remains a reflection of

the global financial economy. The risk exposure from bonds and equities is pushing investors towards alternative investments, and real estate is becoming increasingly important here. Government bonds as a risk-free investment are becoming less attractive because of the sometimes negative interest rates. As well as the financial indicators, the continuing positive rental price trend and the good outlook for the seven strongholds are driving yield compression. In view of the economic downturn, it remains to be seen whether or not investors will still expect to see positive rental growth next year,” said Timo Tschammler.

In connection with the fall in yields during the third quarter, the JLL capital value index for top office properties grew further by the end of September and is now 15% higher compared to 12 months previously. The ongoing yield compression contributed around 53% and rental price growth almost 47% to this result.

In other sub-markets outside the top locations of the Big 7, or in the case of lower quality buildings, average yields also fell further in the third quarter. Yields for prime properties in secondary locations stood at 3.30%, and were only 33 basis points higher compared to the prime yield and to a building in a top location. Yields for properties with shorter remaining lease terms or of average quality currently stand at 3.81%.

In line with office yields, prices for prime logistics real estate continued to rise in the third quarter. Thus the prime yield is still well below the 4% threshold at 3.8% (-10 basis points compared to Q2 2019). “We are maintaining our forecast for 2019 and expect the yield to dip further to 3.75% by the end of December,” said Helge Scheunemann. The increasing significance of the so-called “last mile” for the logistics industry is evident from recent events such as the launch by Blackstone of its own last-mile real estate company, Mileway. The new company will own and operate around 1,000 logistics properties with more than 9 million sqm in the United Kingdom, Germany, the Netherlands, France, Spain and Scandinavia, and plans to expand its portfolio over time.

In terms of retail property, the individual segments have continued to develop in a differentiated way, continuing the trend that was observed towards the end of 2018. The shopping centre yield increased again in the third quarter, rising by 20 basis points to 4.40%. A further increase by 10% would be the consequence of the structural upheaval in the stationary retail landscape, particularly in the case of shopping centres. Demand remained high for specialist retail products. The prime yield remained unchanged at 4.30% in the third quarter, falling below the shopping centre yield for the first time. The prime yield for central commercial buildings fell slightly by three basis points to 2.84%. “Here, as well as for specialist stores and retail parks, we do not anticipate any further changes in prime yields before the end of the year,” said Scheunemann.


 [1]The transaction volume encompasses  office, retail, logistics and industrial property, hotels, land, special property, mixed-used property and the Living asset class with multi-family buildings and residential portfolios including at least 10 residential units and with a residential use of over 75%, the sale of company shares with the acquisition of a controlling majority (without a stock market listing), apartment blocks, student housing, retirement/care homes and clinics.


About JLL

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