Residential portfolio investment market stays buoyant even without mega deals
Insurance companies and pension funds accumulate most assets since 2005
FRANKFURT, 4th October 2018 – The fact remains that the Vonovia mega deal completed in the first quarter of 2018 continues to influence the transaction volume on the German residential portfolio investment market*. In the third quarter of the year, the volume reached €3.5 billion and was therefore far below the €7.2 billion registered at the start of the year. It was also lower than the second quarter result of €4.1 billion. However, the overall transaction volume for the period from January to end-September still amounted to €14.9 billion (about 103,000 residential units), which compares well with previous years. Indeed, the result is 37% above the year-ago volume, 27% higher than the five-year average, and also exceeds the 10-year average by as much as 81%.
LEG NRW, which acquired 3,750 units in the Ruhr region, was responsible for the transaction with the largest number of residential units in the third quarter of 2018. However, the purchase of 3,600 units by a Danish pension fund from a fund managed by Industria came with a higher price tag of €900 million.
“Other international investors are also seeking an entry to the German residential property market, even at the price of a low initial yield,” said Dr. Konstantin Kortmann, Head of Residential Investment at JLL Germany. Overall, the share of international investors was unchanged at 25%. “Owing to the internationalisation of the German market, and the fact that there are still few alternative investment options with attractive risk-return profiles, this percentage will certainly increase,” said Kortmann.
As well as Denmark, investors from the USA (€700 million), the UK (€660 million) and France (€470 million) were particularly active in 2018. It’s worth noting here that international investors are increasingly interested in the domestic rental housing market despite the increased number of regulations on the German residential property investment market.
International insurance companies and pension funds also clearly remain under enormous pressure to invest. This investor group is still strategically underinvested in the real estate market, and long-term government bonds that are about to expire must in turn be reinvested for a return that at least maintains value. “The German residential property market offers the ideal conditions for these rather conservative and long-term oriented investors because of its stable cash flow and high level of tenant protection,” said Kortmann.
This trend is also evident from the analysis of the accumulation and reduction of residential property assets. Here, the insurance companies/pension funds group is ranked in second place
after listed residential property companies (plus €4 billion) with almost €2.5 billion in accumulated assets — the highest volume since 2005. In addition, many pension funds have invested in the market through special funds.
The strong demand is also continuing to push up prices. The average price for existing properties increased by a further 20% to about €1,850/sqm. For project developments, an average price of more than €4,000/sqm has been attained for the first time, representing a 5.4% increase compared to 2017.
“However, there could be a rapid drop in interest if alternative investments in the form of US government bonds grant a better rate of interest again. The resulting depressed demand for residential property investments would likely have an effect on prices, irrespective of the fact that a high level of excess demand for rental housing still exists in German cities. Regulation would be a big obstacle to investment,” emphasised Konstantin Kortmann.
* Sale of residential property portfolios and student residences with at least 10 residential units and 75% residential usage as well as the sale of company shares with the takeover of majority control without IPOs.