Investment Market Overview

JLL currently assumes that the total annual volume in 2022 will be around €70 billion, some 37 percent below the previous year's figure. The sharp and historically strong rise in interest rates has led to a certain rigidity in the investment markets. On the one hand, those investors who operate with a high proportion of debt capital have halted their purchase plans within a very short time; on the other hand, even investors with a high level of equity capital are currently waiting to see how prices and the general market situation will develop. This waiting phase is likely to last until the autumn.

Nevertheless, the days of "cheap money" definitely seem to be over and it is time to move back to a more normal financing environment. This means that some institutional investors will now turn back to the bond markets and real estate will lose its TINA (There Is No Alternative) status. In nominal terms, the yield spread between 10-year government bonds and real estate yields (measured at the average prime office yield) narrowed by around 120 basis points to 1.1 percentage points within the second quarter. The long-term average yield spread since the first quarter of 2009 is 2.96 percent. In order to maintain the attractiveness of real estate as an asset class, including an adequate risk premium, property yields would have to trend upwards.

However, this is where inflation comes into play, pushing real bond yields further into negative territory and revealing a current historically high spread to real estate yields in this calculation logic. So it is not a foregone conclusion that real estate yields have to follow the path of capital market interest rates in parallel. The more inflation is above current bond yields, the more attractive real estate is as an investment.

For many, inflation is a spectre because people have forgotten how to deal with it. The market must learn again to build inflation into investment modelling. We have arrived at a whole new situation that will be a reality for many years. Accordingly, cash flows and indexation must be taken into account. Until recently, one could look at the multiplier alone, but that is no longer sufficient. Even now, the market offers good investments if properties are occupied by tenants who can bear indexation or pass on the additional costs. Some sectors are currently so strong that they will handle this challenge very well.

Taken together, the volume of individual deals across Germany was €20 billion in the first half of 2022, down 13 percent on the previous year. Portfolio sales, however, remain dynamic with a volume of €16 billion, which corresponds to an increase of 43 percent compared to 2021.

25 portfolios with a volume of more than €100 million each changed hands in the first three months of the year and another 17 transactions of this size were added in the months from April to June. In the first half of the year, significantly more portfolio deals (42 transactions) were registered than in the same period of 2021 (25 transactions). In Spring 2022, JLL also observed brisk demand for portfolios, although the volumes were significantly lower than in the previous quarters and the majority of these transactions were focused on the Living segment.

Among the individual transactions, the sale of shares in the Sony Center in Berlin to the Norwegian sovereign wealth fund Norges for almost €680 million stood out in the past quarter. There were also a further 12 transactions above €100 million, predominantly in the large established locations and with a focus on the office and mixed-use real estate segments.

With a volume of €18 billion Germany’s Big 7 cities account for around half of the transaction volume in the half-year analysis. At the same time, the volume increased by 4 percent year-on-year. Berlin continues to lead with a transaction volume of €6 billion, ahead of Frankfurt with €3.9 billion and Hamburg with €3.6 billion. The increase in the Hanseatic city is significant at 87 percent.

The fact that the investment market is in an orientation phase is particularly noticeable in the office segment. Properties worth just €3.5 billion were traded here in the second quarter. Although the bare figures are around two-thirds less than in the first quarter, we do not expect them to remain low over a sustained period. For such higher-risk products, the price level must drop more significantly The office will retain its status as an investment product. In the short term, we expect a higher concentration on the prime locations in the Big 7 cities but with value-add strategies, we see a somewhat longer phase of consolidation in order to generate entry opportunities.

ESG is still part of the overall assessment of an investment. For long-term fund performance, it is essential to continue to consider carbon emissions in the long term. ESG statements of intent were principally made in a wholly different market climate. Now, in a climate of rising interest rates and economic uncertainty, they have to prove themselves. However, resetting the sustainability goals is not an option. 

Mapping the current price level in the real estate markets is not easy at present because the slackening demand means that there is significantly less evidence in the form of concluded transactions. Instead, we see a mixture of individual high-priced deals that confirm the previous yield level and reveal the uncertainty among many market participants about the current price level, which has caused some sellers to take their assets off the market because the original asking price does not seem to be achievable at present. JLL has therefore increased prime yields in the office segment by a moderate 10 basis points to 2.72 percent and in the logistics segment by 15 basis points to 3.11 percent to reflect the impact of financing, particularly for higher-priced products. Nonetheless, and this is important to emphasise in the current market, a rise in yields does not mean that property values will automatically fall. As long as the rents are secured by appropriate contractual clauses, higher rental income can be generated in the future, which can increase the current yield and compensate for a higher level of the initial yield at which the property was acquired.

A look at the rental markets also reveals that prime rents have currently risen in five of the seven real estate strongholds and JLL expects further rent increases by the end of the year. The evaluation of index-linked leases compared to those with no or only partial indexation will be given a new weighting, as will the selection of tenants who, thanks to their business models, will also be able to finance inflation compensation in the future.

JLL currently anticipates no change in prime retail yields. The focus of investors remains on food-anchored supermarkets, discounters and retail warehouses.  The times of “faster, higher, further” are definitely over, but there is no reason to sound the death knell for the German investment market. Liquidity is still available, but business cases need to be prepared more carefully and specifically. Only then will banks continue to provide the appropriate financing.