Institutional investors ramp up exposure to development

Institutional investors are turning to development to boost their portfolios, against a background of dwindling investment opportunities in Germany.

As a result, the market share of investors active in project development has increased from around 20% in 2016 to around 40% this year, according to a study carried out this month by consultancy Bulwiengesa on behalf of Austrian property investor CA Immo.

‘More and more developers are building their own portfolios, instead of constantly looking for land and investment opportunities,’ said Andreas Schulten, chief representative of Bulwiengesa.  ‘As a result, the volume of investor development is increasing rapidly, while the volume of trading developments has remained almost constant.’

Office development leads the charge

Office development is leading the way, driven by strong growth in the office workforce and the declining vacancy rates in the top cities, according to the report. In Berlin, around 260,000 sqm of office space was completed last year, which is expected to soar to 520,000 sqm in 2022, according to Schulten: ‘We expect a further increase in the office workforce in coming years,’ he said. ‘According to our forecast, Berlin is expected to have about 850,000 office workers in 2022, an increase of 42% over 2008.’ According to Bulwiengesa, the growth will also continue apace in Munich and Hamburg.

CA Immo is also jumping on the development bandwagon. ‘CA Immo, like several other investors, prefers to develop its own projects in the current market environment rather than waiting for properties that match the portfolio strategy,’ said CA Immo’s CEO, Andreas Quint.

Prime office rents will continue to rise, especially in Berlin, Munich and Frankfurt

Despite increasing construction activity, Schulten doesn’t expect to see an uptick in vacancies: ‘Unlike in previous cycles, according to our office market forecast, we do not expect to see an increase in office vacancies in the metropolises until 2022,’ he said. ‘Berlin and Munich are very similar in terms of vacancy rates and will not reach more than 2% in 2022. A similar picture emerges for rents in the office market forecast until 2022: Prime office rents will continue to rise, especially in Berlin, Munich and Frankfurt,’ he added.

Berlin has recorded the strongest increase in office rents since 2018 (+14%), followed by Munich and Düsseldorf (around 10% each). According to Bulwiengesa, Munich will replace Frankfurt as the most expensive office location from 2022 onwards.

For now, investors are largely focusing on development in Berlin and Munich – in fact, in Munich, investor development in offices has rocketed by 44% since 2016 to 1.3m sqm this year. Moreover, across all types of use, development for investor-held portfolios in Munich make up almost 63% of the project volume, according to the report, compared to 47.5% in Berlin and 47.8% in Stuttgart.

Other investors betting on development

Other investors are also getting in on the act. This week (30 September), AEW announced that it had acquired New Eastside, a substantially pre-let office development located in Berg am Laim to the east of Munich’s CBD, for an undisclosed sum. The asset has been acquired on behalf of a private German mandate from Optima-Aegidius Firmengruppe who developed the former factory of the Hawe Hydraulik Werke together with Competo Capital Partners and IKR. The property, which is currently under development, will comprise around 21,000 sqm when it is completed in the fourth quarter of 2020.

Fund manager KanAm is also upping its exposure to development via its KanAm Grund German Development Fund. It announced this month that it intends to build a hotel and office building, including serviced apartments, retail and gastronomy outlets on the site of the former loading yard at Augsburg Central Station in a joint venture with CV Projektentwicklung, They have acquired two plots totalling almost 4,0000 sqm for an undisclosed sum. A preliminary building application has been submitted and construction is expected to start in the summer of 2020.