Further Shortage on the Residential Investment Market

Shortage of portfolio transactions - drop in turnover

According to property advisers CBRE, the first nine months of the year saw turnover in portfolio residential transactions (of 50 or more housing units) of about €7.2 billion. This is fully €11.3 billion less than in the first three quarters of 2015, a drop of 61%. Turnover in the present quarter is €2.2 billion, which is slightly above the average for the third quarter over the last five years. With the shortage of units continuing, prices are continuing to rise.

A trend towards smaller portfolios

"Excluding the three big transactions of 2015, the turnover for the first nine months of 2016 is only half a billion euros less than in 2015," says Jan Linsin, head of research at CBRE Germany.

The merger of GAGFAH with the German branch of Annington to form the new company Vonovia, the takeover of Westgrund by Adler Real Estate and the acquisition of the SüDeWo group by the German branch of Annington in the first three quarters of 2015 came to 10.7 billion euros altogether. This year there has so far been no transaction worth more than €500 million.

"But the interest in the residential market remains high," says Linsin. "More attention is being paid to smaller lots. Compared with 2015 there have been more transactions worth between €20m and €50m (a rise of 58%) and €50m to €100m (a rise of 56%) both in the number of registered transactions and in the registered volume."

"Some new smaller investors are active, and there has been a return of old property owners, such as insurance companies, who had bought nothing for several years,’ adds Linsin". ‘We are experiencing an increasing number of enquiries about investments in project development, but here too the demands of investors cannot wholly be met by the number of products available."

While 70% of the registered turnover is in the existing housing segment, project developments are becoming more important. Nearly a third of the volume of transactions in the first three quarters of 2016 are due to new building projects. The capital invested in project developments has risen by 35% to €2.1bn compared to the year before.

Cities are overflowing and prices rising

"More and more people are moving into metropolitan areas and finding there are not enough flats available or being built,’ says Michael Schlatterer, the team leader of residential valuation at CBRE in Berlin. ‘This leads to a rise in purchase prices, so investors are tending to look outside the top ten cities for locations with a dynamic socio-economic development."

‘Nonetheless,’ says Linsin, ‘most of the turnover is still in the metropolitan areas. More than €1.9 bn have been recorded in Berlin alone, followed by €615m in the greater metropolitan area of Frankfurt. Apart from the acquisitions of the foregoing year, the purchase price in portfolio transactions in the third quarter of the year rose from €1,290 per square metre in 2015 to €1,570 per square metre in 2016. As in the earlier period, there were about 200 transactions, but the number of residential units involved fell from 95,000 to 75,000.

C-Locations gaining in favour

According to research from property adviser Catella, the situation in metropolitan areas is causing investors to focus less on A- and even B-locations and more on C-locations, be it in buying or building them, so here too prices are rising and yields falling. The supply will not easily meet the demand.

From January till July 2016 the average rental rates in Germany continued to rise. The increase for buildings in top locations was 2.47% and for buildings in moderate locations was 3.58%. The greatest rise was for buildings in moderate locations in the top 7 residential markets. The rise for the top locations there was 4.85% and for the moderate locations there was 7.08%. These trends are due not only to urbanization but also to Germany’s solid economic performance.

The average residential yield is 5.4%, the highest value being in Herne with 8.2% and the lowest being in Munich with 3.4%. The highest rents are in Munich with €19.49 per sqm/month with the lowest in Duisburg at €5.54 per sqm. The trend towards higher rents is expected to continue throughout the next two quarters. "Certainly the residential market is at the focus of market regulatory measures, but sober reflection reveals that state intervention has hardly affected the rise in rents, and investors have shown little sign of withdrawing from what is said to be an unattractive market segment," says Dr. Thomas Beyerle, head of group research at Catella.