German ‘Champion Regions’ offer better risk/return profile than ‘Top 7’ counterparts

Germany’s Top 30 ‘Champions Regions’ offer a more attractive risk/return profile than the country’s ‘Big 7’ office markets, according to a study published this month by German investment manager Accom.

The study, which was carried out jointly by Accom and consultancy Bulwiengesa, found that the 30 so-called Champion Regions - or German B cities typically home to highly competitive medium-sized companies, such as Ingolstadt - offer higher net initial returns, at between 5% to 6%, compared to less than 4% in the ‘Big 7’.

‘Volatility - and consequently the risk associated with rental levels in the Top 7 cities - is significantly higher than in these B cities with strong small and medium enterprises,’ said Stefan Kalmund, managing director of Accom. ‘For investors, this results in a much more favourable risk/return ratio in Champion Regions, which have often been overlooked by international investors.’

There are 3,000 SMEs which are ‘best of their class’ globally and around 50% of them are in Germany, according to Kalmund. In fact, around 80% of the German workforce works for an SME.

‘There will be between €55b and €60 of commercial real estate deals in Germany this year, of which Champion Regions will, like last year, account for around 44%,’ Kalmund told REFIRE. ‘There are a lot of wealthy investors in those regions. We’ve sold 10 properties in Champion Regions this year and 80% of bidders were local HNW individuals/Family Offices.’

Local investors have good access to off-market deals and tend to focus on office and retail deals, Kalmund said. International investors are also starting to look more at Champion Regions, including Asian investors. ‘The combination of capital preservation and cash yields in Germany means that it doesn’t matter as much which city you invest in. Secondary cities are also less affected by global events,’ Kalmund said.

As a decentralised country with a regional structure, Germany offers investors different conditions to most European markets. ‘The German office real estate market is highly interesting for international investors, not only in the Top 7,’ said Andreas Schulten, CEO of Bulwiengesa. 

Interestingly, Germany’s Top 30 small and medium-sized cities generate around 60% of the country's GDP. Berlin, for its part, represents just 3.5%. Champion Regions also boast sound fundamentals in other areas, such as population growth and low unemployment. The small and medium-sized cities have enjoyed average unemployment below the Top 7 in nine of the past 10 years, according to the study.

In addition, the average economic growth in German Champion Regions outstripped that of the Top 7 and also surpassed the German average between 2000 and 2014. Kempten and Ingolstadt, for example, recorded particularly strong increases in economic output. In 2014, GDP per capita in Germany was around €36,000, compared to €48,000 in Champion Regions.