German investment snapshot shows growing optimism led by office recovery

As the German real estate industry prepares to gather in Munich for the Expo REAL, for many probably the first major industry gathering since the onset of the COVID pandemic more than eighteen months ago, investment turnover in German real estate reached a record volume of nearly €61bn over the first three quarters of the year, with plenty of optimism for a strong spurt in the final quarter.

Figures for the third quarter have been arriving in from all the major broker groups in this first week of October, covering all the major asset categories. According to CBRE, to take just one group, the turnover of €61bn represents an increase of 8% for the same three quarters last year. Transaction volume rose by 38%, buoyed up by the residential market, which also accounted for the largest share of the market at €21bn, ahead of office property at €18.6bn.

Transactions in office properties increased by 3%, while investment in retail over the nine months fell by a further 23% over last year's figures, which were so badly hit by the coronavirus lockdowns.

CBRE's head of research Jan Linsin said, "The office leasing markets have bottomed out and a certain normality is returning, although the topic of flexible and hybrid working continues to gain in importance and requires new office concepts and working environments accordingly."

Konstantin Kortmann, head of leasing and agency at JLL Germany, said: "We sense a growing willingness among occupiers to invest in office space again. The knot has not yet been completely untied, but these are encouraging signs we are seeing at the end of the third quarter in the seven strongholds."

His colleague Stephan Leimbach, head of office leasing at JLL, added: "In addition, more and more companies seem to have found a sensible balance between home office and work in the office. We are at least observing that new work concepts are being rolled out bit by bit and are now increasingly being implemented. In many cases, this works better in new office spaces. In general, we have noticed over the last few months that people's mobility has increased again. There have been more face-to-face events and conferences, and also within the companies there is a great desire on the part of employees to meet and exchange ideas in person again."

JLL puts the turnover in office leasing in Germany's Big 7 cities for the nine months at 2.15 million sqm, up 12% on last year. JLL is forecasting 2.9m sqm for the full year, 9% above last year but still 23% below the five-year average of 2016-2020. 

A look at the seven strongholds shows a mixed trend. While Hamburg, Cologne, Frankfurt and Berlin are clearly or very clearly above the previous year's level with almost 48% (Hamburg) to 12% (Berlin), Düsseldorf, Munich and Stuttgart are currently still lagging behind the result from 2020. "However, a revival is also noticeable in these markets, with the deficit now reduced compared to the first half of the year," says JLL's Kortmann.

Retail has been held afloat by the strength of the food-anchored segment. Colliers put the investment volume for the nine months at €6.3 billion, with more than half of that occurring in the third quarter, and pushing retail's share of the overall market from 12% to 16%, overtaking logistics at 15%.

Within the retail segment, Savills figures help to enlighten how investors favoured different categories. Taking a 12-month view, there are clear winners and losers. Supermarkets and discounters accounted for 31% of the transaction volume - almost twice as much as the average of the last five years (16%). A similarly high volume share was accounted for by retail parks/agglomerations (26%), which is also quite clearly above the five-year average (21%).

Going in the opposite direction were department stores and classical shopping centres. Both lost a huge share of turnover in the last twelve months compared to the 5-year average: Department stores shrank from 16 % to 4 %, while shopping centres fell from 15 % to 6 %. 

For supermarkets in particular, this resulted in a further yield compression. At the end of September, the prime yield was 3.7%, meaning that over a year it has fallen by 100 basis points, making supermarkets now considerably more expensive than shopping centres, whose prime yield is unchanged at 5%. 

Retail parks (Fachmarktzentren) are comparable at the top end with supermarkets, but this only includes local shopping centres. The yield level of retail parks with a stronger focus on textile retailing is similar to that of shopping centres.

Jörg Krechky, head of retail investment at Savills sees continued strength in the grocery-anchored retail sector. "We know here of several billion euros that are still to be invested in local supply formats. This should ensure intensive bidding processes and further yield compression"

Colliers' head of Germany, Matthias Leube, commented: "The uncertainty in the markets caused by the pandemic has largely been overcome. The retail and hotel asset classes, which were particularly hit by the pandemic, are increasingly radiating optimism."

Marcus Zorn, head of BNP Real Estate Germany, said the industry was looking for a strong end to the year, after a dynamic upswing over the summer months. "As long as the central banks don't impose extensive interest rate hikes in the short to medium term, investor interest will remain high."