German pricing continues to firm despite fall in overall investment

Despite a fall in investment activity in Germany in 2016, 2017 will not see the start of a stamped to the exit by investors, says a report on the German real estate market earlier this month by Capital Economics. While record low yields may engender caution among some investors relative to other fixed income assets, German commercial real estate is still fairly valued, and there is scope this year for yields to fall still further, say the researchers.

At €52.5bn and despite a surge in activity in the fourth quarter, investment in German commercial property last year was down 5% on 2015, according to data from CBRE. This still made 2016 the second-highest year on record, behind 2015.

The leading sector was offices, showing a small rise to 47% overall market share. Retail fell to 25%, from 32% in 2015, its second-lowest share since the financial crisis. Industrial and logistics rose on strong demand.

The continued decline in prime office yields to new record lows, says the report, suggests that investors still see value in Germany's biggest cities, although the level of foreign investment fell to €23.6bn, from €27.8bn in 2015. The report cites PwC's recent 2017 Emerging Trends in Real Estate survey which ranked Berlin, Hamburg and Frankfurt at one, two and three in European investors' preferences for overall and development prospects, with Munich ranked at number five.

The report also suggests that German status as a safe have for commercial property investment means that the country is likely to benefit from the heightened political uncertainty expected this year, with several key national elections scheduled in the euro-zone, plus the emerging Brexit negotiations. Overall, the report concludes, a lack of available assets may well prove to be the biggest hurdle for investors in the German market this year.