Investment in Germany could hit new high of €100b in 2017

Germany could be headed for a bumper year with up €100b in deals, according to Fabian Klein, head of investment Germany at CBRE in Frankfurt. ‘We’re expecting a record year in Germany this year, with at least €50b of deals. If enough supply comes to market, we could even see €70b or €100b of deals,’ Klein told REFIRE.

For Timo Tschammler, CEO of JLL Germany, it has become a market which ‘races from one record to the next’: ‘If you bear in mind that it is the case with most transactions that a double-digit number of investors have also shown interest, as well as the ultimate buyer, but have gone away empty handed, this only serves to illustrate the pace of demand in the German investment market for commercial real estate.’

The first half of the year also set a new record in investment terms, with €25.8b in deals, according to CBRE, an increase of 45% on the same period last year.

‘The increase in the investment volume this year has been the result of an increase in stock coming to market and some big deals signed last year that closed this year,’ Klein said. ‘The very good fundamentals, coupled with the robust lettings market, are reflected in the sustained and very dynamic investment activity, which we can also see in the local economy,’ he added.

Portfolio transactions posted above average gains with a y-o-y increase of 92% to €9.4b, according to JLL. In addition to these billion-euro transactions, 15 transactions above €200m each have also been completed this year.

Prevailing mood is positive

A hearty optimism on all fronts has characterized the global and European financial situation in the last three months, according to Tschammler of JLL. ‘An overall very positive prevailing mood has become established with little space for risk scenarios, even though a certain degree of underlying scepticism may still be rooted in the back of our minds,’ he said. ‘However, the recent banking crisis in Italy serves as a reminder that the situation in Europe remains fragile and volatile, and makes it very clear how quickly problem areas can flare up. Investors would do well to factor in such risks, or act with the appropriate level of caution,’ stressed Tschammler.

‘Top 5’ dominate

Germany’s ‘Top 5’ accounted for 40% of investment activity, or €10.3b, according to CBRE, an increase of 20% y-o-y. Berlin accounted for the lion’s share at €2.86b, an increase of 36% y-o-y. Frankfurt followed closely behind with €2.79b, a massive increase of 73% y-o-y.

‘Office deals increased a lot in Frankfurt because more properties came to market. Offices in Frankfurt tend to be bigger – and more expensive - than in Berlin,’ Klein said.

Munich came in a close third, with €2.21b, up 12% on last year and Düsseldorf followed with €1.07b, an increase of 30%. Only Hamburg witnessed a decline in deals, down 34% to €1.33b, which CBRE attributes to a lack of product coming to market.

Offices have been flavour of the year, accounting for 45% of deals, or €11.7b, in the first half of the year, driven by improving fundamentals in the lettings market, according to CBRE. Retail accounted for a further 24% of deals, or €6.3b.

However, one asset class is outstripping all others, in terms of growth: logistics. The volume of logistics deals has increased the most y-o-y, rocketing an astounding 168%, according to CBRE. Logistics accounted for 19% of deals in the period, or €4.9b, aided by Blackstone’s sale of its pan-European logistics platform Logicor to China Investment Corporation for €12.25b in June, which marked the third largest logistics portfolio sale in the past ten years. ‘Some sellers were opportunistic funds taking advantage of demand,’ said Klein. ‘There’s been an upswing in the leasing market. Demand is unbelievable. Some sellers want to sell but decide not to because they don’t know where else to reinvest the money,’ Klein added.

For Tschammler, investors now see better earnings potential from logistics properties, ‘especially as retail rental growth has ended in many markets and they can no longer justify the high prices (low yields)’. This is also reflected in property financing. ‘Banks have become more cautious with regard to retail property, while recent business figures from property financers show a higher volume of loans for logistics properties, hotels, retirement homes and care facilities,’ Tschammler added.

International investors account for almost half of the pie

International investors channelled €12.6 into German real estate in the period, almost €7b more than in the same period last year, or 48% of the total, according to CBRE. Asian investors –including CIC - accounted for 13%: ‘Korean investors are the most active Asian investors in Germany,’ said Klein. ‘Chinese investors aren’t that aggressive. It can be hard for new entrants to compete with buyers who sellers are already familiar with because sellers aren’t chasing the last percent in pricing. For a lot of them, it is more important to sell to someone they know than to sell for a higher price,’ he added.

US and British investors each accounted for 9% of the total, with French investors contributing 6%.

A cautionary tale

Until the financial concerns of some EU countries and banks have been resolved, the European Central Bank will certainly guard against turning the screw on interest rates, according to JLL, which predicts that the ECB may gradually reduce its bond repurchases and remain committed to its slow exit strategy. However, the key interest rate should remain at zero at least until the end of 2018. This also means that interest rates on both sides of the Atlantic will continue on divergent paths, with the United States poised to make further, albeit it minor, interest rate hikes in the medium term. Interestingly, an argument in favour of such a move is to be able to react to future macroeconomic problems by reducing rates again.

Given that capital markets are very sensitive to signals and statements from the ECB, they are already anticipating an exit from the zero interest rate policy, according to JLL. Slightly higher interest rates are likely on these fronts in the coming months and quarters, while yields for 10-year German government bonds could also increase from 0.25% today to 1% within the next 12 months.