Peak reached in Total Returns, but good prospects thru 2018 –study

A new research study by real estate market research group BulwienGesa offers a fairly bullish prognosis for the outlook for German real estate investment over the next four years, but forecasts a halving of total returns over the period, to 6%, which will by then be effectively only the cash flow return on assets.

While many markets would love to have this problem, Germany generated Total Returns last year of 12.6% (up from 12% the previous year), which the researchers see as falling to half that, or 6%, by 2018 across all sectors. Assets tipped to do very well are residential properties in mid-sized cities such as Bamberg.

Last year, among the different asset classes, residential outperformed with a total return of 16.7%, which will fall to around 14.5% in 2014. Retail came to 10.6%, logistics to 10.1%, while office performance already slowed to 10.2% from 10.9%, with a further decline to 8.5% forecast for the full year 2014.

Last year’s Total Return was the highest since BulwienGesa launched its GPI German Property Index in 1995 – and is likely to have represented the peak, with this year’s Total Returns forecast to fall to 10.3%. The GPI Index is based on publicly available market data and BulwienGesa’s own proprietary research from 127 regional markets in Germany, and covers office, retail, residential (new and second-hand) and industrial, particularly logistics, properties. It is made up of Capital Growth Return and Cash Flow Return (“Gesamtrendite, Wertveränderungsrendite und Mietertragsrendite”).

According to Martin Steinger, BulwienGesa’s chief economist, “In view of the excellent position which Germany has earned for itself economically over the years, the institutional real estate market here in Germany has actually been behaving very reasonably. Of course, in a €50bn market there are always some exceptions and excesses, but they are negligible. The real estate industry will be one of the winners in the coming years, with fears of a bubble unjustified.” The market is benefiting from low interest rates, increasing employment and a stable economy. Investors are realistically betting on stable cash flows rather than speculating on capital appreciation, he added.

Logistics assets, which offer the best cash flow yield, are likely to be the best performers in 2018, based on this prognosis, and should top the list with 7.7% four years from now. In residential, the top performers are likely to be many of those whom the boom has so far passed by, such as Bamberg, Ingolstadt and Leipzig, where bulwienGesa expects a strong increase in construction. In the office sector, Koblenz, Potsdam and Regensburg are tipped, while Gera, Fulda and Erfurt – all at the centre of Germany between east and west – are seen as the best for logistics. Retail returns are still likely to be top in the big cities, headed by Berlin.