Residential assets favoured in 2021, suburbs in demand

A number of reports reaching REFIRE’s desk, along with several conversations with active investors, suggest the mood among investors for German real estate remains buoyant, with residential real estate – particularly outside the main conurbations – shaping up to be among the prime targets of investor interest.

Engel & Völkers Investment Consulting (EVIC) surveyed more than 220 large investors as to their intentions in the coming year. With pressure to invest still high, most investors are not expecting major price corrections – rather their concern would seem to be more, where can they get their hands on good properties?

The EVIC survey shows that more investors now want to increase their portfolios in 2021 than at this time last year, in particular in residential, both urban and suburban. 80% of those surveyed plan on further buying this year, almost half (43%) more than last year. The survey was carried out between October and December 2020. According to Kai Wolfram, managing partner of EVIC, “None of the respondents is expecting the sector to be affected by undue pessimism.”

Views on the office sector are divided, while COVID-affected sectors such as hotels and retail are still expected to remain strongly out of favour.

While the Big 7 cities are still the main target of investors, their hinterlands and surrounding areas are rapidly gaining in favour, along with separate secondary or B-locations. Berlin tops the list of destinations, now on a par with Munich. The pressure on capital is expected to significantly exacerbate the shortage of core properties in the big cities and their suburbs over the coming months.

One-third of investors expect the sector to be more strongly divided into winners and losers in 2021. The residential asset class leads the ranking: Residential properties are on the shopping list of 64.1% of investors, while demand for office properties should remain constant (41%) despite the expected decline in occupier demand – 70% of investors forecast higher vacancy rates in the office segment. 

Around one in three investors (33%) also plan further investment in logistics properties. By contrast, retail (excluding food) and hotels are losing out significantly: more than one in ten investors (12%) want to downsize their hotel portfolio, while one in five (20%) want to sell their retail properties in the non-food sector.

Non-food retail and hotels are suffering particularly from the consequences of the Corona crisis - "and so are the owners in these sectors," said John Kamphorst, a member of the EVIC management board. In both areas, rent increases and rent reductions were a major issue during the survey period.

According to the EVIC survey, around 36% of owners in the hotel segment were confronted with this issue - on average, rents had to be reduced by almost 60%. In the retail sector, just under one in two owners reduced rents by an average of around 25%. The vast majority of investors (76%) see a "medium risk" that the "rent-related economic turbulence could increasingly spill over onto the rental side in 2021." 12% of respondents are expecting a ‘high’ risk of this happening.

Respondents in general do not expect the ongoing crisis to have any impact on real estate prices. Most of them (79.6%) believe that prices could even rise in urban areas. In the regional markets, around half (57.4%) of investors expect prices to rise.

However, most of the investors surveyed (81%) fear that the pandemic will result in higher equity requirements. Only around a quarter of the respondents (24.1%) still anticipate rising yields. The willingness to invest high proportion of equity (more than 50%) is declining.