Where can you still get a 5% yield in German real estate?

Where can you still get a 5% yield in German real estate? That’s the question being asked for the last four years in an annual study published and presented by market research group BulwienGesa and supported by lawyers Beiten Burkhardt and HIH Real Estate.

The answer, this year as in the last two years, is – only in niche markets, such as in corporate real estate and offices in D-cities, and some industrial parks. Residential prices have risen so high that yields from core properties are at between 1.9% and 2.6% in the A-cities, and between 2.8% and 3.3% in the B-cities, where they have fallen under the 3% threshold for the first time. Office properties have also risen in price, with the IRR on offices in A-city markets down at 2.9%, and at 3.5% in B-cities. Although yields have also fallen in the tertiary markets, 4.3% is still possible, while in D-cities 5.5% is realistic.

In other words, the goal of effective protection against inflation is only barely achievable in the current market, unless the investor seeks out specific niches. Even in the university towns which have become so popular with investors of late, yields sank over the last 12 months by 13% to 3.2% - and BulwienGesa’s report offers little prospect of imminent change.

Sven Carstensen, head of BulwienGesa’s Frankfurt office and the author and main presenter of the report, says returns are to be found in corporate or industrial real estate, or offices in D-cities. With huge demand and limited supply in the biggest cities, and with office prices in the A-cities rising by a further 12%, IRR’s have fallen to 2.9%. The yields in B-cities are now (at 3.5%) where the A-cities were in 2015. “Even yield-oriented investors, who are looking for stable cashflows from offices, have had to widen their search into smaller markets”, said Carstensen.

BulwienGesa warns against treating C- and D-cities alike, where the yields are understandably higher. In D-cities they can vary widely, from 4.6% in Passau to 7.3% in Suhl, as the study points out. For many investors these cities don’t represent a realistic option, despite the higher yields. Often the properties have high vacancies (and a limited pool of prospects who might sign leases), or unstable lease structures. This can produce yields of up to 8.6%, or even higher in the smallest D-markets.

The encroaching e-commerce world and its effect on bricks and mortar retailing is also exercising investors a lot at the moment. Yields from shopping centres have been remaining fairly constant, and IRRs have risen slightly to between 3% and 3.7%. Fachmarktzentren (specialist centres) are considered less prone to the attack of online commerce, and remain the most desired retail category. Recent studies by EY Real Estate and the German Council of Shopping Centers (GCSC) confirm the attraction of Fachmarktzentren.