Where is the best place to look for a 5% yield in Germany?

For the third year in a row market researchers BulwienGesa teamed up with building consultancy group Drees und Sommer in the convivial surroundings of lawyers Beiten Burkhardt in Frankfurt to see where real estate investors would be most likely to find the magical 5% yield – or more.

Known as the 5% Study, a select group of speakers presented their insights into where these yields could be found, with BulwienGesa bundling the results into a special study. Not surprisingly the range of options this year proved thinner than in previous years as demand remains so high for all forms of German real estate.

The study found, briefly: office properties in smaller selective markets offer potential; while rents are rising in the biggest metropolitan office markets, yields continue to fall; corporate real estate continues to provide fresh yield potential.

The biggest office markets are now showing stagnating IRR returns, as the upwards price spiral slows to a halt. In nearly every other asset class yield potential has fallen compared to last year, with little prospect of a medium term rebound in sight. The 5% yield on classical investment across the main asset categories is now largely wishful thinking, with yield-hungry investors having to burrow around in more niche markets.

Yields on residential property have fallen back noticeably in all domestic markets, including A-, B- and university city locations. Institutional investors have increasingly been rooting around for value in the B-cities for lack of alternatives in the Big 7 cities, leading to further shortages in the second-rank cities and corresponding price rises. In terms of base points, IRRs have fallen in the A-cities by 10.0%, in B-cities by 7.7% and in university towns by 8.5%, bringing yields in the A-cities to under 3%. This trend is expected to continue for at least the next 12 months.

Yields on office properties in smaller markets are a bit more promising, albeit in selected locations and in certain sizes.

Yields on large-volume retail property investment such as in shopping centres or retail parks have likewise fallen, to between 2.9% and 3.6% for shopping centres to 3.4% to4.3% for retail parks.

Logistic assets have held up better than other categories with a fall of 3.5% over last year. Here yields can still be found – depending on type of asset e.g. industrial, light industrial/commercial or warehousing – ranging from 4.7% to 6.8%. The study delves at some length into the different types of yields that can be expected in the non-core field of industrial/logistic assets and the higher-yielding other commercial assets in C- and D-locations for investors prepared to make detailed local studies of less widely-trodden paths.

The full study can be obtained from Sven Carstensen at BulwienGesa in Frankfurt (carstensen@bulwiengesa.de) or from www.bulwiengesa.de