Corporate real estate is a segment of the market in Germany that is not widely tracked by outside observers, partly because of a certain difficulty in accessing up-to-date data but also because of the lack of public accountability, with large industrial corporations using internal benchmarks to measure the efficacy of their bricks-and-mortar assets.
Still, the sector IS tracked, and research group Bulwiengesa have just produced their 18th semi-annual report on the investment market for company-owned buildings and other properties, mainly for industrial use.
The study is commissioned by the Initiative Unternehmensimmobilien, an interest group consisting of ten of the most active participants in the market - Alpha Industrial Developers, Aurelis, Aventos, BEOS, Cromwell Property Group, Frasers Property, Garbe Industrial Real Estate, Investa, Palmira Capital Partners and Siemens Real Estate. The common goal is to improve transparency in this market segment to facilitate access to this asset class. The ten share a reporting system in cooperation with Bulwiengesa, who evaluates all the transaction and leasing date of the participants.
In sympathy with other property investment markets, investment in corporate real estate was down by 19% in 2022 to €1.32 billion, around 26% below its long-term average. Yields rose across all asset types, and letting numbers were up due to a high demand for space. Overall demand for production real estate remained high, despite surging energy costs, says the report.
bulwiengesa.de
Ralf-Peter Koschny, board member at Bulwiengesa
Ralf-Peter Koschny, board member at Bulwiengesa, commented on the report: "The decline in the volume highlights the uncertainty of the players in what is actually a very crisis-resistant asset class. There will be more transactions only when there is greater certainty about inflation and interest rate developments."
The second half of the year saw strong demand for production facilities, making them the most resilient asset type within corporate real estate. Industrial parks were the second-most popular usage type, accounting for €311m, although their share of the market fell by 40% in the last six months of the year. Koschny said the turnaround in interest rates in the middle of the year led to a "complete revaluation of corporate real estate, with financing conditions becoming significantly more difficult; the rise in yields has gained further momentum, at least in part."
Minimum yields (gross initial yields) for prime properties in the last six months were 4.2% for industrial parks, 3.7% for transformation properties, 3.8% for warehouse properties, and 5.0% for production properties.
While investments in the first half of 2022 were broadly spread across regions, investments in the second half of the year were increasingly concentrated on individual regions. For example, the top 3 regions of Berlin, Region East and Region South generated around 67% of the total investment volume in the second half of the year.
While transactions declined, more space was rented, due to ongoing high demand and uncertainty caused by the interest rate rises. Overall new leases were up in the second half to €1.34m, up 7.5% on the first half and itself about 5% above the 5-year average. Demand came mainly from the traditional manufacturing sector, with many now coming from the tech sector. Rents for all types of space continued their upward march due to the underlying demand.
Corporates slow to recognise critical role of ESG in property
In contrast to its residential housing markets, where the majority of Germans rent, it's a different story in corporate real estate, where German companies have traditionally preferred to own the buildings from which they generate their business. According to industry lobby group ZIA the average rate of ownership in Germany of a company's buildings is 75%, compared to only 25% in the USA, where the concept of third-party ownership or sale-and-leaseback is much more prevalent.
ZIA puts the value of corporate real estate - property owned by companies whose business is NOT real estate, at about €3 trillion, or about a third of the total value of real estate in the German economy. At about €960 million square metres, this is more than all German office and retail space together.
A study last year by consultants KPMG highlighted how woefully underprepared at least half of corporates are in respect of ESG issues, with almost no widely available standards to act as benchmarks for corporate property owners. And with 96% of corporate properties more than 20 years old, there's likely to be a lot of catching up to do, given that 10-20% of listed companies' costs are eaten up by property.
A further study last year by fund giant Union Investment showed that one in four DAX companies had no clear idea when they planned to reach carbon neutrality - offering enormous scope for all those advisors and experts in the 'future of work' to tap into the nascent demand for the enormous transformation needed to get Germany's workplaces fit for the new world. Energy efficiency, carbon reductions, adaptation to the new demands of electro- and hydrogen-mobility - these all represent new challenges to corporate managers for whom the management of their properties was traditionally viewed as a secondary or tertiary activity, well below the focus paid to the production of their core products. Accounting for yield and stand-alone profitability of their bricks-and-mortar assets was rarely seen as a priority.
Engineering consultancy group Drees & Sommer, in its latest CREM (Corporate Real Estate Management) Trend Study, sees companies starting to place a more central importance on their property management, with companies like Siemens, BASF, Telekom, BMW and Bosch being cited as particularly progressive. A key factor seems to be the degree to which a company has embraced digitalisation in affecting its approach to property management.
The widespread adoption of Smart Metering Systems, as practised by Siemens, for example, in all of its properties, for instantly measuring its energy consumption and energy costs, is seen as just one step towards a more professional approach to corporate property management.
