Record year for German real estate in 2018, but mood shifting

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Last year marked a record year for German real estate, with around €77.3bn invested in real estate, of which €60.1bn was invested in the commercial real estate market, an increase of 6% y-on-y, according to CBRE.

‘Last year set another record in the investment market for German commercial property,’ said Fabian Klein, head of investment at CBRE Germany. ‘In particular, lively investor interest in commercial real estate in investment centres such as Frankfurt am Main, Berlin and Munich drove momentum. Office properties are especially attracting investor attention, not least due to great demand on the letting markets. The German real estate market generally remains one of the most important target markets for domestic and international investors due to the promising macroeconomic fundamental data and interest rates running at a persistently low level,’ he added.

In Germany’s ‘Big 7’ - Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart – the investment volume jumped by €6.3bn or 17% y-on-y. German investors dominated their home market last year, accounting for €46.5bn or 60% of deals, up from 53% last year.

‘Given the German economy’s stable fundamental data, demand remains persistently strong and the German real estate investment market continues to top the list for real estate investors,’ said Klein. ‘Consequently, the transaction activity will continue to run at a high level in 2019 as well despite speculation about a possible interest rate reversal, with the sole constraint being the lack of property suitable for investment,’ he added.

Resi defies expectations

The residential sector benefitted from significant growth, accounting for €18.7bn of deals, thereby surpassing the five-year average of €16.9bn, according to JLL. This was achieved despite new regulatory and bureaucratic measures that resulted in investors facing more stringent conditions last year. Higher transaction volumes were achieved in 2005 (€19.8bn) and 2015 (€25.2bn).

Since the number of traded properties and portfolios fell slightly and the number of traded units increased only fractionally, last year’s growth was almost entirely due to higher property prices. Compared to the previous year, the average cost for a residential unit increased almost 20% to €142,000 or €2,200 per sqm. Five years ago, prices were 70% below this level, according to JLL.

However, this year, the transaction volume is likely to fall, warns Konstantin Kortmann, head of residential investment at JLL Germany: ‘Even if developers, municipal housing companies and large housing companies build more new housing, it is likely that the overall transaction volume will fall,’ he said. ‘Sustained price growth and the tendency to invest more in special segments such as micro apartments and student accommodation will not fundamentally change that. However, a transaction volume in line with the five-year average of about €17bn should be achievable.’

The largest transaction of the year was the acquisition of Buwog in Austria by the German housing group Vonovia - including around 27,000 German units - for a purchase price of around €2.9bn, including liabilities. Only three other portfolios with more than 4,000 residential units changed hands. More than 90% of the transactions involved fewer than 800 residential units and generated close to €10bn overall, according to JLL.

The acquisition of Buwog alone ensured that listed housing companies again accumulated the highest asset volume, investing a net amount of around €3.6bn. ‘These companies will only be able to retain their leading position in future if adequate large portfolios or companies come onto the market,’ Kortmann said. However, this is not expected to be the case because market consolidation in Germany is now at an advanced stage. ‘Further growth can either be achieved through investment in international markets - a path that is already being taken by some listed German housing groups - and/or development of the existing portfolio,’ he added.

Hotel market just misses €4b mark

Single asset sales dominated the German hotel market last year, with portfolio sales markedly absent, according to JLL.In total, €3.85bn of hotels were transacted, down 7% y-on-y – not quite hitting the forecast of €4bn – of which single assets accounted for €3bn.

‘Yes, the result has fallen for the third consecutive time. No, that does not signal declining interest in this asset class,’ said Stefan Giesemann, executive vice president of the JLL Hotels & Hospitality Group. ‘It’s the same old story: if suitable (portfolio) offers are not available in the market, neither German nor foreign investors have the opportunity to invest. It’s very simple. Last year, only one large portfolio transaction in the three-digit-million range took place, compared to three in 2017 and seven in 2016. However, the increase in individual transactions (+11) compensated for this shortage, because capital is sufficiently available and financing conditions are investor friendly.’

In 2018, a total of 93 single asset transactions were completed, most of which were between €25m and €30m in size, according to JLL. The top five transactions accounted for a volume of about €900m, and included the sale of Hilton Berlin in the second quarter by a joint venture of Park Hotels & Resorts and Abu Dhabi Investment Authority (ADIA) to Aroundtown for around €297m.

‘The hotel markets continued to show robust growth with record numbers of overnight stays in almost all cities, stable domestic demand and a steady rise in foreign tourists, an important reason for the strong performance of hotels,’ Giesemann added. ‘This encourages foreign off-shore investors to invest their capital into German hotels with lease structures.’

Domestic players dominated the market accounting for around 72% of all transactions or €2.8bn. International investors, who were particularly interested in large portfolios or individual transactions, accounted for a further €1.1bn. Most capital came from the UK (€300m across five deals), followed by French investors with about €164m across eight transactions. Off-shore investors from the Middle East and Asia invested around €180m in three German hotel transactions, according to JLL.

Office properties remain the strongest asset class with new high

Office deals accounted for the lion’s share of investment at €31.9bn, or 41% of the overall volume and a 15% increase y-on-y, thereby outpacing all other asset classes. Of the total, 60% of office deals were transacted in the ‘Big 7’, according to CBRE.

‘The dominance of the most sought-after asset class, office real estate, is of particular significance,’ said Helge Scheunemann, head of research at JLL Germany. ’Around 80% on average has been invested in property in the ‘Big 7’ over the past few years (since 2012).’

In Frankfurt, the commercial real estate market broke through the €10bn barrier last year, following the completion of a number of large-volume office transactions at the end of the quarter, according to JLL.

‘The high level of interest in the established markets is primarily owing to the strong lettings market, which provides a fundamental basis for investments as well as the prospect of further rent increases following refurbishments or the renting out of vacancies in a property,’ said Scheunemann. ‘In the face of diminishing yield compression, rental growth in particular is becoming increasingly important as a way of generating added value. This is also why value-add properties with short remaining leases, or properties with vacancies, are currently in continued rising demand due to the shortage of existing properties in both the investment and letting markets, especially in central city locations. Numerous office or residential construction projects are currently let before completion, thus reducing the risk of such investments.’

Prime yields for offices in the ‘Big 7’ on office properties dipped by 0.22% to 3.04%, according to German Property Partners. The lowest prime yield was registered in Hamburg at 2.80%, with the highest recorded in Cologne and Stuttgart at 3.30%.

‘The transaction volume in 2018 was the best result for more than ten years,’ said GPP spokesperson Guido Nabben. ‘Currently, the market features a large number of properties in which the majority of space is already let before completion. Investors are especially interested in these properties, which explains why the number of forward deals is now appreciably rising,’ he added. (ssk)