Düsseldorf, 5 April 2017 – According to Colliers International, €12.2bn were invested in German commercial real estate in Q1 2017. This is the second time that transaction volume has exceeded €10bn since the 2007 record year, in line with the excellent performance seen in the first quarters of 2014 and 2015. Transaction volume is up 48% from Q1 2016 and even 67% above the ten-year average.
“In Q4 2016 there were already signs that the spectacular end-of-year rally would continue into 2017. Many of the deals ready to be signed at the end of 2016 were finalized in the first months of the new year,” comments Ignaz Trombello MRICS, Head of Investment at Colliers International Germany. These deals include a pan-European Ikea warehouse store portfolio, the German share of which was sold to a fund held by British asset management company Pradera at a purchase price in the mid-9-figure range.
In contrast to the previous year, investment activity was generally characterized by portfolio deals, with €4.2bn changing hands for portfolios in the first three months of 2017, twice as much as in Q1 2016. This reflects a 35% share in total transaction volume. The Hansteen portfolio, comprised of 100 German logistics assets and sold for €980m to a joint venture involving Blackstone and M7 Real Estate, accounted for just shy of one quarter of total transaction volume alone. The German share of the Melody portfolio consisting of two shopping centers took third place after the Hansteen and Ikea portfolios, also going for a purchase price in the mid-9-figure range. One of the largest single deals in Q1 was the Munich project Kap West, which was snapped up by Allianz before development.
Foreign investors dominate portfolio transactions
Foreign investors were particularly ready to seize opportunities to get involved in large-volume portfolio deals. Around two-thirds of foreign capital (€2.5bn) was poured into portfolios, with German investors only dedicating roughly one-fifth (€1.8bn) of their invested capital to these types of transactions.
Foreign investors generated a total investment volume of €5.2bn in Q1 2017, bringing in a market share of 43%. These results were up considerably from the 29% posted in Q1 2016, a development that can mainly be attributed to lack of supply. With the Hansteen deal, US investors accounted for the largest share in foreign investments with an 11% market share (€1.4bn), followed by the UK (€605m) and Switzerland (€570m) with market shares of 5% each.
According to Susanne Kiese, Head of Research at Colliers International Germany, “The German investment market continues to boom for the third year in a row thanks to highly favorable conditions.” As Europe’s growth engine and a country that enjoys extremely low unemployment rates, Germany has earned permanent status as a safe haven among long-term investors. In light of the upcoming federal elections in September, Germany’s economic stability is also perceived as a guarantee of political stability and that the public will continue to back conventional parties. In addition, the interest rate reversal in the US has not yet triggered any noticeable redirection of capital to the US. In view of the failed healthcare reform and immigration policies, we are instead seeing increasing doubt regarding the realization of Donald Trump’s planned economic and tax reforms, which have been touted as the basis of a forthcoming economic boom. The UK’s formal application on 29 March 2017 to leave the EU and the imminent tough negotiation phase between the EU and the UK could animate investors who are still sitting tight to soon begin moving their assets to Germany.
At the same time, the ECB’s ongoing expansive monetary policy is strengthening real estate’s position as a low-risk investment option. Despite the return to positive yields for 10-year German government bonds (0.29% in Q1 2017) and continued yield compression on commercial assets across all segments, the spread is still large enough to particularly inspire institutional investors with high equity ratios to increase their real estate shares. This trend is also being driven by the fact that interest on deposits are still below zero, making larger liquidity holdings less profitable.
Open-ended real estate funds/special funds again dominated the market buy-side, snapping up assets for around €4.5bn in Q1 (37% market share). Project developers defended their first place sell-side with a transaction volume of €3bn and a share of 24%. They remain the main beneficiaries of the shortage of supply in the popular core and core plus segments. In their position as key intermediaries, asset managers came in second both buy and sell-side with a market share of around 20% for purchases and well as sales.
Logistics and retail outside of Big 7 dominate market activity
Two additional observations indicate that, in view of pressure to invest, current market activity is largely characterized by supply-side opportunities. The portfolio deals dominating market activity and an unusually large number of more than 20 high-volume deals in the segment of between €100m and €250m (total volume €3.3bn) have triggered a marked shift in investment focus in terms of location and asset class.
Although office properties have remained the most important asset class with a market share of 37% (approx. €4.5bn) in 2017, retail properties were able to increase their market share from 18% at the end of 2016 to 27% in Q1 2017. Roughly €3.3bn were directed at investments in warehouse store and retail park portfolios. The industrial and logistics property segment saw a particularly impressive start to the year, largely characterized by the Hansteen portfolio deal. Irreversible future trends such as e-commerce and the significance of same-day delivery, both of which are behind the creation of entirely new property types such as distribution warehouses for city logistics and multi-story properties, will ensure high demand for this asset class. Industrial and logistics assets changed hands for €1.9bn in Q1, accounting for a 15% share in total transaction volume. Investors also continued to focus on hotels with a transaction volume in excess of €1bn (9% market share).
Locations outside Big 7 account for more than 60% of transaction volume
In terms of location, the majority of deals in Q1 shifted towards areas outside of the Big 7 investment hubs. These locations accounted for around €7.2bn, a share of roughly 60% in total transaction volume. Over the past few years, this share has typically come in below 50%. However, Q1 results tend to be more prone to fluctuation than the remainder of the year.
We are again seeing the limiting effect of the scarcity of investment opportunities in Germany’s Big 7, particularly in the office segment. The impact of this situation is also apparent in the currently high margin of fluctuation in investment volumes among the Big 7.
Total investment volume in Berlin came to €1.6bn, more than doubling yoy and once again underscoring the city’s immense popularity among German and foreign investors. With an investment volume of €1.2bn, Munich was able to exceed the €1bn mark in Q1 for the fourth year in a row. These results can increasingly be attributed to Munich’s surrounding area. Both cities saw prominent office properties change hands including the Vattenfall center in Berlin and the Kap West and Highrise One projects in Munich. The largest increase in transaction volume in Q1 (180%) was recorded in Cologne, where two mixed-use district developments – the second construction phases of Gerling Quartier and Friesenquartier – led the pack and accounted for a transaction volume of €150m. Cologne’s total transaction volume came to around €670m, followed by Hamburg with €624m – a relatively weak start to the year in a long-term comparison. The largest deal in Hamburg was the sale of the Radisson Blu hotel. Like Hamburg, Frankfurt was also unable to match Q1 2016 results. Due to a lack of major deals, total transaction volume in the city came to €480m, down 25% yoy. Frankfurt was followed by Düsseldorf with €350m. Stuttgart saw the lowest investment volume in Q1, failing to surpass the €100m mark and recording a very steep yoy drop of 73%.
Prime yields in Big 7 continue to fall
In light of high excess demand, in particular in Germany’s Big 7 investment hubs, prime yields for office assets have continued to drop since the start of the year, currently ranging between 3.30% in Munich and, for the first time, in Berlin as well and 4.50% in Cologne. Assuming the boom phase continues, Düsseldorf (4.00%) and Frankfurt (4.10%) will see yields fall below the 4% mark this year, joining Stuttgart (3.80%) and Hamburg (3.50%).
Outlook: Total transaction volume could reach €50bn in 2017
“The promising start to the year confirms our expectations that total transaction volume could realistically reach €50bn in 2017,” Ignaz Trombello predicts. “Not all sales negotiations initiated in 2016 have been finalized to date, which will, in turn, have a favorable impact on Q2 results.”
Susanne Kiese adds, “The general conditions spurring demand will continue to influence the market throughout 2017. Although rising interest rates could pose a risk to the German real estate investment market in the long run, the Fed’s two expected interest rate hikes will not affect levels significantly this year. According to Mario Draghi, the ECB will not start raising the key interest rate before quantitative easing comes to an end in late 2017. It is likely that many investors will use this phase of excess liquidity and rising real estate prices to their advantage, which will result in a higher turnover rate of properties and (partial) portfolios.”