Düsseldorf/Munich, 10 April 2017 – According to Colliers International, retail properties changed hands for a total of €3.3bn in Germany in Q1 2017, more than doubling yoy from €1.5bn. This is the steepest rise in transaction volume we have seen in the established asset classes of office, retail, logistics and hotel. After performing below the long-term average both in Q1 and throughout 2016, claiming an 18% share in transaction volume, the retail segment accounted for 27% in Q1 2017. The retail segment thereby reinforced its position as the second most important asset class by far following the office segment, which accounted for 37% of transaction volume.
According to Thomas Dänzel, Head of Retail Investment at Colliers International Germany, “The high levels of pent-up demand we saw throughout the past year have heavily impacted the market since the beginning of the year. Transactions under negotiation for quite some time were concluded in the first three months of 2017.” These also included the two largest deals that were finalized in Q1: the German assets in the Melody portfolio, consisting of two shopping centers (purchased by Union Investment Real Estate) and the German properties in the pan-European Ikea warehouse store portfolio (purchased by Pradera).”
Growth due to several large-volume portfolio deals in single to mid-double-digit million euro range
“Thanks to these high-volume transactions, Q1 2017 was able to match the above-average results seen in Q1 2015 of well above €3bn. Back in Q1 2015, the excellent results were based on one single mega deal in the 10-figure range, the Corio portfolio consisting of five shopping centers. This time, the strong results can largely be attributed to several portfolio deals in the single to mid-double-digit million euro range,” Susanne Kiese, Head of Research at Colliers International Germany, adds. However, no single deals exceeding €100m were recorded.
Market activity was generally dominated by portfolio deals, which accounted for a market share of 63% (€2.1bn), up six percentage points yoy. Broken down by retail asset type, retail warehouse and retail park portfolios accounted for a transaction volume of €1.2bn, reflecting more than one third of total transaction volume. Including single deals, properties of this type changed hands for a total of €1.4bn (market share of 41%). Shopping centers accounted for the second highest share in transaction volume at €1.1bn (23%). Due to lack of supply, downtown buildings featuring an office-retail mix accounted for a share in transaction volume of only 25% (€814m) in Q1.
“The current market environment is largely characterized by limited supply, a situation German institutional investors are able to address more effectively than foreign investors,” states Susanne Kiese. German investors can use their home advantage when dealing with the small-scale structure of many portfolios or individual properties located outside of the Big 7, where around 80% of investment activity took place in the past three months. Advantages for German investors include better knowledge of locations and lower expenses.
German institutional investors most active buy side
Similar to Q1 2016, foreign investors accounted for only one third of total transaction volume (€1.1bn), roughly €310m of which came from British investors, around €290m of which from Switzerland and €240m from the US.
As in the previous year, open-ended real estate funds and special funds strongly characterized activity buy side, accounting for a market share of roughly 36% in Q1. A number of new funds were established, including Pradera European Retail Parks SCSp, which purchased the Ikea portfolio. Asset and fund managers acting on behalf of equity-strong investors followed in the ranks with a market share of 18%. Project developers again made up the largest seller group when it came to long-term investments in core products, accounting for a 26% market share. Open-ended real estate funds and special funds came in neck-and-neck with asset managers at 15% each.
Yield compression continues
Institutional investors, driven by excess liquidity and their search for reasonable yields, continue to be prepared to pay increasingly high prices. The drop in prime yields appears to be ongoing particularly in the premium segment, which includes buildings featuring an office-retail mix in prime locations and modern, high-footfall shopping centers. High-street properties in the Big 7 currently generate gross initial yields of between 2.90% in Munich and 4.20% in Cologne. Yields for shopping centers are well below 5%, with Berlin ranking first among the Big 7 at 3.30%. Unmet demand for individual retail warehouses and retail parks combined with urban planning regulations that limit growth in supply, in particular with regard to this type of property, are paving the way for the most noticeable yield compression among all retail concepts. Prime yield has meanwhile dropped below the 6% mark in all investment hubs as a result.
Outlook: Transaction volume could reach €10bn in 2017
“The fact that the transaction volume achieved in Q1 is well above the long-term average, despite small-scale portfolios outside of German investment hubs dominating the market, clearly reflects the tremendous activity we are currently seeing on the German investment market. We are currently seeing more advisory talks with potential investors in the retail segment than in any other asset class. That is why we are confident that total transaction volume will hit €10bn in 2017,” Thomas Dänzel predicts.