- Transaction volume of €57.3 billion reflects highest end-of-year result in past 10 years
- Outstanding portfolio and single-asset deals once again make Q4 the strongest quarter of the year at just shy of €18.6 billion
- Logistics solidifies position as third-strongest asset class behind office and retail
- All investment hubs post above-average results; Berlin leads the Big 7 with more than €7.5 billion
- Prices continue to feel pressure moving into 2018 due to excess demand and a positive trend in the leasing markets
Frankfurt, 9 January 2018 – According to Colliers International Deutschland, the German commercial investment market ended 2017 with a transaction volume of €57.3 billion, a 10-year record high. 2017 is the third consecutive year to post a total-year result of over €50 billion also beating out 2015’s recent high of €55.4 billion. The only hurdle missed was 2007’s all-time record high of €59.3 billion. A 70% increase compared to the 10-year average also points to an exceptionally favorable market situation.
Even though the end-of-year rally failed to break through the €20 billion barrier as it did in 2016, Q4 once again proved the strongest quarter of the year with €18.6 billion, or roughly one-third of total 2017 transaction volume. A number of major deals once again impacted market activity. Among the three largest was the Primus portfolio comprised of five renowned premium assets: Alsterarkaden and Kaufmannshaus in Hamburg, Upper West in Berlin, Upper Zeil in Frankfurt and a 50% share of the Karstadt department store at Munich central station. RFR Holding sold the portfolio to Austrian Signa Prime Selection for €1.5 billion. The sale of a portfolio comprising more than 40 assets has also been officially confirmed. Intown Invest, an asset/fund manager handling Israeli capital, purchased the portfolio for roughly €1.2 billion from Apollo Global Real Estate. 3rd place was claimed by the German share of a portfolio sold within the scope of the takeover of pan-European logistics platform IDI Gazeley by Global Logistic Properties from Singapore. The share comprised 30 logistics assets valued at over €815 million. The largest deal of the year, which was finalized in Q2, also involved a logistics platform deal with China Investment Corporation acquiring a pan-European real estate portfolio from Blackstone subsidiary Logicor. China Investment Corporation paid more than €2 billion for the properties located in Germany alone. Transactions similar to the numerous cross-border deals we saw change hands in 2017 are often the only opportunity global investors have to pursue investments in the billion-euro range. Such deals are a striking indication that many investors are pursuing long-term investment strategies in Germany.
Impressive number of portfolio and single-asset deals in billion-euro range
Despite the large number of portfolio deals in the billion-euro range, the share of these deals came in just shy of previous-year levels with a share of 36% and a transaction volume of €20.5 billion. High-volume single-asset deals such as the sale of the Sony Center in Berlin for roughly €1.1 billion by South Korean sovereign wealth fund NPS to Canadian pension fund OMERS at the end of Q3 were followed by numerous landmark transactions in the last three months of the year. The sale of the Frankfurt office building Tower 185 by CA Immo and a group of pension funds to Deka Immobilien for €775 million deserves particular mention. Single-asset deals claimed a share of 64%, or €36.8 billion, at year-end.
Increase in transaction volume traces back to foreign investors
Matthias Leube, CEO and Head of Capital Markets at Colliers International Deutschland, comments, “We saw an increased presence of foreign investors on the German investment market over the course of the year thanks to the stable political situation and continued strong economic performance. The share of foreign direct investments increased year-over-year from 40% to 45%, or €21.0 billion to €25.6billion. If we were to also include the foreign capital invested through asset managers, this share would come to well over 45%. Foreign investors accounted for the lion’s share of transaction volume growth year-over-year.”
The majority of foreign capital poured into the German investment market in 2017 again had its source in the US at €4.2 billion, or 16%, followed by roughly €2.9 billion, or 11%, from the UK. Due to the exceptional platform deals traded in 2017, France shared 3rd place with China, both claiming an 8% market share and investing €2.1 billion. Another Asian country (€2.0 billion) took a place in the ranks practically neck-and-neck with Singapore. “Japanese investors in particular looked in greater numbers to Germany, shifting their earlier focus from the UK and the US. Even though this development did not impact transaction volume in 2017, we expect to see Japan become a new source of foreign capital in 2018,” Matthias Leube observes.
German investors managed to defend their position despite the high share of foreign capital. Although their market share dropped from 60% to 55% in 2017, their absolute investment volume remained stable at roughly €32 billion.
Open-ended real estate funds and special funds continued to dominate the German market buy-side in 2017, claiming more than one-quarter of total transaction volume, or €15 billion. Asset/fund managers, which are increasingly acting on behalf of foreign investors, took 2nd place with a 21% market share, or €12.1billion. They were active sell-side as well, dominating the market at year-end with 22% (€12.4 billion), in the lead ahead of property developers with 17% (€9.7 billion).
Logistics assets prove popular as long-term investments
Colliers’ asset class analysis paints a clear picture: While office properties, basically unchanged yoy, continued to claim a market share of 47%, retail assets posted 21% following a weaker previous year particularly characterized by scarce supply. Logistics and industrial assets advanced to claim a clear 3rd place throughout each quarter of 2017 thanks to the platform deals mentioned above.
It remains to be seen whether logistics and industrial assets will be able to maintain their current 15% market share in 2018. However, we can expect to see them pulling in a two-figure share regardless as warehousing and logistics will continue to be classified as growth sectors in the medium term due to the ongoing e-commerce boom and the modern distribution concepts being pursued by courier, express and parcel service providers. As a result, these types of assets are becoming increasingly attractive to more risk-averse investors. This also applies to increased investment in food-related retail warehouses such as supermarkets, discounters and hypermarkets. “In addition to product availability, sustainability and capital preservation are proving strong arguments when it comes to investment decisions. These aspects serve to differentiate the current boom from the one we saw in 2007,” reflects Matthias Leube.
Investments in Big 7 remain investor favorite
In terms of regional distribution of transaction volume, Germany’s seven investment hubs continued to dominate the field with around 52%, reflecting a slight yoy drop of 3 percentage points. Many of the high-volume portfolios traded in 2017 contained assets located outside the Big 7. This applies not only to logistics, retail warehouse and hotel portfolios as in previous years, but also in increasing numbers to office portfolios, such as the portfolio acquired by Intown.
Berlin claimed pole position among Germany’s Big 7 at year-end with more than €7.5 billion, nevertheless falling short of 2015’s record high of around €8.1 billion. As the stage for the highest-volume single-asset deals signed in Germany in 2017, including the Sony Center and Springer Media Campus, Berlin also proved its popularity among both German and foreign investors, in part due to the city’s lively property development activity.
Frankfurt demonstrated its standing as the go-to market for foreign investors looking to invest in Germany with the sale of numerous high-rises, in particular Tower 185. The beginnings of the Brexit effect could be felt in 2017 despite uncertainty as to how things will turn out. Transaction volume at the end of the year came to a total of €6.9 billion, up 13% yoy.
In Munich, where the severe lack of supply was tangible, a number of deals signed right before the end of the year managed to put transaction volume at just under €6.2 billion, roughly 10% down from the exceptional 2016 results. The same can be said for Hamburg and Stuttgart, which missed the previous year’s 10-year high by 31% and 37%, respectively. Nevertheless, these cities, just like the rest of the Big 7, managed to considerably exceed the 10-year average by 17% and 21% at €3.4 billion and €1.2 billion, respectively. Thanks to several major deals, Düsseldorf (including the Vodafone campus) and Cologne (DuMont Carré, Gerling-Quartier) posted new record highs at €2.7 billion and €2.0 billion, respectively.
Yield compression continues
Excess demand for investment opportunities and the ongoing boom on the leasing markets continued to put yields under pressure in some of Germany’s seven investment hubs in the months from October through December, although compression did lose some of its momentum due to high prices.
Prime yields for office properties fell most significantly in Frankfurt and Hamburg to a current 3.30%. Berlin and Munich also saw slight adjustments with yields currently at 3.20%. Cologne (4.25%), Stuttgart (3.80%) and Düsseldorf (3.75%) came in at the other end of the narrow spectrum. Investments in buildings featuring an office-retail mix in prime locations of Germany’s top 7 cities continued to record the lowest yields. Prime yields for this property type in Frankfurt and Munich came to 2.80%, with Cologne and Düsseldorf claiming the highest yields at 3.50%. Prime yields of 4.65% proved the norm in the logistics segment across all locations and experienced the most compression in 2017, in some cases dropping from well over 5%.
Outlook: 2018 transaction volume only expected to fall slightly in light of ongoing sector trends
“With the central banks, especially the ECB, continuing to pursue a low-interest policy and in light of ongoing strong economic growth and rents increasing in almost all asset classes, most investors continue to find real estate a highly attractive investment,” Matthias Leube explains. “The sweeping economic upturn we are seeing take hold throughout Europe will also drive increases in take-up on the leasing markets. Germany will particularly benefit from these trends thanks to its stable job market and export strength. We therefore expect to see a similarly high transaction volume in 2018 somewhere in the range of €55 billion. If one thing proves limiting, it will be a lack of product suitable to meet demand and not a lack of capital. These circumstances together with general rental growth will continue to drive prices on the investment markets upwards.”