Matthias Leube, CEO of Colliers International Deutschland, comments: “The numbers reflect the extraordinary stability and longevity of the current investment boom, which is currently receiving new impetus from many sides giving us reason to anticipate another above-average year for investment.”
One factor contributing to this outlook is the fact that general conditions on the capital market remain unchanged. Leube continues: “The ECB’s announcement that it would postpone reversal of its zero-rate policy until late 2020 and continue to pursue its quantitative easing policy will help keep real estate an attractive asset class over the next two years, particularly in Germany. In light of these developments, it comes as no surprise that the share of real estate assets held by German insurance companies has exceeded 10 per cent for the very first time.”
The fact that 10-year German government bonds recorded negative interest rates in April and May is also fueling this trend, a development that reflects current expectations, particularly of risk-averse investors, regarding Germany’s crisis resilience.
“Germany remains a top investment destination in light of increasing trade conflicts and other global economic and political crises that are curbing economic growth. The strong upward trend on the leasing market also supports a favorable outlook for secure cash flows,” adds Matthias Leube.
Foreign investors poured €10.7 billion into the German commercial real estate market in H1 2019, reflecting a market share of 43 per cent. US investors were the most active foreign investor group in Germany with €1.9 billion. Their growing interest in investments across the Atlantic can be attributed to the fact that the US investment cycle is past its peak.
British investors claimed second place with €1.8 billion. The strong result could be attributed to the fact that British asset and fund managers often act as intermediaries for international investors, which obscures the actual origin of their investment capital, while the uncertain outcome of Brexit was also a factor.
Transaction activity particularly lively in the Big 7
Transaction activity in Germany’s seven top investment hubs was especially lively with an investment share of 53 per cent in H1. The €13.5 billion posted in transaction volume, just 5 per cent shy of the previous year’s record result, is the second-highest ever recorded in H1.
Berlin hit a new record transaction volume of €4.9 billion, up 85 per cent compared to June 2018. This can mainly be attributed to high-volume deals in Q1, particularly the sale of the Oberbaum City office complex for €500 million. Deutsche Real Estate AG’s sale of Carrée Seestraße (Osram Höfe) to Cording Real Estate for €225 million was the largest deal signed in Q2.
Munich and Frankfurt recorded decreases of 24 per cent and 17 per cent, respectively, in comparison with the previous year’s record results. Following a modest start to the year, several landmark deals that had been in the pipeline for some time were signed in Frankfurt at mid-year, putting transaction volume at €2.6 billion. The sale of the Die Welle office property, the largest H1 single-asset deal in Germany, was announced shortly before the end of the quarter. Norges Bank and Axa Investment, which held the asset on behalf of the Norwegian sovereign wealth fund, sold it to Invesco Real Estate for €620 million. By contrast, Munich will not see major deals signed until the second half of the year.
Düsseldorf came in fourth with a new H1 record volume of €1.2 billion. Three deals for €100 million each contributed to this result, including the sale of the Herzog-Terrassen office building. With this result, Düsseldorf surpassed Hamburg, which saw a calm H1 and barely managed to reach €1 billion.
Cologne recorded a transaction volume of €810 million, exceeding the previous year’s result by one third, also due in part to two deals signed for over
€100 million (partial sale of Barthonia Forum, Wallarkaden) and several larger
hotel transactions. Limited supply in Stuttgart resulted in the lowest H1 result among the Big 7 due to a relatively weak Q2 and a transaction volume of €744 million. The sale of the Königsbau-Passagen in Q1 for €280 million dominated the city’s real estate investment landscape in the first six months of the year.
Portfolio deal activity low – strong transaction volume expected for H2
Overall, the trend toward high-volume single-asset deals accelerated year-on-year with single-asset deals accounting for €21 billion, or 84 per cent of total transaction volume. In contrast, portfolio deals claimed a market share of 16 per cent with transaction volume at €3.9 billion. This year-on-year drop of 13 percentage points marks a new all-time low, even though the largest transaction this year to date was a portfolio deal for well over €1 billion.
Christian Kadel, Head of Capital Markets at Colliers International, says: “Even more than single-asset deals, portfolio deals tend to exhibit substantially longer periods of sale until the deal is signed. Available products are becoming increasingly complex. That means intensified due diligence – especially in this mature market phase, whether it be in terms of a ground lease, fire safety or locations outside established areas. This particularly applies to portfolio products, such as the Metro-Real portfolio and the Salt & Pepper retail warehouse portfolio.”
Yield compression ongoing for some core products only
In this context, investors are less willing to pay increasing purchase prices outside the premium segment. Gross prime yields in the office segment have dropped slightly in the past three months; they decreased by 10 basis points to 2.90 per cent and 3.30 per cent in Munich and Stuttgart respectively, and by 20 basis points to 3.10 per cent in Frankfurt. Gross prime yields in secondary Big 7 locations remained mostly stable.
According to Kadel: “In view of current gloomy prospects for global trade and the ongoing upswing in the real estate sector over the past few years, not all investors looking to buy are expecting to see a rental increase. In addition, yields outside top locations are in many cases approaching prime-location levels. The difference between prime and secondary locations in Stuttgart is currently only 20 basis points, in Düsseldorf 15 basis points and in Berlin 10 basis points. The corresponding gross yields for high quality assets in those secondary locations have reached 3.20 per cent, with gross yields in all other Big 7 secondary locations also below the 4 per cent mark. Further yield compression in these locations is unlikely for the most part. Yields in peripheral office locations might continue to drop in some markets, although even yields for quality assets in those locations are already coming in below 5 per cent. Gross prime yields of 3.7 per cent have already been recorded in Berlin. We are also seeing this trend in Stuttgart (4 per cent), Munich (4.5 per cent) and Frankfurt (4.9 per cent).”
Divide in willingness to take risk, particularly on the part of German investors
Compared to the previous year, investors are displaying a tendency to take less risk. The core segment accounts for approximately 37 per cent of transaction volume classified by risk, reflecting a year-on-year increase of 9 percentage points. The core plus segment, on the other hand, saw a decrease of 7 percentage points to 35 per cent. At the same time, a considerably low 2 percentage-point decrease in investments in value-add and opportunistic assets resulted in a significant 28 per cent.
Christian Kadel adds, “We saw lively interest in these products, especially in Germany’s seven investment hubs.”
German investors claimed a 34 per cent share in this segment, significantly higher than that of foreign investors at 20 per cent. In the current market phase, German investors are making use of their ‘home advantage’ when it comes to assessing the risk-return potential of properties and responding to lower product availability in the core segment.
Office assets remain the most popular asset class
Pressure to invest in the office segment remains high. Office assets accounted for just under 50 per cent of total transaction volume, or €12.2 billion with single-asset deals even claiming 57 per cent. Office assets currently play a rather insignificant role in portfolio deals at 4 per cent, at least in terms of the status quo without taking into account the few high-volume portfolios currently on the market. The opposite can be said for the retail segment, which is traditionally the second most important asset class. In H1 2019, retail assets accounted for €4.9 billion, or 20 per cent of market volume, and a 59 per cent market share in the portfolio segment. However, the retail market share involving single-asset deals only came to 12 per cent. Investors continue to be predominantly interested in portfolios in the industrial and logistics sector; this asset class managed to defend its third-place position with a market share of around 10 per cent, or €2.5 billion. Hotels and land sites claimed a shared fourth place, each recording a transaction volume of €1.6 billion, or a market share of 7 per cent.
There were no significant changes in terms of buyer and seller profiles. Asset and fund managers continued to be the main players in the current market, accounting for €6.9 billion, or 28 per cent. Open-ended real estate funds and special funds followed in the ranks with €4.4 billion, or 18 per cent. The high share claimed by listed property companies (12 per cent) can primarily be attributed to the Kaufhof transaction. Property developers continued to dominate sell-side with €6.7 billion, or a market share of 27 per cent. Asset and fund managers came in second with €3.8 billion, or 15 per cent.
Outlook: Timing of large-scale transactions increasingly difficult to predict
According to Matthias Leube, “Q2 results are entirely in line with the promising start to the year. We continue to see a large number of high-volume transactions with no end in sight. However, it is becoming increasingly difficult to determine closing dates, a critical piece of information when it comes to predicting annual transaction volumes. Taking into account the current deal pipeline, we expect the annual result to come in close to the previous year’s record of €60 billion.”