research germany investment market overview
TRANSCRIPT
Q3 | October 2021
Research Germany
Investment MarketOverviewHigh transaction volume in Q3
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Demand for commercial property in Germany remains at a high level
Germany has voted, but the nation does not yet have a new government. This was to be expected, of course. As a reminder, it took around four months to form a new coalition after the last federal election in 2017. For investors, this means that little is likely to change before next year. Beyond the actual result itself, however, one of the positive key messages from this election is that Germany will continue to be a politically stable, reliable and democratic economy. Indeed, voters have put a stop to the slide towards the political fringes.
This is not at all insignificant in turbulent times such as these, given the diverse challenges that lie ahead. The climate clock is ticking relentlessly, and the geopolitical landscape has not become less complicated, not least because of the disaster in Afghanistan. Last but not least, the fear of a resurgence of the coronavirus pandemic is still palpable. In addition to the federal
election, there was also a local referendum on the expropriation of property from large housing groups in Berlin. Berlin residents strongly endorsed the campaign to expropriate properties from corporate landlords, and this result illustrates how necessary a reorganisation of housing policy in Germany has become in general. Beyond Berlin, there is an urgent need for politicians to bring all stakeholders to one table in order to develop solutions and options that will stimulate social housing construction in such a way that housing remains affordable for everyone. However,
Transaction Volume Germany
With beginning of the year 2019 JLL Research modified its calculation for transaction data. The total transaction volume includes both, pure commercial properties but also our new asset class Living which includes residential properties (mul-ti-family properties and portfolios with more than 10 units), student housing, micro living and Elderly Care Homes.
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even the construction of new housing is not a solution on its own as it would conflict massively with climate goals and the reduction of carbon emissions in the construction sector.
Strong third quarter for transactions – focus on the Big 7 citiesIn addition to ESG as a mega trend that is here to stay, international investors in particular are still struggling with travel restrictions. When competing for the relatively few top products on the market, this can be a major disadvantage. Here, the investors that benefit are those that have access to the capacities and capabilities of local asset managers. And the fight for the best properties will continue in the final quarter of the year. The term ‘frustrated capital’ is increasingly being used to describe investors that have not yet been successful in structured bidding processes. And yet so much capital found its way into property during the third quarter that the yearonyear decline has been turned into a small increase. The transaction volume including Living amounted to a total of €60.8 billion for the nine months from January to September, equating to an increase of 5% compared to 2020. The third quarter alone contributed almost €27 billion or 44% to the result. Since 2016, there have only been three quarters with an even higher volume.
A number of highpriced singleasset transactions contributed to this development, primarily the two Frankfurt office buildings T1 and Skyper. The former was sold for around €1.4 billion, while the Skyper deal was in the threedigit million range. Such transactions show that there is still confidence in the German investment market and that investors still believe in the office asset class. In total, the volume of singleasset deals exceeded that of the previous year by a remarkable 29%. On the other hand, larger portfolios are still absent, and this applies to all types of commercial use. Here, although the trend has improved compared to the first
half of the year, the volume is still well below the previous year at minus 17%. This is probably not the case for residential property. The sale of the Akelius residential portfolio to Heimstaden stands out here as it involved a total of more than 17,600 residential units in Berlin and Hamburg.
What can we expect in the fourth quarter, which is traditionally considered the most active time of the year?
A transaction volume of up to €100 billion still appears feasible, including the Vonovia/Deutsche Wohnen merger. But even without this one-off effect, we expect an annual result that will come close to the level of the previous year because of ongoing sales processes.
Residential transactions increase their dominance – logistics picks up momentumRegardless of the political debate on the subject of housing, this asset class remains an investor’s darling. More than €23 billion has been invested in German residential complexes, microapartments, care homes and student accommodation. That represents 38% of the total transaction volume and already significantly exceeds the annual figures for 2018 and 2019.
Purchases of foreign investors
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SCHLESWIG-HOLSTEIN
LOWER SAXONY
NORTHRHINE-WESTPHALIA
HESSE
RHINELAND-PALATINATE
BADEN-WURTTEMBERG
BAVARIASAARLAND
BRANDENBURG
MECKLENBURG-WESTPOMERANIA
SAXONY
SAXONY-ANHALT
THURINGIA
Hamburg
Hanover
Bremen
DüsseldorfEssen
Cologne
Dortmund
Frankfurt/ Main
Wiesbaden
Stuttgart
Karlsruhe
Mannheim
Munich
Augsburg
Nuremberg
Berlin
Dresden
Leipzig
* 2020 Q4 - 2021 Q3, aggregiert in 40 x 40 km Makrozellen, überregionale Portfoliotransaktionen wurden nicht berücksichtigt
Transaction Volume in million € *
none
above 0 to 20
above 20 to 100
above 100 to 300
above 300
JLL Research 2021
Investment Volume Germany 2020 Q4 - 2021 Q3Transaction Volume Real Estate Q4 2020 – Q3 2021
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Office properties have fallen further behind housing compared to the first half of the year and now account for a share of 27% (€16.4 billion). A total of 35 transactions each worth over €100 million were completed, which is only slightly fewer than in 2020. However, the total volume increased from €8.2 billion in the previous year to €9 billion. This segment therefore remains on a recovery path with a moderate but noticeable improvement. As rental markets pick up and international investors return to the German stage, the underlying conditions for a higher transaction volume should improve further. After all, around US$370 billion in institutional funds globally is available to be invested in property. So far, that is as much as in the whole of 2019. And a large part of the capital will also find its way into office properties.
A record volume of €6.4 billion has been invested in German logistics property to date. The momentum has accelerated further here in the last three months. Between July and September alone, properties worth €2.6 billion were sold. On the buyer side there are nu
merous asset managers who often act for international investors, which also explains the higher proportion of foreign capital in this asset class with a share of around 50 %. Ecommerce is and will remain the outstanding engine of growth. Demand from online retail will continue to rise significantly over the next three years. But we also expect surges in demand from the areas of express and parcel delivery, healthcare and life sciences, as well as construction and materials.
Retail property is next with a volume of €5.9 billion (10% share). Almost 190 transactions contributed to this result, although structural and pandemicrelated effects remain evident. And this is one of the reasons why the more securityoriented retail parks and retail warehouses as well as supermarkets and discount retailers continue to dominate this segment. Around 74% or €4.4 billion of the transaction volume was invested in this segment. The development of private consumption and the related willingness of consumers to spend play an important role here. The pandemic caused an unprecedented savings rate that reached a record high of 16.1% (share of savings in disposable income) in 2020. According to estimates by the Kiel Institute for the World Economy, this corresponds to a purchasing power backlog of €200 billion. But the high level of spending has fallen and, at least this year, is not developing as fast as expected. In the end, this also impacts the willingness of investors to invest in this sector, especially in central commercial buildings.
Berlin is booming (again) – transaction volume increases significantly in the Big 7The recent largevolume transactions all took place in one of the Big 7 cities. It is therefore not surprising that the transaction volume here rose to €35.9 billion in the first three quarters of the year, equivalent to a year-on-year increase of 36%. The seven property strongholds account for almost 60% of the total German transaction volume. Growth was particularly strong in Berlin.
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Transaction Volume by Risk Profile of the Investments
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Here, the transaction volume increased 91% to €15.6 billion, of which more than half is attributed to the Living segment. In addition to the aforementioned sale of Akelius to Heimstaden, with Berlin accounting for most of the residential units sold, two further mega
transactions took place in the capital with the acquis-ition of a total of almost 15,000 apartments from Deutsche Wohnen and Vonovia by the state of Berlin. Regardless of the current political landscape, Berlin remains attractive as an investment location and also offers suitable products. Outside of the established markets, only relatively few transactions have taken place so far. Mostly smaller residential portfolios or logistics properties have been sold here.
Prime office yields continue to show a moderate decline – logistics remains dynamicThe fact remains that the property investment market in Germany is still very liquid. The European Central Bank continues to leave the money market floodgates open, the earnings prospects of banks still appear too uncertain and the consequences of the coronavirus pandemic for companies are still not yet possible to predict. Thus, interest rates remain at historically low levels. It is true that we have to keep an eye on the recent sharp rise in the inflation rate, but as long as the latest rise is only temporary, which we also assume,
Impact of change in Rents and Yields on Office Capital Value Growth
Transaction volume Big 7 (€ m) Q1-3 2020 Q1-3 2021 %Berlin 1) 8,180 15,600 91
Düsseldorf 2) 2,600 1,640 -37
Frankfurt/M 3) 4,530 6,300 39
Hamburg 4) 4,890 4,800 -2
Cologne 5) 1,100 1,770 61
Munich 6) 4,320 4,740 10
Stuttgart 7) 810 1,060 31
Total 26,430 35,910 361) City Area; 2) City Area incl. Ratingen, Neuss, Erkrath and Hilden; 3) City Area incl. Eschborn and Kaiserlei; 4) City Area; 5) City Area; 6) City Area incl. surrounding areas; 7) City Area incl. Leinfelden-Echterdingen
Transaction volume Germany (€ m) Q1-3 2020 Q1-3 2021 %Single assets 27,200 35,100 29
Portfolios 30,900 25,700 -17
Total 58,100 60,800 5
Aggregated Numbers for Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munichand Stuttgart without combinatory effects
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there is no need for the ECB to change its course. This means that the financial framework for investments in German property remains favourable. As a consequence, and combined with robust demand, property yields are not only stable at a low level but will even decline further in some areas.
Net initial yields in the prime office segment are continuing to fall meanwhile. On aggregate for the Big 7 cities, the office prime yield fell five basis points from the previous quarter to 2.69%. The times of accelerated yield compression are probably over. We rather expect to see a continuous but moderate decline. Yields could fall another five points by the end of the year. At the other end of the yield spectrum, with properties that contain vacancies or are of lower quality and are located in submarkets outside of the prime locations, we also see a further slight yield compression. This could indicate that investors have regained confidence in the office sector and are again a little more willing to take
risks with a ‘manage to core strategy. There is currently no noticeable change in retail properties. Here, the yields for all sector products from central commercial buildings (2.91%) to retail warehouses (3.75%) and shopping centres (4.85%) remain stable. Based on the fact that some properties are in the process of being sold, we expect to see a further slight decline both for retail warehouses and retail parks by the end of the year.
In contrast, logistics properties are far more dynamic. After three quarters of stability, yields have now fallen sharply by 27 basis points to an average of 3.11%. And other upcoming transactions also confirm the trend: the 3% mark could be reached by the end of the year.
Transaction Volume by Main Asset Class
* Hotels, Sites, Special Properties; Status: October 2021; Source: JLL
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Prime yields in 1a-locations Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021Office 2.85 2.81 2.81 2.74 2.69
Retail: Shopping center 4.75 4.85 4.85 4.85 4.85
Retail: Warehousing parks 4.00 3.90 3.80 3.75 3.75
Retail: Warehousing solus units 4.60 4.60 4.60 4.50 4.50
Retail: High street 2.89 2.91 2.91 2.91 2.91
Warehousing/Logistics 3.53 3.38 3.38 3.38 3.11
Aggregierte Nettoanfangsrendite in den Big 7 in %
Office prime yields in % Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021Berlin 1) 2.65 2.65 2.65 2.50 2.50
Düsseldorf 2) 3.00 2.95 2.95 2.80 2.70
Frankfurt/M 3) 2.85 2.80 2.80 2.80 2.80
Hamburg 4) 2.80 2.70 2.70 2.60 2.60
Cologne 5) 3.10 3.00 3.00 2.90 2.80
Munich 6) 2.70 2.70 2.70 2.70 2.70
Stuttgart 7) 2.85 2.85 2.85 2.85 2.751) City Area; 2) City Area incl. Ratingen, Neuss, Erkrath and Hilden; 3) City Area incl. Eschborn and Kaiserlei; 4) City Area; 5) City Area; 6) City Area incl. surrounding areas; 7) City Area incl. Leinfelden-Echterdingen
Transaction Volume* by Vendor and Purchaser Type (€ mn)
*Period: Q1 2021 – Q3 2021; **others: Private Investors, Open-ended Public Funds, REITs, Banks, Closed-ended Funds, Public authorities, Non-Profit Organisations, Cooperatives; Status: October 2021; Source: JLL
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Jan Eckert CEO Schweiz & Head of Capital Markets DACH
+41 (0) 44 215 75 10
Marcus LütgeringHead of Office Investment Germany
+49 (0) 89 290088 158
Michael BenderHead of Residential Germany
+49 (0) 69 2003 2333
Helge ScheunemannHead of Research Germany
+49 (0) 40 350011 225
Sabine KeulertzCo-Head Retail Investment Germany
+49 (0) 69 2003 1194
Sarah HoffmannCo-Head Retail Investment Germany
+49 (0) 40 350011 297
Nick JonesHead of Industrial Investment
+44 (0) 207 087 5697
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