Investment Market Overview - Germany | 2nd quarter 2018 Published in July 2018 - JLL
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Investment Market Overview Germany | 2nd quarter 2018 Published in July 2018
Investment market in line with previous year despite political and economic volatility Jeans, peanut butter and whiskey. These three products be ruled out for the rest of the year. At the same time, the manufactured in the USA are representative of a global trade dispute with the USA is only one of numerous upsets trade dispute between China and the USA as well as bet- that seriously jeopar-dise further economic recovery. Italy’s ween the EU and the USA. A dangerous escalation of the possible exit from the EU and the EU dispute over a com- situation has begun with new announcements of trade mon asylum and refugee policy certainly have the potential tariffs at every turn. In the almost unanimous opinion of to trigger politi-cal tremors. In particular, the refugee debate most experts, there will only be losers in this seemingly is putting the governing coalition in Berlin under significant archaic power struggle with a succession of retaliatory pressure. Meanwhile the European Central Bank is caught tariffs. A well-functioning system of global trade remains between the still favourable economic data and rising the basis as well as the driving force for economic pros- inflation on one hand, and political disruption on the other. perity. A disruption in trade relations directly affects the The bank has only just communicated relatively clearly that green shoots of recovery in the EU and is already having a the period of historically low interest rates is coming to an markedly negative impact on the economic forecasts for end and that it also wants to terminate its massive bond export-oriented countries such as Germany. purchase programme. However, in order to be prepared for Thus the first research institutes have also lowered their a possible relapse of the economy, it may be forced to economic growth forecasts for both 2018 and 2019. All increase interest rates more quickly. Otherwise it would institutes have noted that the export economy is already lack the monetary policy means to be able to take new weakening. Companies are no longer expanding their countermeasures. capacities, and also clearly no longer expect the economic All these ‘grey or black swans’ have so far played practi- environment to improve. A further escalation and a spill- cally no role on the German investment market. Never- over into the financial markets (such as the sale of Ameri- theless, there is growing scepticism and concern that can government bonds by the Chinese state bank) cannot the persistent upswing since 2010 could be nearing its Transaction Volume Germany Investment Market Overview | 2nd quarter 2018 2
Transaction Volume by Risk Profile
of the Investments
appetite for risk and prompt them to adopt a wait-and-see
attitude next year.
A quick word about the hype surrounding co-working and
flexible office space operators: while we are seeing an ever
increasing desire to expand on the lettings markets, from
an investor perspective it is clear that they are still critical
of the new concepts. The sustainability of the business
model has yet to be proven, especially during periods when
vacancies could increase again. At least for now, we are un-
able to confirm that investors are specifically seeking proper-
ties whose main tenants are WeWork, DesignOffices et al.
High demand for property in the Big 7 – Importance of
secondary cities is waning
It was also the case in the period from April to June that no
end. This is at least the message from surveys on the transactions above the billion mark were registered. The
future business expectations of property experts. In any biggest deal in the quarter, as well as in the first six months,
case, the topics we formulated at the end of the first was the sale of 71 clinics by a US REIT to France-based
quarter under the heading of a ‘challenging investment Primonial for more than €800 million. This is the first time
year’ have certainly proved correct. that a top transaction has taken place outside the estab-
lished asset classes. The ten largest deals in the first half
Transaction volume at previous year’s level of the year with volumes of €300 million apiece amounted
The transaction volume on the German commercial real to almost €4.4 billion in total, accounting for 17% of the
estate market of about €25.6 billion was almost identical to transaction result. The importance of very large transac-
the volume recorded in the previous year’s period (minus tions has therefore declined, which in our view is due more
1%), and thus confirmed the trend from the previous to a lack of such offers, particularly portfolio transactions,
quarter. The number of transactions was also at a similar than to a reduction in demand. During the second quarter,
level, maintaining the underlying market dynamics. Even investors clearly focused on the seven property strong-
though Germany’s reputation as a haven of political stabi- holds, which accounted for about 63% of the total German
lity has suffered in recent days, we expect to see no signifi- transaction volume. Of the 20 largest transactions in the
cant impact on demand for German commercial real estate period from April to June, only one did not take place in
at least during the remainder of 2018. As a result, we are one of the strongholds. The transaction volume in the Big 7
sticking to our full-year forecast of about €55 billion. increased significantly by 29% in the first six months com-
However, a further deterioration of the crisis within the pared to the previous year. Transactions fell accordingly in
government could have a negative impact on investors’ secondary or tertiary cities. The strategy of only investing in
Investment Market Overview | 2nd quarter 2018 3Transaction Volume Commercial Real Estate 2017 Q3 – 2018 Q2
Investment Volume Commercial Real Estate 2017 Q3 - 2018 Q2
Transaction Volume in
million € *
0
above 0 to 20
above 20 to 150
above 150 to 300 SCHLESWIG-HOLSTEIN
above 300 MECKLENBURG-WEST
2017 Q2 - 2018 Q2 POMERANIA
* aggregated in
Hamburg
40 x 40 km grids
JLL Research
Bremen
LOWER SAXONY
Berlin
Hanover
BRANDENBURG
SAXONY-ANHALT
NORTH
RHINE-WESTPHALIA
Dortmund
Essen Leipzig
Düsseldorf SAXONY
Dresden
Cologne
THURINGIA
HESSE
Wiesbaden
Frankfurt
RHINELAND-PALATINATE / Main
SAARLAND Mannheim Nuremberg
BAVARIA
Karlsruhe
Stuttgart
BADEN-WURTTEMBERG
Augsburg
Munich
Investment Market Overview | 2nd quarter 2018 4Purchases of foreign investors Prime yields are unchanged, but yield compression
increases elsewhere
Market players are always anxiously awaiting the latest
news on yields. Are they still falling? Are things getting even
more expensive? Are property yields reacting to changes in
interest rates? It’s a mixed picture, and every asset class has
its own cycle. Different trends are also evident in this res-
pect. In the office asset class, which is responsible for the
highest transaction volume, the trend towards what is now
a very moderate decline for top products in the best loca-
tions continued into the second quarter. The bottom seems
to have actually been reached here. The average prime
top and secondary cities clearly dominates the current yield for all seven strongholds is 3.24%, which is virtually
market environment. unchanged from the previous quarter. The 12-month
Berlin and Munich have regularly shared the top spot in comparison shows a decline of 23 basis points. We are
recent quarters, but the banking and finance metropolis seeing a shift in investment preferences on the part of
resumed the leading position by the end of the first half investors towards products or locations that do not meet
with a transaction volume of at least €3.8 billion and the definitions for prime investments. For example, the
growth of 62% compared to the first half of 2017. This was yield on properties in top locations, but with a poorer
mainly due to eight transactions with a volume of more building quality and shorter remaining terms, has fallen by
than €100 million apiece (including Frankfurt properties in 12 basis points to 4.00%. The gap between these and prime
portfolios). Munich (€3.62 billion) and Berlin (€3.18 billion) yields has thus narrowed to 76 basis points, which is the
also exceeded the €3 billion mark. Cologne was the only smallest yield gap since the second quarter of 2010. The
top 7 city to experience a decline, with a 43% reduction in background to this is an optimistic assessment by investors
the transaction volume. with regard to the lettings market. Apparently they still see
At about €11.4 billion, office properties accounted for around rental price growth potential in non-prime properties and
45% of the transaction volume and remained by far the most have the confidence in themselves or an asset manager to
dominant usage type. Retail property accounted for a share realise corresponding increases in value through a repo-
of almost 18%, while the transaction volume for logistics sitioning or a new letting. This optimistic attitude is even
property stabilised in the double-digit percentage range more evident with regard to sub-markets outside the city
(11%). Clinics, nursing homes and retirement homes are centres. Here, yields fell on a quarterly basis by 13 basis
becoming increasingly established among the various usage points to 3.59% on average, and are now 30 points lower
types, accounting for approx. €1.6 billion and therefore only than a year ago. We have not seen such a small risk
just behind hotels and mixed-use properties. Nothing changed premium compared to the prime rate since the start of
in the ratio of foreign to domestic buyers during the second our research in 2009.
quarter. No salient trends have emerged here in terms of However, logistics properties continue to fuel the strongest
either buying or selling activities among the investor groups. yield momentum. The average prime yield for the Top 7
What is undermined at the geopolitical level by punitive logistics regions currently stands at 4.25% and is therefore 15
tariffs fortunately still functions on the investment market. basis below the rate at the end of the first quarter. There has
All possible capital flows can be observed here. been no drop in demand from investors for well-positioned
Investment Market Overview | 2nd quarter 2018 5Impact of change in Rents and Yields on
Office Capital Value Growth
logistics halls or portfolios. The yield compression of almost
70 basis points within the last 12 months illustrates this
trend, which is further compounded by the persistently low
availability of products.
Even commercial buildings in the top retail locations of
major city centres remain a rare investment product.
However, yields for such properties have been stagnating
at a low level for several quarters and currently lie at 2.91%.
The net initial yield for individual speciality stores, retail
parks and shopping centres have also remained at previ-
ous quarterly levels, at 5.20%, 4.50% and 3.90% respec-
tively. The days of strong yield compression are obviously
over for the time being. Although high-priced investments
are still being made, capital security is playing a much
Aggregated Numbers for Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich
and Stuttgart without combinatory effects greater role. Thus the focus of performance is increasingly
on rental price development. There is still optimism here
that the positive economic environment will continue and
Transaction volume Big 7 (€ mn) that suitable rental adjustments can be undertaken with
sound asset management.
H1 2017 H1 2018 %
Berlin 3,140 3,180 1%
Düsseldorf 1,015 1,450 43%
Frankfurt/M 2,370 3,840 62% Transaction volume Germany (€ mn)
Hamburg 1,500 2,380 59%
Cologne 1,200 680 -43% H1 2017 H1 2018 %
Munich 2,710 3,620 34% Single assets 16,400 18,900 15%
Stuttgart 465 880 89% Portfolios 9,400 6,700 -29%
Total 12,400 16,030 29% Total 25,800 25,600 -1%
Transaction Volume Germany by Type of Use
* Hotels, Sites, Special Properties
Investment Market Overview | 2nd quarter 2018 6Prime yields in 1a-locations (aggregated net initial yield in Big 7 in %)
Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018
Office 3.47 3.39 3.27 3.26 3.24
Retail: Shopping center 4.00 4.00 3.90 3.90 3.90
Retail: Warehousing parks 4.90 4.70 4.60 4.50 4.50
Retail: Warehousing solus units 5.40 5.40 5.30 5.20 5.20
Retail: High street 3.48 2.96 2.96 2.93 2.91
Warehousing/Logistics 4.91 4.70 4.50 4.40 4.25
Office prime yields in %
Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018
Berlin 3.00 3.00 2.90 2.90 2.90
Düsseldorf 3.90 3.75 3.45 3.45 3.35
Frankfurt/M 3.50 3.25 3.25 3.25 3.25
Hamburg 3.25 3.25 3.05 3.05 3.05
Cologne 3.85 3.65 3.45 3.45 3.45
Munich Region 3.30 3.30 3.30 3.20 3.20
Stuttgart 3.50 3.50 3.50 3.50 3.50
Transaction Volume by Vendor and Purchaser Type (€ mn)
Investment Market Overview | 2nd quarter 2018 7Strong half-year volume following further consolidation of portfolios are becoming increasingly differentiated. They
on the commercial residential investment market either serve a specific sub-segment, as shown by the micro-
Further consolidation measures took place on the German apartment transactions at the beginning of the year, or
commercial residential investment market in the second they have fairly homogeneous risk profiles in the way they
quarter of 2018 following the acquisition by Austria-based are structurally designed. The importance of forward deals
Buwog in the first three months of the year. For instance, remains at a high level. Around 30% of the transaction sum
Adler Real Estate acquired 70% of the shares in the reside- was realised from project developments sold prior to
ntial portfolio of Israel-based Brack Capital for some €700 completion. On average, prices of more than €4,000/sqm
million, while also selling a portfolio to its joint venture were achieved – more than twice as much as for existing
with Benson Elliot for about €115 million. The consolida- portfolios and properties, which were traded at around
tion process, the transactions in the micro residential €1,700/sqm. Investors remain under enormous pressure to
segment and more than 200 smaller transaction each with invest. Many insurance companies and pension funds are
fewer than 800 residential units generated a total sum of still under-invested in the real estate market. At the same
€11.3 billion in the first half of 2018. This means that more time, long-term government bonds are expiring and capital
than 70% of the previous year’s volume has already been is being released, which in turn must be invested at least
achieved after six months. The five-year average for first with a focus on value retention. Thus in terms of direct
half-years was exceeded by 35%; the ten-year average by as property investments, the buyer group comprising banks/
much as 95%. A total 83,900 residential units had changed insurance/pension funds invested more than €1.4 billion
hands by the end of June 2018. Beyond the major deals net in residential real estate. At the same time, indirect
and consolidation measures mentioned above, the profiles investments through various fund vehicles registered a
Residential Investment Market
Ø-Transaction Volume
2013-2017:
€ 16.9 bn
Investment Market Overview | 2nd quarter 2018 8stable influx of capital with net asset growth of more than Other market players are focusing on alternative options €1.2 billion; they have already reached 70% of the average in Germany, perhaps with their own project developments five-year inflow. In particular fresh capital has been injected or by participating in such investments. This applies, for into numerous special funds by investor pools of insurance example, to Adler Real Estate in Europacity in Berlin and companies and pension funds. Deutsche Wohnen in Potsdam. At this stage, further mega As before, however, the listed residential property groups deals are not expected before the end of the year. Due to invested by far the most in residential real estate: by the the many forward deals, numerous portfolio adjustments end of June, their additional residential property assets and individual transactions, the investment volume on the amounted to a total of more than €3.2 billion. commercial residential market will nevertheless achieve an Although many listed residential property companies and outstanding result of €17 billion-€18 billion in 2018. This funds have international investors, the commercial residen- would then be 10% more than the volume recorded for the tial investment market is still dominated by domestic in- previous year. vestors. As things stand, they have accounted for 80% of the transaction volume for several years. By mid-2018, three-quarters of the capital invested from abroad was attributable to three countries: the United States (€600 million), the United Kingdom (€580 million) and Singapore (€350 million). Berlin still attracted the most capital in the first half of the year, accounting for 15% or €1.65 billion, followed by the Frankfurt-Rhine-Main area. The €920 million invested here already exceeds the volume for the entire previous year. Hamburg, meanwhile, achieved three quar- ters (corresponding to €750 million) of its 2017 volume by the middle of the year. In both regions, the proportion of high-priced forward deals is at a very high level. Given the short supply of good stock in Germany, the major German residential property groups are pursuing other routes to achieve growth. For example, Vonovia, the largest German owner of housing stock, is pushing ahead with its interna- tional growth strategy. Following its investment in Austria, the company acquired the Swedish housing company Victoria Park in the second quarter. Investment Market Overview | 2nd quarter 2018 9
Contacts
Willi Weis
Kontakt Sandra Ludwig Marcus Lütgering
Head of Industrial Investment Head of Retail Investment Germany Head of Office Investment Germany
Name
Germany, Team Leader Industrial Hamburg Munich
Title/Function
Investment Munich +49 40 350011 207 +49 (0) 89 290088 158
City
Frankfurt sandra.ludwig@eu.jll.com marcus.luetgering@eu.jll.com
tel +49
+49 (0) (0)
69 2003
00 000000
1026 000
firstname.lastname@eu.jll.com
willi.weis@eu.jll.com
Dr. Konstantin Kortmann Helge Scheunemann
Head of Residential Investment Head of Research Germany
Germany Hamburg
Frankfurt +49 (0) 40 350011 225
+49 (0) 69 2003 1390 helge.scheunemann@eu.jll.com
konstantin.kortmann@eu.jll.com
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