Dynamic start to the year for the residential investment market
Investment volume of €3.2 billion in the first quarter of 2017 – significantly higher year on year despite ongoing property shortage
Share of property development rises to 30 percent – mid-range selling prices at new record high
Yield compression expected in the ongoing year – no trend reversal in sight for rents and purchase prices
Trading in German residential portfolios got off to a very dynamic start in 2017. The investment volume in residential portfolios and complexes upward of at least 50 units came in at €3.2 billion in the first three months, which is around 30 percent higher year on year. This is the conclusion of a current analysis prepared by the commercial real estate services company CBRE.
We are seeing a consistently brisk level of market activity on the German residential market, driven by the high liquidity of capital assets.
The ongoing political uncertainty prevailing in Europe and elsewhere in the world on the one hand, and Germany’s stable economic situation on the other, is increasing the interest of international players in the German housing market. Investment activity, however, and the associated even higher investment volume on the German residential investment market are constrained due to the shortage of suitable investment products.
A major portion of the investment volume is attributable to trading in large-scale existing portfolios
In the first three months, we registered seven transactions each of over 1,000 units and all of them in portfolios of existing stock. The year before, we counted only five transactions of this size.
These seven residential portfolio transactions alone accounted for a turnover of more than €1.2 billion, which corresponds to around 39 percent of the entire investment volume. Listed real estate companies contributed a major part of this high proportion, including, for instance, the Deutsche Wohnen’s acquisition of a residential portfolio of some 3,900 units in Berlin that was by far the largest portfolio deal in the first quarter.
Purchase prices at new record high
Generally speaking, the number of transactions remained stable at a high level compared with the first quarter of 2016. The average size of the portfolios traded dropped to 382 residential units (down seven percent compared with the year-earlier figure), representing the third lowest figure in the last five years. In contrast, the average purchase price per square metre climbed by 41 percent to €2,020 per sq m. Similarly, the purchase price per residential unit rose 43 percent to around €127,200. “The reason for these new record figures is mainly to be found in the increasing trade of portfolios in the high-price segment. This includes in particular new property developments realized in and around metropolitan regions that, owing to the higher price of land and construction, cater more to the premium segment,” Lüttger explains.
“In recent years, we have seen a rapid increase in prices that have surged not only in the top locations. The average nationwide rent has risen by around four percent in the last three years. The purchase prices of owner-occupied apartments increased by as much as 17 percent over the same period,” Schlatterer says. “Against the backdrop of the steady influx of people into the major and ‘en vogue’ cities and the persistently strong demand for rental apartments and condominiums, we see no reason for this trend to reverse. Owing to the low interest rates and the lack of investment alternatives, the pressure on prices will remain high,” Lüttger explains.
Forward purchases becoming increasingly important
Given the current lack of housing, the ongoing influx of the working population and students into urban regions has ensured that property developments are increasingly catching the attention of investors. “At over €970 million, 30 percent of the entire transaction volume was invested in new property developments. Many of the new builds under construction have already been sold before completion by way of forward funding or forward purchases to German institutional investors largely via special funds,” Schlatterer says. The group of open-ended real estate and special funds proved to be extremely active thanks to the high liquidity ratio. Their capital allocated to the German residential investment market totalled €748 million in the first three months of 2017. They therefore accounted for 23 percent of the entire investment volume and came second place in the buyer's league. First place was taken by the traditionally very strong listed real estate companies that acquired residential units worth more than €1.2 billion (39 percent of the total traded volume). This includes Deutsche Wohnen’s acquisition of a large portfolio.
Against the backdrop of the growing importance of new builds, property developers on the seller side generated the highest turnover. They realized sales in a volume of €857 million, which raised the already high year-earlier figure by 27 percent. Asset and fund managers as well private investors came next. “They seized the opportunity of higher prices and disposed of properties worth €820 million and €353 million respectively,” Linsin explains.
Outlook: investor interest ups the pressure on prime yields
Over the remainder of the year, activity on the market for housing portfolios is set to pick up momentum, driven by the growing interest of domestic and international investors. “There is a good chance of a sizeable transaction volume: Financing conditions have firmed up at a historical level and have made ‘German resi’ even more attractive. At the same time, however, the demand for housing portfolios outstrips supply despite the increase in completion numbers. We anticipate further increases in purchase prices and rents in the coming months, accompanied by falling vacancy rates, that for their part will be reflected in ongoing yield compression in the top locations in Germany,” Linsin comments. “Market activity in 2017 will be determined by increased trading in new housing developments with lot sizes in a range of between €20 million and €100 million, suggesting that a transaction volume of significantly more than €10 billion is realistic,” says Lüttger.
Residential portfolio transactions in Germany (upward of 100 residential units)
Source: CBRE Research, Q1 2017
Market for residential portfolios in Germany
Source: CBRE Research, Q1 2017
Head of Residential Investment Germany
+49 (0)69 17 00 77 29
Team Leader Market Intelligence
+49 (0)30 726 154 156
Dr. Jan Linsin
Head of Research Germany
+49 (0)69 17 00 77 663
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.