• Investment total rose by around 42 percent year-on-year

• Package sales gained noticeably, climbing to a volume of approx. nine billion euros and a 38-percent share of the total

• Investment category continues to be dominated by office investments

• Investments in the retail sector surge in response to numerous large-scale portfolio transactions

• Demand for hotel asset class remains strong – investment volume unchanged year-on-year

• Share of foreign investors at 57 percent

• Further yield compression across all asset classes as high investment pressure remains unrelieved

• Forecast: Transaction revenue of well over 45 billion euros expected

A sum total of approx. 24 billion euros was spent on the German investment market for commercial real estate during the first six months of 2015, according to the latest market report by the real estate consultant firm CBRE. It implies that the transaction revenue substantially exceeded the prior-year result (by 42 percent). Investments during the second quarter of 2015 alone were on a level with Q4 2014, the strongest quarter on record since 2007. Quarter-on-quarter, the transaction volume grew one-and-a-half times.

The noticeably increased transaction revenue once again highlights Germany's role as one of the most sought-after real estate markets in the world. Investors appreciate the attractive economic conditions, such as the steady decline in unemployment, the favourable financing situation, and the generally upbeat sentiment indicators in the Germany economy. A key role is also played by real estate returns that remain significantly above the low interest of risk-free government bonds, and therefore fuel the investment boom.

Significant Rise in Transaction Total in the Top 5 Investment Markets
Germany's Top Five cities Berlin, Düsseldorf, Frankfurt, Hamburg and Munich saw a significant collective increase in investment volume by 58 percent year-on-year. At the same time, the five cities accounted for roughly 46 percent of the nationwide investment total. Frankfurt and Berlin registered a triple digit growth compared to H1 2014 at 2.9 billion euros (+127 percent) and 2.7 billion euros (+134 percent), respectively. The increase in Munich (2.8 billion euros) and Hamburg (1.9 billion euros) was comparatively moderate at 48 percent and 27 percent respectively. Düsseldorf was the only city in the group where commitments declined, dropping by 37 percent to 703 million euros, although the fact is explained by the extremely high investment total of the reference period H1 2014.

“More than other German cities, the Top Five markets have a powerful appeal for property investors from abroad. They offer big-ticket investment opportunities that are particularly suitable as first-time commitments for new market players. This may explain why they accounted for 45 percent of the investments allocated to these markets, almost half of the total,” said Klein.

Remain Broadly Diversified – Listed Property Companies and REITs Dominate the Market
The most prominent buyer group, accounting for 6.7 billion euros or 28 percent of the total, consisted of listed public property companies and REITs, with notable deals including the merger of the Dutch shopping centre company Corio with the French company Klépierre during the first quarter along with the takeover of the Kaufhof department store properties by the Canada-based Hudson's Bay Company (HBC), which spun off some of the assets in a joint venture with the US-based Simon Property Group. Next in line are asset and fund managers with 5.8 billion euros or 24 percent, followed by open-ended property funds and institutional funds with 3.6 billion euros or just under 15 percent.

Portfolios Setting the Pace on the Investment Market
Overall, around 38 percent of the investment total was traded in the form of package sales. This implies an increase by 45 percent to 9.2 billion euros. The sum total includes large-scale transactions such as the Klépierre/Corio and HBC deals. There were 21 portfolios with a volume of at least 100 million euros each, adding up to a total of approximately 7.5 billion euros. Of these, 14 were acquired by foreign investors, mainly from the United States and Canada but also from the United Kingdom and France, who brought the total foreign investments in block sales of German commercial real estate up to a total of 6.4 billion euros and thereby drove the brisk transaction dynamic during H1 2015. Foreign investors were also the dominant buyer group for German retail property portfolios.

Foreign Investors Highly Active in Germany
Foreign buyers continued to expand their share of the market as they accounted for 13.7 billion euros or 57 percent of the total by mid-year 2015 (H1 2014: 8.2 billion euros or 48.5 percent). Among the international players, North American investors made up the largest group. Their combined investments of 5.5 billion euros (23 percent of the total) included 3.4 billion euros from Canadian investors, who were responsible for one quarter of the entire foreign capital invested during the first six months. Next in line were French investors with 2.5 billion euros or well over ten percent of the total, which is not least explained by the merger of Corio with Klépierre, and British market players with 2.4 billion euros, claiming another ten percent. Asian investors accounted for well over four percent of the transaction total. Meanwhile, domestic investors stepped up their commitments in their home market by around 18 percent year on year to a total of 10.3 billion euros or roughly 43 percent of the overall volume.

Office Investments the Dominant Asset Class while Retail Property Transactions Double in Volume
Office real estate remains the strongest asset class. With more than ten billion euros committed, it claimed a share of around 42 percent. Following closely behind was retail real estate, which saw its transaction volume double year-on-year at 9.8 billion euros or 41 percent of the market. Main drivers motivating the elevated interest in the German retail sector among investors are primarily the high rate of internal consumption, the robust situation on the labour market, rising wages and salaries, and the historically high level of German consumer sentiment. Activity on the German retail investment market concentrated on shopping centres and large-scale retail warehouses/retail warehouse parks, supermarket portfolios and department stores – with HBC's entry on the German retail market the dominating transaction. Hotel properties rank third with an investment volume of nearly 1.5 billion euros (six percent) which more or less matched the prior-year level in this asset class. By contrast, the investment volume in warehouse/logistics properties merely added up to 1.4 billion euros or six percent of the total by the end of Q2 2015. While this marks a year-on-year drop by roughly a fifth, the fact is explained by quite a number of large-scale portfolio deals that went ahead during the first semester of 2014.

Yield Compression across all Types of Use – Yields Regressing even in the Non-Core Locations of the Leading Markets
The high level of liquidity on the market has impacted even the prime yields of traditional investment classes. As far as office properties in the investment centres go, yields kept softening in all of Germany's Class A cities. The pressure to invest caused net initial yields to drop by another 0.1 percentage point in Berlin, Düsseldorf, Frankfurt, Hamburg and Munich over the past three months. The lowest yield level among the Top Five office markets was registered in Munich at four percent. Faced with the very limited supply in core property products in central locations, investors have expanded their investment focus to include non-core locations in Germany's office centres. This has in turn impacted the yields of well-positioned assets in this segment, which in some cases have decreased significantly.

Initial Rates of Return also Regressive in the Retail Sector
Meanwhile, the net initial yields for retail property remain under pressure as well. Yield rates for Grade A retail buildings in prime high street pitches have continued to decline. In Munich, Germany's priciest location in this segment, they are now down to 3.60 percent (minus 0.3 percentage points quarter-on-quarter). The four percent mark was also undercut in Berlin, Frankfurt and Hamburg in this asset class. Here as elsewhere, the currently keen demand for large-scale retail properties kept pushing down real estate returns. By mid-year 2015, prime yields for shopping centres in the country's top markets stood at 4.30 percent (minus 0.2 percentage points), whereas in regional centres they are now down to five percent (minus 0.1 percentage points). Initial yields for retail warehouse parks and superstores occupied on long-term leases are currently 5.40 or 5.70 percent, respectively (in either case losing 0.1 percentage points quarter-on-quarter). The initial yield rate for Grade A standalone retail warehouses and supermarkets remained stable at 6.25 percent, maintaining the level of the previous quarter.

The steadily intensifying diversification of the investment strategy also prompted a further yield reduction by 0.2 percentage points down to 5.60 percent for Grade A logistics properties.

Investors Becoming Aware of Alternative Investments with Higher Yield Opportunities in Germany
The so-called Core and Core-Plus segment continued to play the lead role for investors in H1 2015. Because of the supply shortage in this segment, some of them shifted their focus towards attractive investments outside the CBD locations. “Accordingly, we assume that yield rates will keep eroding in this segment, too, as the year progresses,” said Klein. “In all likelihood, investors will increasingly signal a willingness to accept higher risks for their real estate allocations – and within the European context, Germany will present the optimal conditions for doing so.” Especially investments with value-add potential could offer yet another solution for investors. In addition to office property developments in Germany's premium locations, retail real estate with revitalisation potential could be particularly suitable in this context.

Forecast: Transaction Volume may Total Well over 45 Billion Euros in 2015
“The run will continue, and we still believe that the transaction total will be somewhere around 45 billion euros by the end of 2015,” said Jan Linsin, Head of Research at CBRE Germany. “The reason for our assumption is not least that the necessary debt capital is available on the part of banks and investors, and that yields here remain high compared to other countries in Europe.” Foreign investors will keep dominating the German markets during the second semester of 2015, and keep trying to raise their real estate ratio. “More than any other group, investors from North America and Asia play a key role here, because their second port of call, after London, for real estate investments in Europe is primarily the German market,” elaborated Linsin. The trade in real estate packages is just as likely to accelerate during the second half of 2015 as the investments in secondary and tertiary cities, even though the pressure on yields will increase even for inner city peripheries and suburban locations. “On the one hand, there are several large-scale packages in circulation, and on the other hand, investors are reorienting themselves to alternative cities and non-core-products as the supply in the premium cities is drying up not least due to the sub-average backlog in the property development pipeline,” said Linsin. “While office and retail real estate plays a big role here, it is not the only role, because real estate in the logistics and hospitality sectors offer a great alternative to the classic types of use.”

Contact:
Fabian Klein
CBRE GmbH
Head of Investment Germany
+49 69 17 00 77 55
fabian.klein@cbre.com

Dr. Jan Linsin
CBRE GmbH
Head of Research Germany
+49 69 17 00 77 663
jan.linsin@cbre.com