Best 9-month result since 2007 thanks to significant increase in portfolio transactions // Foreign investors hold just under half the capital invested

The German investment market for commercial real estate saw turnover of €25.4 billion in the first nine months of 2014. This was the best 9-month result since 2007 and represents an increase of around one-third or €6.27 billion over the same period in the previous year. The third quarter saw 22% more capital – €8.5 billion – being invested than in the previous quarter. An analysis carried out by property consulting company CBRE documents these facts. “The German commercial real estate market is continuing to benefit from the strong influx of foreign capital,” says Fabian Klein, Head of Investment at CBRE in Germany. “We are seeing a large number of new market players wanting to participate in one of the world’s most secure, stable property markets.” Germany’s strength as a key European economy with a stable employment market; good domestic economy; increasing exports and a balanced budget continues to be apparent in the strong appeal of the German property market.

Foreign investors continue to increase
Cross-border investments of just under €11.9 billion are impressive proof of the high degree of confidence foreign investors have in the German real estate market. They account for some 47% of the total. US investors in particular (13.3% relative share of the total transaction volume) and investors from Great Britain (8.7%) and France (6.9%) value the German market. “In addition to this, a steadily increasing number of Asian investors are entering the German market, accounting for 5.6% of total investment,” says Klein. “Investors from South Korea in particular are applying the market expertise they have gained to make further investments in Germany.” Investors from Malaysia and China are also displaying a desire to acquire large volumes of German property in order to better diversify their own real estate portfolios. “Compared to London and Paris, where yields have continued to decrease in recent times, the top five German markets currently offer higher returns,” explains Klein.

Portfolio transactions increase
In this context, foreign investors are increasingly putting their capital into portfolio transactions – either as direct investments or, for example, via equity participation models within the scope of joint ventures – in order to expand their German portfolios. Examples of this include the acquisition of three commercial office properties leased to Deutsche Telekom, which, together with the Concor Park property in Aschheim-Dornach near Munich refurbished in 2011 by I-Reit Global Management, recently went public on the Singapore stock exchange or the joint venture between South Korean pension fund Public Officials Benefit Association (POBA) and Dream Global Reit. Within the scope of the latter POBA will hold a 50% share in a total of seven German commercial office properties. In total, 46 major deals and portfolio transactions, each totalling €100 million or more, were concluded in the first three quarters. The overall transaction volume of package sales amounted to €8.3 billion. The portfolio transaction share for the first three quarters of 2014 was thus around 33%. The figure for the previous year was approx. 22%.

Offices dominate – Logistics growing steadily
At just under €13 billion or a total volume share of 51% commercial office properties continue to be the most sought-after asset class. Second place is taken by retail real estate at just under €6.4 billion, representing an approx. 25% share. The boom in logistics real estate trading continues, amounting to just under €2.4 billion (9.4% of the overall transaction volume). “Germany’s extremely robust economic fundamentals; its status as a strongly export-based manufacturing location and steadily increasing e-commerce mean that demand for suitable logistics properties is high,” comments Klein. He continues, “They are also of increasing interest to institutional investors since, in comparison to other asset classes, the risk-adjusted yields are higher.”

Large-volume, nationwide portfolio transactions in Germany resulted in the Top 5 markets’ share decreasing from 56 to 48%, although at just under €12.2 billion transaction turnover was some 15% higher than the volume for the same period in the previous year. Munich was the most popular market at over €3.52 billion (+37% over the previous year), followed by Berlin with €2.57 billion (+10%) and Hamburg with €2.37 billion (+38%). Fourth place was taken by Frankfurt, which saw a decrease of 23% to €2.1 billion. “A number of large-volume transactions involving Asian participation are, however, in the pipeline for Frankfurt and will ensure extremely dynamic year-end business,” forecasts Klein. Various large transactions saw Düsseldorf achieve significant growth of 25% to €1.62 billion.

Highly diversified investor base
In the first nine months asset/fund managers were the most active investors, placing €6 billion or 24% of the total. Open-ended real estate funds/special funds took second place with just under €5 billion respectively 19.5%. Insurance companies and pension funds spent just under €3 billion, representing some 12% . Listed real estate companies and corporates each invested approx. 10% of the overall transaction volume. With a share of 10% private investors were equally strongly represented; this is a response to the lack of alternative investment opportunities, which is also boosting the investment market for commercial real estate. “We are currently seeing a highly diversified investor base, both from home and abroad, interested in the German property market,” says Klein. “This reflects the degree of confidence in the German economy.”

Increasing pressure on yields
Strong excess demand in the core segment is resulting in continuously increasing pressure on initial yields in the commercial office and large-scale retail segment. Prime yields in the office segment have, however, continued to remain stable at the previous quarter’s low level – Berlin (4.65%), Düsseldorf and Frankfurt (each 4.70%); Hamburg (4.55%) and Munich (4.45%). “The rest of the year will see an emerging trend towards a further reduction in yields for prime properties,” says Klein. Yields for premium-segment shopping centres in the top five German markets are in the range of 4.50%; 5.30% for comparable products in prospering regional centres; 5.90% for modern retail parks and 6.90% for stand-alone retail warehouses/supermarkets. The strong demand for logistics properties has caused prime yields to decrease by 25 basis points to a current 6.00% in major logistics centres. In the hotel segment prime yields have also decreased by 25 basis points to a current 5.25% due to strong investor’s demand. “Alternative investment yields far below the one per cent mark are forcing institutional investors in particular to acquire properties in core markets with stable economies,” explains Klein. “In the top cities the alterative strategy of focusing on good commercial office properties in Class B locations is resulting in further yield compression in the secondary market segment.”

Forecast: €35 billion transaction volume for the year overall
“Thanks to its economic strength and a low degree of fluctuation in rents and prices Germany will remain one of the world’s most popular investment havens for real estate investors,” says Jan Linsin, Head of Research at CBRE in Germany. “The spread of 371 basis points between real estate prime office yield and risk-free alternative investments will continue to ensure a lively influx of investment capital from both domestic and foreign investors into the real estate market. The financing environment, which continues to be extremely favourable thanks to historically low interest rates across the entire maturity spectrum, will also keep the investment market highly dynamic.” CBRE consequently forecasts that the transaction volume for the overall year 2014 will be significantly in excess of €35 billion.

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

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