• Transaction volume totals approx. 13.3 billion euros in 2014

• Limited supply prevents record score

• Sales prices stabilise on high level

• Very bright outlook for investment market in 2015 due to low interest ratesand potential mergers

The residential property segment continues to count among the most popular investment choices on Germany's real estate market, and trade with residential portfolios has maintained a brisk momentum as a result. According to analyses conducted by the real estate services firm CBRE, approximately 13.3 billion euros worth of investments were spent on residential portfolios and housing developments of 50 residential units or more in Germany in 2014. Transaction volumes kept returning to a very high level, and fell only three percent short of the prior-year result. Following the boom years of 2004 to 2006 and the record level of the previous year, this figure represents the fifth-highest year-end result since records began in 1997.

Interest of Real Estate Investors Remains High

“The momentum for residential portfolios on the German investment market remains as high as it was in the previous year. Furthermore, the supply side has proven insufficient to fully meet demand, least of all the demand generated by major property investors and institutional investors,” observed Konstantin Lüttger, Head of Residential Investment at CBRE Germany. “Primary factors fuelling the undiminished interest among property investors in the German housing market include very robust fundamental data, historically low financing rates and an extremely low vacancy rate for marketable housing stock in the country's metropolises and campus towns which even is below one percent in some places. The current geopolitical uncertainties have turned the German housing market into a must-have component of capital building,” said Lüttger.

Figures released by CBRE suggest that more than 226,000 residential units (plus four percent) with a total residential floor area of 13.7 million square metres changed hands as a result of the 232 portfolio transactions registered in 2014 (a year-on-year increase of 15 percent). During the fourth quarter of 2014 alone, a total of 54,330 residential units was sold for approx. 3.5 billion euros, which implies a quarter-on-quarter growth of 46 percent. Considering the entire year, however, Q1 showed the highest turnover in 2014.

Five Major Portfolios Dominated the Investment Market in 2014

The 2014 investment market was dominated by sales of very large residential portfolios to listed residential property companies. The past year saw the sales of five major portfolios including the Vitus portfolio and the Dewag portfolio to Deutsche Annington, or the DGAG portfolio to Buwog Group, with a total of 81,000 residential units worth 4.2 billion euros. This represents nearly a third of the entire investment volume of 2013. This also includes the acquisition of a residential portfolio from the Vitus portfolio (Deutsche Annington) with around 9,600 residential units in North Rhine-Westphalia for approx. 480 million euros by LEG Immobilien AG in Q4. In addition, another 33 portfolio transactions with 1000 residential units or more each were registered and added up to a total of more than 5.0 billion euros.

Due to the high number of large-scale trancactions of medium-quality stock properties outside the top locations in 2014, the average investment volume per transaction dropped to 57.5 million euros or by almost 16 percent year-on-year.

Prices Stabilise on High Level – Berlin Continues on its Upward Trend

“With the exception of Berlin, residential property prices everywhere in Germany have stabilised on a high level,” said Lüttger. Alongside North Rhine-Westphalia, the city state of Berlin remains one of the most sought-after investment locations in the residential segment, accounting for approximately 2.5 billion euros or nearly 19 percent of the entire transaction volume of 2014. Strong demand and limited product availability are also reflected in selling prices. Accordingly, purchase price multiples of more than 20 times the current rent for institutional-grade core products in Berlin have become the rule rather than the exception. “On the one hand, this is due to the acquisitions by institutional investors who, instead of focusing exclusively on yield aspects, plan to participate in secure long-term rent revenues as portfolio holders and in the stability of value that characterises Berlin's housing market. On the other hand, we have registered a high level of investing activities by municipal housing companies, especially in Berlin, who, in 2014, spent roughly 960 million euros stocking up their property stock in the German capital, true to the maxim that it is cheaper to buy than to build,” added Michael Schlatterer, Team Leader Residential Valuation at CBRE Germany. “The price trend in the coming months will essentially be determined by the next moves of the municipal property investors.”

Domestic Investors Continue to Dominate the German Housing Market

The majority of investors, judging by transaction volumes, hail from Germany, Austria and Switzerland, with German investors accounting for 80 percent of the total and thus clearly dominating the domestic market. Due to large-scale portfolio sales, domestic listed property companies dominate the German market for residential portfolios.They invested more than seven billion euros or nearly 54 percent of the entire transaction volume of 2014 in German housing stock. Thus, the investment volume of the major housing property investors increased by more than eleven percent year-on-year. Other very active buyer groups included institutional investors, such as special property funds, insurance companies, and pension funds with a combined transaction volume of more than two billion euros or a market share of around 15 percent.

Significance of Construction Projects Continues to Increase

A closer look at the deals transacted by institutional investors in recent years reveals a growing inclination to invest in property developments. In fact, half of the funds invested in 2014 went into new flats in multi-dwelling units. The average transaction volume per deal was approximately 33 million euros or approx. 3,500 euros per square metre of residential floor area, with investments concentrating on prospering top locations and university towns. Considering the increasing number of completions in multi-family residential construction, the share of construction projects in the overall volume will continue to grow. With 263 million euros, private investors were responsible for a mere two percent of the total transaction revenue represented by residential portfolios.

Attractive Investment Destinations in East Germany

Persistently high demand of institutional investors for multi-family residential buildings in Germany's major investment centres and their suburbs have pushed purchase prices and purchase price multiples for core properties steadily upward in recent years. Driven by the elevated risk tolerance of investors, even the purchase price multiples of non-core properties with increased management costs in prime locations have risen by one to two annual rents. Lately, CBRE has noted that institutional investors increasingly tend to invest into fast-growing medium-sized citites in North and especially East Germany.

“Following the trend set by Potsdam, Dresden and Jena, the cities of Rostock and Leipzig have recently become attractive investment destinations for institutional investors,” said Schlatterer. Lüttger added, “The same holds true for the attractiveness of Magdeburg and Halle, whose local housing markets have stabilised as a result of the recent removal of the typical high-rise apartment blocks of the former GDR, which are no longer marketable.” Opportunistic investors in particular are redirecting their investments into B- and even C-locations, as competition remains negligible and thus yields are higher.

B-Locations Moving into Focus

More than others, listed housing companies with platforms well networked and well anchored in their markets will expand their portfolios to include B-locations in East and West Germany by exploiting their competitive advantages. “On the buyer side, the market will be dominated by listed companies, not least because a consolidation is already well under way that will leave fewer but bigger players on the field,” said Lüttger. Following the acquisition of housing company GSW by Deutsche Wohnen last year, two other German housing companies, Deutsche Annington and GAGFAH, announced their merger. The consolidation will create a company with altogether 350,000 apartments, more than one million tenants, and a company value of currently 21 billion euros, putting it in a lead position not just on the housing market of Germany but of Continental Europe as a whole. In addition to a market consolidation, CBRE expects intensified efforts by well-established, listed housing companies to optimise their portfolios through a geographic focus on selected core markets as demonstrated by the GAGFAH housing company, in the year ahead.

Favourable Environment Helps to Maintain Dynamic Investment Activities

“Due to the ECB's highly accommodative interest rate policy will, financing conditions will remain on their historically low level on the one hand. On the other hand, it will make low-risk alternative investments in the form of long-term government bonds yielding less than one percent in interest profitable,” predicted Jan Linsin, Head of Research at CBRE Germany. “Against this background, demand for residential portfolios will maintain its high level in 2015 despite the contemplated rent control legislation, and will significantly outstrip supply of marketable products. The growing shortage of core products in combination with an increased risk tolerance will prompt investors to shift their focus to more management-intensive, opportunistic products.” Thus, investment activities on the residential portfolio market will continue to be highly dynamic in 2015. Alongside the favourable funding environment, both the willingness of underwriting banks to step up their commitments in the residential segment by approving large-volume loans and the high current price level will keep encouraging property investors to buy.

Contact:

Konstantin Lüttger
CBRE GmbH
Head of Residential Investment Germany
+49 69 17 00 77 29
konstantin.luettger@cbre.com

Michael Schlatterer
CBRE GmbH
Team Leader Residential Valuation
+49 30 726 154 156
michael.schlatterer@cbre.com

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