Second best half-year result on the German retail investment market
Transaction volume of €6.3 billion up 44 percent year on year
Significant increase in portfolio transactions – portfolio share at 50 percent
Retail warehouses and retail parks remain strongest asset class, followed by shopping centers
A good €6.3 billion was invested in German retail properties in the first six months of 2017. Accordingly, around one quarter (24 percent) of all investments in Germany’s commercial investment market was attributable to retail property which, after office real estate, makes it the most sought after asset class in the country’s real estate investment market. The current retail investment volume rose by 44 percent in comparison with the year-earlier period despite the shortage in the core segment, which therefore underscores the continued appeal of these investment properties in the German market. This is the conclusion drawn in a current analysis prepared by the integrated commercial real estate services company CBRE.
Although the transaction volume in the period from April through to the end of June 2017 came in at €812 million, which is almost one fourth (23 percent) lower than the figure posted in the outstanding first quarter, the German retail investment market nevertheless achieved the second best half-year result since records began.
The only year with a higher half-year result was 2015, boosted by large-scale property takeovers at the time as part of corporate transactions, which made a definitive contribution to the strong result.
Investments outside the top investment centers predominate
At €5.6 billion (89 percent), a major portion of the transaction volume was invested outside the Top 6 locations in Germany. “With its polycentral structure, the German market offers manifold, attractive location alternatives for investment, also outside the large cities,” Linsin states. “Major provincials such as Leipzig, Potsdam, Freiburg and Dresden, as well as B-locations such as Aachen, Fürth and Mühlheim (Ruhr), have increasingly become investment targets partly in the context of large-scale single transactions. Examples include the acquisitions of the Forum City Mülheim, the Karstadt warehouse in Potsdam and Carré Fürther Freiheit in the second quarter of 2017. By contrast, beyond these locations the German retail investment market is dominated by portfolio transactions, specifically portfolios comprising food markets such as discounters, supermarkets and superstores.
Retail properties relevant for local supply and let long term to tenants with excellent credit ratings appeal to investors because they are less cyclically sensitive. With these properties, the emphasis is more on the micro rather than the macro location, with a focus on easy accessibility, the situation of the surroundings in terms of location and competition, as well as the respective purchasing power in the catchment area.
Almost half of the entire retail investment volume throughout Germany totaling more than €2.9 billion was invested in retail warehouses and neigbourhood centers as well as in food markets. At currently 47 percent, this asset class upped its share again compared to the previous year’s period (41 percent). Second place was taken by shopping centers with a retail investment volume of €1.7 billion and a share of 26 percent, unchanged from the year-earlier level. Then come high-street properties with a transaction volume of a good €900 million and a share of 14 percent, as well as other non-high street retail properties which accounted for a volume of €776 million (12 percent).
Significant increase in portfolio share
As a result of numerous large-scale portfolio sales, the proportion of portfolios in the overall transaction volume on the German retail investment market has now more than doubled to 50 percent, up from 24 percent in the previous year. Sales included a portfolio of 90 commercial buildings acquired from Corestate by Universal-Investment on behalf of Bayerische Versorgungskammer and the Sidewalk portfolio comprising 20 German retail properties which AEW took over from BMO Real Estate Partners for a triple-digit million amount. Besides this, the takeover of Frankfurt-based WCM and its portfolio of retail and office properties by Berlin-based real estate investor TLG contributed to the high portfolio share.
Domestic investors dominate the market
In the first half of 2017, domestic investors were particularly active on the German investment market for retail property with investments of almost €4.0 billion, reflecting a share of 64 percent. Foreign investors nonetheless also stepped up their activities on the German market compared with the year-earlier period. Compared with €1.1 billion they had invested by the end of the first half of 2016, a contribution of 25 percent to the overall investment volume, international investors had already allocated funds of €2.3 billion (36 percent) to German retail properties by the end of the first six months of this year.
With investments of €1.9 billion, asset and fund managers accounted for just under one third of the investment volume (30 percent), followed by the group of open-ended real estate and special funds which contributed a transaction volume of €1.1 billion, equivalent to 18 percent of the overall investment volume. Above all, special funds designed for institutional investors were active in the first six months of the current year. The group of asset and fund managers embraced the role of vendors more strongly than that of buyers. In the first half of 2017, they sold retail property worth €2.5 billion (41 percent). They were followed at some distance by developers with sales in a range of €908 million (14 percent), as well as listed property companies/REITs which disposed of retail property worth €720 million (11 percent).
Yields initially largely stable – further yield compression anticipated
Despite sustained strong demand for German retail property and severely limited availability, especially in the case of core properties, net initial yield for German retail properties remained largely stable compared with the preceding quarter. Only Munich as Germany’s most expensive location saw prime yields for first rate commercial buildings in top locations decline by another 20 basis points to currently 2.90 percent in a quarter-on-quarter comparison. As a result, the average net initial yield for inner-city commercial properties in the Top 6 locations dropped marginally to 3.36 percent. By contrast, the prime yield for other types of retail property has remained stable for the time being at its historically low level compared with the first quarter of 2017. Further yield compression is, however, expected over the course of the year.
The lower investment volume in the second quarter 2017 as against the preceding quarter should on no account be interpreted as a lack of attractiveness on the part of this country's retail investment market. It is rather more the case that investors screen properties minutely, in particular where value-add and opportunistic properties are concerned, which is why the acquisition process tends to be longer.
Taking account of the supply currently available in the market, momentum in the second half of the year is set to accelerate, which is why we think that the target of €12 billion for the full year may be exceeded again.
Investment volume in retail property (in billion)
Source: CBRE Research, Q2 2017
Net prime yield trend* of retail property
*: Net initial yield
**: Average net initial yield in Berlin, Düsseldorf, Frankfurt, Hambaurg, Cologne and Munich
Source: CBRE Research, Q2 2017
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