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German commercial real estate set to fall below record 2018

3 MIN READJanuary 23, 2019
Commercial real estate market activity in Germany hit a new high in 2018, according to Savills’ full-year data, as transactions worth a total of €60.4bn were recorded - up by 2% on 2017 and well above the average of the last five years, of just below €50bn. On the other hand, residential real estate transactions totalled  €15.1bn in 2018, a fall of 3% compared to the previous year. In 2019, residential real estate transactions are forecast to stay broadly in line with 2018, while commercial real estate transactions are expected to drop to around €50bn to €55bn, says Matthias Pink, Savills head of Research for Germany. Pink explains that this is less to do with Germany’s fundamentals and more to do with broader, capital markets activity: “Institutional investors are rebalancing their portfolios”.

Germany’s top three cities in 2018, in terms of market growth (ie. rises in transaction values), were Hamburg, Frankfurt and Stuttgart, with total commercial real estate transaction values of €5.3bn (up 49% compared to 2017), €8.9bn (up 41%) and €1.9bn (up 38%). Marcus Lemli, CEO of Savills Germany, explains that the trends driving Frankfurt’s growth are two-fold: “In Frankfurt, there is strong tenant demand, particularly in the context of Brexit, and only limited supply  - growth is very much to do with the availability of product. Investors are also looking for trophy assets, worth three-digit values, which are more readily available in Frankfurt than elsewhere in Germany”.

Development land on upward trend

Transactions involving development land are on a strong upward trend: in 2018, development land transactions in Germany totalled just over €2bn, an increase of 55% on the previous year. On the other hand, transactions in the industrial/logistics sector fell by 28% to €6.7bn in 2018, and retail transactions fell by 10% to just under €13bn. Offices are still by far the largest sector, with transactions worth €27.1bn (up by 13%), accounting for almost half of total transactions in Germany’s commercial investment market.

Development land is being used for a variety of purposes, explains Lemli. “There is demand for good quality, modern offices, but only a limited supply. So developers are taking the opportunity to meet that strong demand. There is also an increasing trend towards mixed-use developments.”

Berlin playing catch-up

In Berlin, annual transaction values in commercial real estate fell by 13% in 2018 to a total of €6.8bn. However, Berlin is highlighted as a long-term, ‘boomtown’ story in Savills’ latest briefing note on the outlook for the German real estate market, published in December 2018. 

In the note, Savills reviews how the German real estate market has developed in the ten years since the global financial crisis, and considers how that journey might continue. Berlin is characterised by its ongoing start-up and creative scene, which has seen the rise of online retailer Zalando - now accounting for one of the largest office lettings requirements in Berlin. 

As Pink points out, “Berlin is still catching up with other German cities, having started from a low level in terms of economic output”, but Savills believes that Berlin’s prospects over the coming decade are good,  with investors’ high expectations of the city’s future growth reflected in low yields. 

Institutional investors all over residential property

The return of residential property to institutional investors’ portfolios is another notable, long-term investment story in Germany, even if there is the possibility of increasingly stringent regulation on rental growth. “Investors are not that bothered by risks affecting rental growth outlook. Even if cash flows from residential rents are low, they are attracted by its stability and low volatility - that is what prevails,” says Lemli. The typical investor mix across Germany’s real estate asset classes is 55/45, split between domestic/foreign, but Pink adds that increasing regulation in the residential real estate sector could deter foreign investors, who are less familiar with the domestic situation.

Savills notes that, in the 1970s, residential real estate was an integral component of the portfolio mix for German institutional investors: asset allocations to residential property by life insurance companies and pension funds were constantly above 5%. By the time of the financial crisis in 2008, allocations were down to just 0.3% in the portfolios of Germany’s direct insurers. 

At present, it is hard to tell exactly how much of Germany’s residential property sits in the hands of institutional investors. However, Savills calculates that, over the last ten years, German insurance companies have been responsible for net, direct investment of €1.9bn in the German apartment market, and that together with their foreign counterparts, they have invested €3bn over that same time period. Indirectly, these same investors have also taken exposure to Germany’s apartment market via special funds, which have accounted for net investment of over €13bn, and they amongst the largest shareholders of publicly-quoted, residential property companies (REITS). The Norwegian sovereign wealth fund, for example, owns shares in three of Germany’s most prolific REITS, so according to Savills, mathematically ‘owns’ more than 40,000 German apartments through that route alone.

Trends and opportunities  in Germany’s commercial and residential real estate markets will be discussed further at Deutsche GRI 2019 on 8-9 May in Frankfurt.
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