As expected, the German commercial investment market delivered a strong start to 2018. In Germany’s Top Seven cities of Berlin, Munich, Frankfurt, Hamburg, Cologne, Düsseldorf and Stuttgart, all of the major brokerage houses reported transaction volumes of between EUR 11.8 billion and EUR 12.3 billion in the first quarter of 2018.
Office rules the roost
According to BNPPRE, Colliers, JLL and CBRE, more than 50% of investment flowed into the office sector. A clear majority of the quarter’s commercial real estate transactions involved single properties. There was a distinct shortage of portfolio deals, with the sale of the Alpha Industrial logistics portfolio to Frasers and the Goodman Azurite portfolio (including logistics) to Blackstone as the only exceptions. These two portfolio deals were enough to ensure that logistics emerged as the second strongest asset class, accounting for 16% of the first quarter’s total transaction volume.
Single deals up, portfolio deals down
In Q1 2018, portfolio sales only accounted for 22% of commercial real estate transaction revenues. The quarter’s largest deals almost exclusively involved large office schemes in Hamburg (e.g. the Springer Quarter), Frankfurt and Munich (Correo, Atlas, SZ Tower). At EUR 6.5 billion, the office sector registered the highest first quarter result ever reported by JLL. According to Colliers, Aroundtown is paying around EUR 500 million for the Behördenzentrum (government services building) in Frankfurt. The last time a similar amount (i.e. EUR 6.17 billion) was invested in offices in one quarter was in 2007, said BNPPRE. At that time, however, this was largely due to portfolio sales, while in 2018 more capital flowed into individual office deals than ever before.
Retail market in the doldrums
The picture was not so rosy on the retail real estate investment market. According to CBRE, retail properties only accounted for 13% of commercial investment – mainly due to the shortage of available product in the Top Seven top cities. Beyond these seven strongholds, retail properties, especially specialist stores and retail parks, held their own as the second-strongest asset class after logistics.
Yields are low but stable
So far, real estate prices have not reacted to the slight rise in German government bond yields and investors remain under pressure to invest. The average prime office yield in the Top Seven cities hasn’t moved since the end of 2017 (3.26%).
Retail properties remained stable with prime initial yields of 2.93% (CBRE: 3.16%) and 5.2% for specialist stores. Logistics was the only asset class to register an increase, with yields up by 10 basis points to 4.4%. However, Colliers reported a significantly higher prime yield of 4.65% for logistics. According to CBRE, yields in the hotel sector have now reached 4%. As far as the further development of prime yields is concerned, only BNPPRE was willing to stick its neck out. BNPPRE does not rule out a further slight decline by the end of the year, but only in the higher risk classes of core-plus and value-add.
Risk premiums fall – outlook remains positive
All in all, the first quarter of 2018 proved to be one of the best first quarters since brokers’ records began. Although the result was a few percentage points down on the previous year, it still managed to beat the ten-year average by a whopping 70% according to the CBRE. JLL expects a transaction volume of EUR 55 billion for the year as a whole, which would almost match the 2017 result (approx. EUR 57 billion). Although the risk premium for real estate yields has decreased compared to government bonds, JLL stressed that long-term investors are focusing on further rental growth and are not currently being deterred by high prices and less attractive financing conditions.
Colliers is similarly optimistic, but for different reasons. Colliers believes that uncertainty surrounding political and policy developments in the United States will limit the flow of capital being redirected there. Colliers is also confident that the yield spread of 250 to 300 basis points to German government bonds is attractive enough to sustain investors’ interest in German commercial real estate. According to Colliers, Germany’s real estate boom is set to continue and transactions should total around EUR 55 billion by the end of the year.
More cautious assessments
CBRE and BNPPRE Germany were slightly more cautious with their forecasts. Both suggest EUR 50 billion as a realistic figure and emphasised the dearth of product as a major factor in holding back the market. CBRE also identified an interesting shift in investors’ strategies as they respond to the ongoing product shortage – a number of large-scale investors are weighing up the acquisitions of entire property companies and real estate platforms.
Which way will the wind blow?
So, after a strong first quarter, how will the rest of the year develop? Investors are certainly interested in buying commercial real estate in Germany. Will enough properties and portfolios come to market to hit the upper range of brokers’ forecasts? If not, what alternative investment strategies will emerge? The next 9 months are definitely going to be interesting – so stay with us for regular updates!
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