Investment Market Overview - Germany | 2nd quarter 2018 Published in July 2018 - JLL

Investment Market Overview - Germany | 2nd quarter 2018 Published in July 2018 - JLL
Investment Market Overview
Germany | 2nd quarter 2018
Published in July 2018
Investment market in line with previous year
despite political and economic volatility

Jeans, peanut butter and whiskey. These three products         be ruled out for the rest of the year. At the same time, the
manufactured in the USA are representative of a global         trade dispute with the USA is only one of numerous upsets
trade dispute between China and the USA as well as bet-        that seriously jeopar-dise further economic recovery. Italy’s
ween the EU and the USA. A dangerous escalation of the         possible exit from the EU and the EU dispute over a com-
situation has begun with new announcements of trade            mon asylum and refugee policy certainly have the potential
tariffs at every turn. In the almost unanimous opinion of      to trigger politi-cal tremors. In particular, the refugee debate
most experts, there will only be losers in this seemingly      is putting the governing coalition in Berlin under significant
archaic power struggle with a succession of retaliatory        pressure. Meanwhile the European Central Bank is caught
tariffs. A well-functioning system of global trade remains     between the still favourable economic data and rising
the basis as well as the driving force for economic pros-      inflation on one hand, and political disruption on the other.
perity. A disruption in trade relations directly affects the   The bank has only just communicated relatively clearly that
green shoots of recovery in the EU and is already having a     the period of historically low interest rates is coming to an
markedly negative impact on the economic forecasts for         end and that it also wants to terminate its massive bond
export-oriented countries such as Germany.                     purchase programme. However, in order to be prepared for
Thus the first research institutes have also lowered their     a possible relapse of the economy, it may be forced to
economic growth forecasts for both 2018 and 2019. All          increase interest rates more quickly. Otherwise it would
institutes have noted that the export economy is already       lack the monetary policy means to be able to take new
weakening. Companies are no longer expanding their             countermeasures.
capacities, and also clearly no longer expect the economic     All these ‘grey or black swans’ have so far played practi-
environment to improve. A further escalation and a spill-      cally no role on the German investment market. Never-
over into the financial markets (such as the sale of Ameri-    theless, there is growing scepticism and concern that
can government bonds by the Chinese state bank) cannot         the persistent upswing since 2010 could be nearing its

Transaction Volume Germany

Investment Market Overview | 2nd quarter 2018                                                                                2
Transaction Volume by Risk Profile
of the Investments

                                                                 appetite for risk and prompt them to adopt a wait-and-see
                                                                 attitude next year.
                                                                 A quick word about the hype surrounding co-working and
                                                                 flexible office space operators: while we are seeing an ever
                                                                 increasing desire to expand on the lettings markets, from
                                                                 an investor perspective it is clear that they are still critical
                                                                 of the new concepts. The sustainability of the business
                                                                 model has yet to be proven, especially during periods when
                                                                 vacancies could increase again. At least for now, we are un-
                                                                 able to confirm that investors are specifically seeking proper-
                                                                 ties whose main tenants are WeWork, DesignOffices et al.

                                                                 High demand for property in the Big 7 – Importance of
                                                                 secondary cities is waning
                                                                 It was also the case in the period from April to June that no
end. This is at least the message from surveys on the            transactions above the billion mark were registered. The
future business expectations of property experts. In any         biggest deal in the quarter, as well as in the first six months,
case, the topics we formulated at the end of the first           was the sale of 71 clinics by a US REIT to France-based
quarter under the heading of a ‘challenging investment           Primonial for more than €800 million. This is the first time
year’ have certainly proved correct.                             that a top transaction has taken place outside the estab-
                                                                 lished asset classes. The ten largest deals in the first half
Transaction volume at previous year’s level                      of the year with volumes of €300 million apiece amounted
The transaction volume on the German commercial real             to almost €4.4 billion in total, accounting for 17% of the
estate market of about €25.6 billion was almost identical to     transaction result. The importance of very large transac-
the volume recorded in the previous year’s period (minus         tions has therefore declined, which in our view is due more
1%), and thus confirmed the trend from the previous              to a lack of such offers, particularly portfolio transactions,
quarter. The number of transactions was also at a similar        than to a reduction in demand. During the second quarter,
level, maintaining the underlying market dynamics. Even          investors clearly focused on the seven property strong-
though Germany’s reputation as a haven of political stabi-       holds, which accounted for about 63% of the total German
lity has suffered in recent days, we expect to see no signifi-   transaction volume. Of the 20 largest transactions in the
cant impact on demand for German commercial real estate          period from April to June, only one did not take place in
at least during the remainder of 2018. As a result, we are       one of the strongholds. The transaction volume in the Big 7
sticking to our full-year forecast of about €55 billion.         increased significantly by 29% in the first six months com-
However, a further deterioration of the crisis within the        pared to the previous year. Transactions fell accordingly in
government could have a negative impact on investors’            secondary or tertiary cities. The strategy of only investing in

Investment Market Overview | 2nd quarter 2018                                                                                  3
Transaction Volume Commercial Real Estate 2017 Q3 – 2018 Q2

               Investment Volume Commercial Real Estate 2017 Q3 - 2018 Q2
                Transaction Volume in
                million € *

                      above 0 to 20

                      above 20 to 150

                      above 150 to 300                                         SCHLESWIG-HOLSTEIN

                      above 300                                                                                          MECKLENBURG-WEST
               2017 Q2 - 2018 Q2                                                                                            POMERANIA
               * aggregated in
               40 x 40 km grids

               JLL Research


                                                                     LOWER SAXONY






                                             Essen                                                                              Leipzig

                                      Düsseldorf                                                                                            SAXONY



                                     RHINELAND-PALATINATE          / Main

                                  SAARLAND              Mannheim                                Nuremberg




Investment Market Overview | 2nd quarter 2018                                                                                                                        4
Purchases of foreign investors                                   Prime yields are unchanged, but yield compression
                                                                 increases elsewhere
                                                                 Market players are always anxiously awaiting the latest
                                                                 news on yields. Are they still falling? Are things getting even
                                                                 more expensive? Are property yields reacting to changes in
                                                                 interest rates? It’s a mixed picture, and every asset class has
                                                                 its own cycle. Different trends are also evident in this res-
                                                                 pect. In the office asset class, which is responsible for the
                                                                 highest transaction volume, the trend towards what is now
                                                                 a very moderate decline for top products in the best loca-
                                                                 tions continued into the second quarter. The bottom seems
                                                                 to have actually been reached here. The average prime
top and secondary cities clearly dominates the current           yield for all seven strongholds is 3.24%, which is virtually
market environment.                                              unchanged from the previous quarter. The 12-month
Berlin and Munich have regularly shared the top spot in          comparison shows a decline of 23 basis points. We are
recent quarters, but the banking and finance metropolis          seeing a shift in investment preferences on the part of
resumed the leading position by the end of the first half        investors towards products or locations that do not meet
with a transaction volume of at least €3.8 billion and           the definitions for prime investments. For example, the
growth of 62% compared to the first half of 2017. This was       yield on properties in top locations, but with a poorer
mainly due to eight transactions with a volume of more           building quality and shorter remaining terms, has fallen by
than €100 million apiece (including Frankfurt properties in      12 basis points to 4.00%. The gap between these and prime
portfolios). Munich (€3.62 billion) and Berlin (€3.18 billion)   yields has thus narrowed to 76 basis points, which is the
also exceeded the €3 billion mark. Cologne was the only          smallest yield gap since the second quarter of 2010. The
top 7 city to experience a decline, with a 43% reduction in      background to this is an optimistic assessment by investors
the transaction volume.                                          with regard to the lettings market. Apparently they still see
At about €11.4 billion, office properties accounted for around   rental price growth potential in non-prime properties and
45% of the transaction volume and remained by far the most       have the confidence in themselves or an asset manager to
dominant usage type. Retail property accounted for a share       realise corresponding increases in value through a repo-
of almost 18%, while the transaction volume for logistics        sitioning or a new letting. This optimistic attitude is even
property stabilised in the double-digit percentage range         more evident with regard to sub-markets outside the city
(11%). Clinics, nursing homes and retirement homes are           centres. Here, yields fell on a quarterly basis by 13 basis
becoming increasingly established among the various usage        points to 3.59% on average, and are now 30 points lower
types, accounting for approx. €1.6 billion and therefore only    than a year ago. We have not seen such a small risk
just behind hotels and mixed-use properties. Nothing changed     premium compared to the prime rate since the start of
in the ratio of foreign to domestic buyers during the second     our research in 2009.
quarter. No salient trends have emerged here in terms of         However, logistics properties continue to fuel the strongest
either buying or selling activities among the investor groups.   yield momentum. The average prime yield for the Top 7
What is undermined at the geopolitical level by punitive         logistics regions currently stands at 4.25% and is therefore 15
tariffs fortunately still functions on the investment market.    basis below the rate at the end of the first quarter. There has
All possible capital flows can be observed here.                  been no drop in demand from investors for well-positioned

Investment Market Overview | 2nd quarter 2018                                                                                 5
Impact of change in Rents and Yields on
Office Capital Value Growth
                                                                                 logistics halls or portfolios. The yield compression of almost
                                                                                 70 basis points within the last 12 months illustrates this
                                                                                 trend, which is further compounded by the persistently low
                                                                                 availability of products.
                                                                                 Even commercial buildings in the top retail locations of
                                                                                 major city centres remain a rare investment product.
                                                                                 However, yields for such properties have been stagnating
                                                                                 at a low level for several quarters and currently lie at 2.91%.
                                                                                 The net initial yield for individual speciality stores, retail
                                                                                 parks and shopping centres have also remained at previ-
                                                                                 ous quarterly levels, at 5.20%, 4.50% and 3.90% respec-
                                                                                 tively. The days of strong yield compression are obviously
                                                                                 over for the time being. Although high-priced investments
                                                                                 are still being made, capital security is playing a much
Aggregated Numbers for Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich
and Stuttgart without combinatory effects                                        greater role. Thus the focus of performance is increasingly
                                                                                 on rental price development. There is still optimism here
                                                                                 that the positive economic environment will continue and
    Transaction volume Big 7 (€ mn)                                              that suitable rental adjustments can be undertaken with
                                                                                 sound asset management.
                                H1 2017          H1 2018                %
  Berlin                          3,140             3,180              1%
  Düsseldorf                      1,015             1,450              43%
  Frankfurt/M                     2,370             3,840              62%          Transaction volume Germany (€ mn)
  Hamburg                         1,500             2,380              59%
  Cologne                         1,200              680              -43%                             H1 2017         H1 2018          %
  Munich                          2,710             3,620              34%        Single assets          16,400         18,900         15%
  Stuttgart                           465            880               89%        Portfolios             9,400           6,700         -29%
  Total                           12,400           16,030              29%        Total                 25,800          25,600          -1%

    Transaction Volume Germany by Type of Use

* Hotels, Sites, Special Properties

Investment Market Overview | 2nd quarter 2018                                                                                                 6
Prime yields in 1a-locations (aggregated net initial yield in Big 7 in %)
                                                Q2 2017    Q3 2017      Q4 2017    Q1 2018   Q2 2018
 Office                                           3.47       3.39           3.27     3.26      3.24
 Retail: Shopping center                          4.00       4.00           3.90     3.90      3.90
 Retail: Warehousing parks                        4.90       4.70           4.60     4.50      4.50
 Retail: Warehousing solus units                  5.40       5.40           5.30     5.20      5.20
 Retail: High street                              3.48       2.96           2.96     2.93      2.91
 Warehousing/Logistics                            4.91       4.70           4.50     4.40      4.25

Office prime yields in %
                                                Q2 2017    Q3 2017      Q4 2017    Q1 2018   Q2 2018
 Berlin                                           3.00       3.00           2.90     2.90      2.90
 Düsseldorf                                       3.90       3.75           3.45     3.45      3.35
 Frankfurt/M                                      3.50       3.25           3.25     3.25      3.25
 Hamburg                                          3.25       3.25           3.05     3.05      3.05
 Cologne                                          3.85       3.65           3.45     3.45      3.45
 Munich Region                                    3.30       3.30           3.30     3.20      3.20
 Stuttgart                                        3.50       3.50           3.50     3.50      3.50

Transaction Volume by Vendor and Purchaser Type (€ mn)

Investment Market Overview | 2nd quarter 2018                                                          7
Strong half-year volume following further consolidation         of portfolios are becoming increasingly differentiated. They
on the commercial residential investment market                 either serve a specific sub-segment, as shown by the micro-
Further consolidation measures took place on the German         apartment transactions at the beginning of the year, or
commercial residential investment market in the second          they have fairly homogeneous risk profiles in the way they
quarter of 2018 following the acquisition by Austria-based      are structurally designed. The importance of forward deals
Buwog in the first three months of the year. For instance,      remains at a high level. Around 30% of the transaction sum
Adler Real Estate acquired 70% of the shares in the reside-     was realised from project developments sold prior to
ntial portfolio of Israel-based Brack Capital for some €700     completion. On average, prices of more than €4,000/sqm
million, while also selling a portfolio to its joint venture    were achieved – more than twice as much as for existing
with Benson Elliot for about €115 million. The consolida-       portfolios and properties, which were traded at around
tion process, the transactions in the micro residential         €1,700/sqm. Investors remain under enormous pressure to
segment and more than 200 smaller transaction each with         invest. Many insurance companies and pension funds are
fewer than 800 residential units generated a total sum of       still under-invested in the real estate market. At the same
€11.3 billion in the first half of 2018. This means that more   time, long-term government bonds are expiring and capital
than 70% of the previous year’s volume has already been         is being released, which in turn must be invested at least
achieved after six months. The five-year average for first      with a focus on value retention. Thus in terms of direct
half-years was exceeded by 35%; the ten-year average by as      property investments, the buyer group comprising banks/
much as 95%. A total 83,900 residential units had changed       insurance/pension funds invested more than €1.4 billion
hands by the end of June 2018. Beyond the major deals           net in residential real estate. At the same time, indirect
and consolidation measures mentioned above, the profiles        investments through various fund vehicles registered a

Residential Investment Market

                                                                                                 Ø-Transaction Volume

                                                                                                 € 16.9 bn

Investment Market Overview | 2nd quarter 2018                                                                             8
stable influx of capital with net asset growth of more than       Other market players are focusing on alternative options
€1.2 billion; they have already reached 70% of the average       in Germany, perhaps with their own project developments
five-year inflow. In particular fresh capital has been injected   or by participating in such investments. This applies, for
into numerous special funds by investor pools of insurance       example, to Adler Real Estate in Europacity in Berlin and
companies and pension funds.                                     Deutsche Wohnen in Potsdam. At this stage, further mega
As before, however, the listed residential property groups       deals are not expected before the end of the year. Due to
invested by far the most in residential real estate: by the      the many forward deals, numerous portfolio adjustments
end of June, their additional residential property assets        and individual transactions, the investment volume on the
amounted to a total of more than €3.2 billion.                   commercial residential market will nevertheless achieve an
Although many listed residential property companies and          outstanding result of €17 billion-€18 billion in 2018. This
funds have international investors, the commercial residen-      would then be 10% more than the volume recorded for the
tial investment market is still dominated by domestic in-        previous year.
vestors. As things stand, they have accounted for 80% of
the transaction volume for several years. By mid-2018,
three-quarters of the capital invested from abroad was
attributable to three countries: the United States (€600
million), the United Kingdom (€580 million) and Singapore
(€350 million). Berlin still attracted the most capital in the
first half of the year, accounting for 15% or €1.65 billion,
followed by the Frankfurt-Rhine-Main area. The €920 million
invested here already exceeds the volume for the entire
previous year. Hamburg, meanwhile, achieved three quar-
ters (corresponding to €750 million) of its 2017 volume by
the middle of the year. In both regions, the proportion of
high-priced forward deals is at a very high level. Given the
short supply of good stock in Germany, the major German
residential property groups are pursuing other routes to
achieve growth. For example, Vonovia, the largest German
owner of housing stock, is pushing ahead with its interna-
tional growth strategy. Following its investment in Austria,
the company acquired the Swedish housing company
Victoria Park in the second quarter.

Investment Market Overview | 2nd quarter 2018                                                                             9
Willi Weis
Kontakt                                                                       Sandra Ludwig                                                                 Marcus Lütgering
Head of Industrial Investment                                                 Head of Retail Investment Germany                                             Head of Office Investment Germany
Germany,     Team Leader Industrial                                           Hamburg                                                                       Munich
Investment     Munich                                                         +49 40 350011 207                                                             +49 (0) 89 290088 158
tel +49
+49  (0) (0)
         69 2003
             00 000000
                  1026 000

Dr. Konstantin Kortmann                                                       Helge Scheunemann
Head of Residential Investment                                                Head of Research Germany
Germany                                                                       Hamburg
Frankfurt                                                                     +49 (0) 40 350011 225
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