German offices are still ‘investors’ darling’
Germany is ending 2018 on a high, with record investment inflows and commercial real estate transaction volumes at the highest levels since 2007, delegates heard at the PropertyEU Germany Investment Briefing, which was held on Tuesday at Schroder Real Estate’s London headquarters.
‘We in the real estate business in Germany are in a very good mood,’ said Thomas Beyerle, managing director, Catella Property Valuation. ‘The market is healthy and prices and rents are still on the rise. There have been some very large transactions in the market already but, given the high demand and the levels of liquidity, there will be more to come before the end of the year.’
In the first three quarters of the year CRE transaction volumes grew to €42.23 bn, an 8% increase on the same period of 2017, and according to Catella the forecast is for volumes to reach €58 bn, which would be the highest recorded since before the financial crisis.
Germany’s top 5 markets – Berlin, Frankfurt, Dusseldorf, Hamburg and Munich – have performed particularly well, with record volumes of €22.68 bn in Q1-Q3 2018, a 32% increase on 2017. The increase is due to a high number of large single asset deals, such as the €500 mln Behordernzentrum deal in Frankfurt, the €400 mln Springer Quartier transaction in Hamburg and the €356 mln Galileo Tower deal in Frankfurt.
Offices continue to be ‘investors’ darling’, Beyerle said, with €14.5 bn spent, 64% of the total invested in the top 5 cities. Strong take-up is leading to a decline in vacancy rates and an increase in rents.
‘Demand for offices is high to the point of being unhealthy, because a city should always have space available,’ said Oliver Kummerfeldt, European Real Estate analyst, Schroder. ‘Berlin and Stuttgart are running at below 3% vacancy rates and a lot of supply that is coming is already pre-let.’
The sector is booming, but ‘the cycle will come to an end at some point,’ said Tim Bruckner, managing director, head of portfolio management, Corpus Sireo Real Estate. He sounded a note of caution: ‘Our strategy is to avoid having single tenants in our buildings to spread the risk. In Germany we have more space per employee than the UK, and I think the trend is for companies to move to the city centre and have less space, so I would not invest on the outskirts of cities.’
The strong economic backdrop, particularly rising wages and more people in work, supports consumption and has led to a resurgence of the retail sector. Q1-Q3 volumes were up compared to last year and reached €2.1 bn.
‘Shopping centres are having difficulties because it is an outdated concept so we are very selective in our retail investments,’ said Bruckner. Despite the headwinds, it is still possible to find opportunities, said Frank Forster, managing director, EQT Partners: ‘We have just bought a shopping centre in Leipzig because we want exposure to a market which will have a huge population growth, as companies and people are moving there from Berlin which has become more expensive.’
Prices have increased in Berlin but the city is still undervalued, said Marius Preisig, managing partner, NAS Invest Suisse: ‘Prices are moderate compared to other European cities. Demand is high and will be even higher, as 40-50,000 people move to the city every year, but there is a lot of competition for assets in all sectors, from offices to residential.’
Looking ahead, we can expect a slowdown in the market, given the increase in construction projects, the tapering of the European Central Bank’s Quantitative Easing programme and the eventual rise of interest rates, said Beyerle. ‘However, low inflation and cautious lending suggest that it will be a controlled and gradual slowdown, rather than a bubble bursting,’ he said. ‘Winter is coming, but we should trust the fundamentals rather than sentiment, and the fundamentals in Germany are solid.’