Real Estate Markets Germany Dr. Thomas Beyerle, London 22nd of September

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1 Real Estate Markets Germany 2015 Dr. Thomas Beyerle, London 22nd of September

2 German economy Why invest in Germany?

3 German economy Domestic demand will push the recovery Economic growth The German economy expanded at a solid pace in Q2, with 0.3% GDP rise being much weaker than in Q at 0.7%. The slowdown reflected firms running down their inventories. The Ifo Business Climate Index for German trade and industry rose to points in July from points last month. Assessments of the current business situation improved significantly after last month s setback. Business expectations were also somewhat more optimistic after declining for three consecutive months. Positive fundamentals for household spending The continued strength of household spending in Q2 can be attributed to the boost to households real incomes from the plunge in the oil price, which briefly pushed annual consumer price index (CPI) inflation into negative territory at the beginning of the year. Weak Euro will help exporters - there are several reasons why export growth is unlikely to be especially buoyant. First, last year s global trade weakness looks set to extend into this year. In addition, Germany s specialism in machinery and capital goods production does not bode well given the likely subdued pace of global investment growth. Finally, Germany s hard-won increase in competitiveness has been eroded by weak productivity growth and rising wages. Annual development of the gross domestic product Unemployment rate in % EU-18 EU-28 Germany Outlook The recent easing of the Greece situation contributed to stronger sentiment in the German economy. The near term-outlook remains positive, so GDP growth will pick up to 2.4% in 2015 and then 2.1% in Inflation rates EU-19 EU-28 Germany The recovery will continue to be driven mainly by domestic demand over the next couple of years. In the near term, this will partly reflect the boost to real incomes from the plunge in the oil price and current low unemployment rate. Germany is not expected to be significantly affected by uncertainty beyond in the short term and may benefit from safe haven effects and attract increased levels of investment Germany EU-28 EU-19 3

4 in mn. EUR in bn. EUR The German real estate market Retail portfolios boost the market The German commercial investment market saw a total volume of 24.1bn in the first half of 2015, representing an increase of 41% compared to H1`14. Demand for German commercial property remains very high and investors targeting to increase allocations to real estate due to continuing low interest rates and increased volatility in the equit QUICK STATS H Commercial transaction volume Prime office yield (average TOP5) 24.1 billion 4.32% COMPARED TO H yand bond markets. Demand for core properties outperforms supply and leads to an increase in 2 ND -tier locations, especially with potential to improve income through asset management. Offices properties are still the most sought after assets, but retail volumes improved significantly in H1`15 due to several large portfolio deals. However, single transactions were dominated by the office sector due to many deals above 100M. Prime yield high street retail (average TOP 5) Prime office yield (average B- location) Prime yield Shopping centre Prime yield logistic 3,78% 6.10% 4.80% 6.60% Commercial transaction volume is likely to reach 50bn by the end of the year. Volume per type of asset H H ,000 8,000 6,000 4,000 2,000 0 Office Retail Industry Mixed use Hotel Others 1HY HY HY 2015 Commercial transaction volume per quarter Q1 Q2 Q3 Q

5 2008 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q2 The German real estate market Still raising cross border activity Volumes underpin that German TOP-5 cities are receiving the most interest of domestic and foreign investors. However, the number of 2 ND -tier and 3 RD -tier locations which are receiving capital, has Cross-border proportion TOP 5 markets increased and indicates strong interest in investment across the country. Cross-border investments into German commercial properties achieve a proportion of 55% ( 13.3bn), up by 55% compared to H1`14. Top investors primarily came from North America and the UK. Even in German TOP-5 cities cross-border investors are dominating the markets (proportion: 53%) and 47% H Total 11.2bn 53% improved significantly compared to H1`14 (proportion: 38%). Prime yields in German TOP 5 markets have now reached an average of 4.28%. Compared to the first half of 2014 prime yields decreased by 29 basis points and continue to harden. Some compression also being noted in 2 ND -tier CBD-locations and secondary markets. Prime office net yields (%) Foreign Investors Cross-border proportion TOP 5 markets Domestic Investors % H Total 7.3bn 38% 3.50 Berlin Dusseldorf Frankfurt Hamburg Munich 5

6 in mn. EUR The German real estate market TOP 5 markets with continuous high demand Acquisitions in German TOP 5 markets reached a share of 46% of total commercial volume in Germany in H1`15 and is primarily due to large single office transactions e.g. in Frankfurt, Berlin and Munich. In the TOP-5 markets office investments are still in the focus of investors, with the exception of Dusseldorf, with a proportion of 52% in retail sector. Berlin`s commercial volume more than doubled and demand shifting more and more towards B- and C- locations which is reflected in two larger office transactions (Stettiner Carree 210M, Deutsche-Bank-Campus 150M) In Frankfurt the office sector dominated market activity (82%) and investors interest remains primarily focused on core and core-plus. Nevertheless, activity in value-add has recently increased, underpinned by several transactions in B-locations (Niederrad). In Hamburg and Munich invstors demand shifting towards B-locations as well as value-add properties due to low supply in prime segment. Yields on office properties in these locations are likely to harden further and stronger compared to prime segment. Commercial transaction volume Transaction volume by type of use Top 5 21% 3% 8% 5% H total: 11.2bn 63% Office Retail Industry Hotel Others 3,500 3,000 2,500 2,000 1,500 2,930 2,790 1,880 2,780 12% 4% 11% H Total 7.3bn 54% 1, % Berlin Dusseldorf Frankfurt Hamburg Munich 1HY HY HY HY HY

7 H % In bn The German real estate market Demand shifting towards B-locations Office prime-yields BIG 7 vs. B-locations Commercial transaction volume, TOP 5 vs. Rest of Germany bp TOP 7 B-Locations TOP 5 B- and C-locations, rest of Germany Due to high investment demand prime net yields decrease to a new low record level. Prime net yields expect to remain at the same level or even decrease slightly in medium-term. Stronger yield compression in B-locations compared to TOP 5. German B-locations offer higher yields with moderate volatility. 7

8 The German real estate market Risk/Return-profile of German office markets 2015 next best - Opportunities Potential Investmentcorridor 8

9 The German real estate market Risk/Return-profile of German office markets 2015 Potential Investmentcorridor: Freiburg Darmstadt next best - Opportunities Aachen Heilbronn Mannheim Augsburg Heidelberg Dresden Potential Investmentcorridor Potsdam Münster Dortmund Mainz 9

10 The German real estate market Investors target allocation Attractiveness of office investments under Risk/Return aspects Property type Newly existing property Elder existing property Project development Occupancy rate 100 % 0 % 100 % 0 % 100 % 0 % Top-7: Central location Top-7: 2 nd -tier location good quality B-Location: Central location B-Location: 2 nd -tier location good quality C-Location In terms of Risk/Return aspects: attractive middle not advisable Core-Properties: Wide yield-gap to government-bonds, but continuous yield compression in Big-7 Fully let properties in good peripheral locations: Risk-Return profile still attractive Vacant properties cause higher risks due to economic uncertainty 10

11 The German real estate market Investors potential target allocation Calcaulation of Catella`s Risk-Return-Profile is mainly based on fungibility of markets and vacancy rates. German A-Markets are primarily characterized by low risks. Therefore offering lower yields. With the exception of Magdeburg and Erfurt, several B-locations offer a similar development. Nevertheless, certain markets e.g. Dortmund, Mainz and Dresden offer attractive yields with manageable risks. Very attractive Investment opportunieties ( best next ) are available in several B- and C-locations. Würzburg, Osnabrück and Trier offer substantially higher yields with solely slightly higher risks. expected A further target extension of investors to certain B- and C-Locations is 11

Trends in the Secondary Markets

Trends in the Secondary Markets The Hidden Champions The Secondary Markets 1 1 Due to the high demand pressure and associated price rises in established office markets, smaller markets are becoming more