Investment Market Overview. Germany 1 st quarter 2018 Published in April 2018

Transcription

1 Investment Market Overview Germany 1 st quarter 2018 Published in April 2018

2 Good start to a challenging investment year The global economy continues to boom, and Germany now finally has a government again. Despite all this, business sentiment has deteriorated. There are various reasons for this. On one hand, there is clearly some disharmony within Germany s governing body only a few days after the formation of the grand coalition. Then came the surprisingly strong wage growth in the US, with rising inflation rates as a consequence. For investors, this resulted in the risk of faster rising interest rates and a slowdown in the economy. This first storm, which caused turmoil on the stock markets at the beginning of February, has now subsided. However, a storm of an entirely different magnitude is building up at the end of the quarter. Protectionism and increasing nationalism have been identified by us as a political risk for years. Now it s getting serious. Trade war fears are becoming a reality, triggered by President Trump s announcement of trade tariffs for certain industrial goods from Asia and Europe. Although the implementation of tariffs for Europe was initially averted, the move has given markets and investors a fright, while tit-for-tat tariffs have started between China and the US with unforeseeable consequences for the global economy. Although the uncertainties have increased, and we expect volatility every now and then over the course of the year, the economy in Germany should nevertheless continue to develop positively. Inflation should also increase slowly and not exceed the magic limit of 2%, thus putting no pressure on the central bank to adjust interest rates earlier than planned. As a result, a gradual and slow exit from the zero interest rate policy will continue. Accordingly, interest rates on government bonds will also increase at only a slow rate over the course of the year. Real interest rates that is, after the deduction of inflation will remain in negative territory for some time to come. Yet even without a formal increase in interest rates, interest rates hikes in Europe have already begun. Capital market rates are edging up, not least in response to the end of the ECB s bond-buying programme. This melange of positive economic data, increasingly sceptical sentiment and rising interest rates will make 2018 a challenging year for all players. Transaction Volume Germany Investment Market Overview 1 st quarter

3 Transaction Volume by Risk Profile of the Investments a reliable forecast, but the number of transactions suggests that we can again expect to see a very active and dynamic investment market in In Germany as a whole, we expect a transaction volume of around 55 billion for the full year. The environment for investments still appears to be good and, coupled with the positive economic data, longterm investors are focusing on further rental growth and are not deterred by the current high prices and poorer financing conditions. The following challenges have to be overcome: Interest rates remain low, but investors should (re-)orient themselves in the context of a changed interest rate landscape. Purchase prices continue to rise, irrespective of the underlying financial data. With bond yields rising at the same time, the risk premium for property investments is reduced. Capital investment pressure remains huge and it is still difficult for many investors to find adequate products. The economic fundamentals remain intact and form the basis for further well-performing consumer markets. However, if inflation increases suddenly and interest rates subsequently rise sharply, the economy could cool off faster than expected. Transaction volume just below the previous year s level The transaction volume on the German commercial property market reached 12.3 billion, which is similar to the level recorded for the same period of the previous year (minus 2%). As always, the first quarter cannot be taken as Strong demand for office property No billion-euro transactions materialised in the first three months of the year. Nevertheless, the ten largest deals in the quarter amounted to around 2.9 billion, corresponding to almost 25% of the quarterly result. As was already evident at the end of last year, the largest deal concerned a pan-european portfolio transaction consisting of a total of 18 logistics properties in Germany. A South East Asian investor paid around 500 million for this portfolio. A further seven transactions for above 200 million all individual transactions took place in Hamburg, Munich and Frankfurt. Six of these seven transactions were for purely office properties, ensuring that the share of this asset class increased significantly to 53%. At almost 6.5 billion, office property not only remains the undisputed investor s favourite, but also achieved the highest transaction volume ever recorded for a first quarter. Retail property was again in second place, despite the significant reduction in this segment s share of the transaction volume to 14% (with only two transactions with a value of more than 100 million). In contrast, the strong investor demand for logistics property also looks set to continue in The lack of product availability prevented an even higher volume from being achieved. Nearly 1.5 billion and 12% of the transaction volume were invested in the period from January to March. Investment Market Overview 1 st quarter

4 Transaction Volume Commercial Real Estate 2017 Q Q1 Investment Volume Commercial Real Estate 2017 Q Q1 Transaction Volume in million * 0 above 0 to 20 above 20 to 150 SCHLESWIG-HOLSTEIN above 150 to 300 MECKLENBURG-WEST POMERANIA above 300 Hamburg 2017 Q Q1 JLL Research Bremen LOWER SAXONY Berlin Hanover BRANDENBURG SAXONY-ANHALT NORTH RHINE-WESTPHALIA Essen Dortmund Leipzig Düsseldorf SAXONY Dresden Cologne THURINGIA HESSE Wiesbaden RHINELAND-PALATINATE Frankfurt / Main Mannheim SAARLAND Nuremberg BAVARIA Karlsruhe Stuttgart BADEN-WURTTEMBERG Augsburg Munich * aggregiert in 40 x 40 km Makrozellen Investment Market Overview 1st quarter

5 Purchases of foreign investors Further increase in demand in the Big 7 The seven property strongholds in Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart accounted for an aggregate volume of about 8.6 billion by the end of March This represents an increase of 47% compared to the first quarter of the previous year and a share of 70% of the total German transaction volume. The often supposed trend of investors turning to locations other than the established cities in search of more attractive returns cannot be confirmed, at least not at the start of Only two of the registered 24 individual transactions in the range of 100 million or more did not take place in one of the Big 7 cities. Whether this indicates the direction that investors will take in 2018 cannot yet be said with any sense of certainty, but for the moment it shows a firm commitment of investors to risk aversion in terms of possible letting issues and better opportunities for potential resale after the expiration of planned holding periods. Meanwhile, the interplay at the top of the table continues regardless. Munich is now again the top investment destination by some margin, with a transaction volume of 2.4 billion (corresponding to an increase of 48%). This is followed by Frankfurt (+73%) and Berlin (+3%), with virtually the same volumes of 1.56 billion and 1.5 billion respectively, and Hamburg with 1.4 billion. The Hanseatic city also registered the strongest 12-month increase among the four cities with growth of 135%. The percentage annual increase in Stuttgart was twice as high. With a transaction volume of almost 700 million euros, Stuttgart was able to push Düsseldorf ( 650 million) into fifth place. Similar to last year, the share of foreign capital accounted for about half of the transaction volume in the first quarter of the year. In four of the five largest transactions, foreign investors were active on the buyer side, while German investors acted as the seller in four out of five of these transactions. And as for Asian investors? They have been reluctant to take part at least in the first quarter of the year, appearing as buyers in only two of the 29 transactions worth over 100 million. Yields continue to decline slightly In which direction are yields tending to go? In view of the persistent yield compression and the now apparent end to the zero interest period, this is one of the most interesting questions in the current market climate. There is still no clear answer. The pressure on investors to invest as a result of the continuing massive inflow of capital into this asset class still outweighs the risk of a short-term rise in interest rates. As an example, recently published figures from the German Insurance Industry Association (GdV) show that for insurance companies, the capital investment volume doubled by 30 billion in 2017 compared to 2016, but the property quota was virtually unchanged at 3.7%. In contrast, the proportion of listed debt securities, which include government and corporate bonds, rose to 18%. This is surprising given the very poor returns, especially on government bonds. These figures, however, clearly highlight the additional yield pressure that could also have arisen in the real estate sector if even more capital had found its way into the property asset class. At the end of March 2018, the average prime yield for office properties across all seven strongholds stood at 3.26%. This was almost unchanged from the previous quarter but 21 basis points below the value recorded for the first quarter of Only in Munich did the prime yield decline by 10 basis points in the current period to 3.20%. Central commercial buildings in the top shopping locations of the big cities remain a very rare investment product. Against this backdrop, yields across the Big 7 declined by three basis points to 2.93% on a quarterly basis. The net initial yields for individual specialist stores and retail parks also fell Investment Market Overview 1 st quarter

6 Impact of change in Rents and Yields on Office Capital Value Growth Aggregated Numbers for Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart without combinatory effects Transaction volume Big 7 ( mn) Q Q % Berlin 1,450 1,500 3% Düsseldorf % Frankfurt/M 900 1,560 73% Hamburg 600 1, % Cologne % Munich 1,620 2,400 48% Stuttgart % Total 5,885 8,640 47% again slightly and are now 5.20% and 4.50%, respectively. Yields stabilised at 3.90% for well-positioned shopping centres that are aligned with their respective catchment areas. As in the last quarter, the biggest drop in yields was evident in the logistics property segment. Here, prime yields fell by another 10 basis points within the last three months to only 4.40% at present. Despite the slight increase in returns on government bonds, property yields should remain on a slight downward trend until the end of the year. Thus, the positive yield gap is slowly narrowing and it is to be expected that prices will reach their peak. However, a strong direct correlation between long-term government bonds and property yields cannot be established. Only when capital market interest rates are on a sustainable upward trend should property yields also reach a turning point. However, in terms of performance it remains to be seen what countermovement will be triggered by the continually rising rental prices, because it must not be forgotten that rising interest rates are often accompanied by a positive economic development, with corresponding positive consequences for rental price development. Transaction volume Germany ( mn) Q Q % Single assets 9,100 10,500 15% Portfolios 3,500 1,800-49% Total 12,600 12,300-2% Transaction Volume Germany by Type of Use * Hotels, Sites, Special Properties Investment Market Overview 1 st quarter

7 Prime yields in 1a-locations (aggregated net initial yield in Big 7 in %) Q Q Q Q Q Office Retail: Shopping center Retail: Warehousing parks Retail: Warehousing solus units Retail: High street Warehousing/Logistics Office prime yields in % Q Q Q Q Q Berlin Düsseldorf Frankfurt/M Hamburg Cologne Munich Region Stuttgart Transaction Volume by Vendor and Purchaser Type ( mn) Investment Market Overview 1 st quarter

8 Mega deal enables commercial residential investment market to achieve above-average transaction volume The commercial residential investment market made a strong start to 2018 with the signing of a mega deal which came after 12 months without a single transaction above 1 billion. A major residential market player has struck again with Vonovia s takeover of Austria-based Buwog in a deal that was announced last year and completed this year. The approx. 2.9 billion that was paid for the German part of the portfolio boosted the overall transaction volume to 7.1 billion (48,000 residential units) in the first three months. Only in 2015, when transactions reached a record level of 11 billion, has a higher first-quarter volume been registered. This year s quarterly result already accounts for nearly half of the transaction volume of the entire previous year. Comparisons with previous results are also correspondingly favourable, with an increase of 109% compared to the same period in The five-year average for first quarters was also exceeded by a factor of 2.4 (an above-average result was achieved here even without the Buwog acquisition), while the 10-year average was surpassed by a factor of 1.5. Five transactions including between 1,000 and 2,500 residential units apiece proved to be a solid foundation for the overall high volume: these deals alone accounted for onequarter of the total transaction volume, and also highlight which types of assets are currently being sought. Investors prefer a homogenous portfolio profile that aligns perfectly with their respective investment strategy. They tend to focus less on bringing in properties with different economic parameters, regardless of whether these would have an improving or worsening effect on the overall portfolio. This is because only a homogeneous product can be used to identify clear opportunities, implement business plans and ultimately justify the high prices. This investment specialisation was also demonstrated by the sale and acquisition of three micro and student apartment portfolios at the start of the year. This transaction also saw two international investors enter the German micro apartment market: the sovereign wealth fund of Singapore (GIC) and US investor Harrison Street. At over 1.4 billion, this market has already reached an unprecedented level. It is our expectation that micro apartments will become established as a separate Residential Investment Market Ø-Transaction Volume : 16,6 bn Investment Market Overview 1 st quarter

9 asset class over the course of the year. Another trend that has been observed for some time due to the scarcity of products will also continue: the sale of project developments. With 29 out of 101 transactions, forward deals account for about 30% of the total volume. Due to the continuing high demand for housing, especially in urban areas, this increasing share is a sign that supply is being expanded in response to the imbalance between supply and demand and rising prices. Buyers of German residential real estate are predominantly German companies. Over 80% of the capital invested came from the domestic market. The top three countries to invest foreign capital were the US ( 570 million), Singapore ( 350 million) and the UK ( 220 million). The advantage that German investors have is their excellent market knowledge. International bidders often have difficulties with aspects such as the structure of the housing market with low ownership rates, tenant protection and local housing markets. However, at least in the first three months of this year, Berlin proved to be the exception: for the first time, more capital (two-thirds of the total of 1.1 billion) flowed into the German capital from foreign than from German investors. The Frankfurt-Rhine-Main region ranks second in the regional analysis of the commercial residential investment market. With a transaction volume of 650 million, the 40% share generated by international investors was also significantly higher than in previous years. It is worth noting here that private equity funds are back with a new strategy. After having tended to be among the net sellers in Germany during the last seven years, they are now buying up residential stocks in Berlin, Frankfurt and Hamburg. Due to the acquisition of Buwog by Vonovia, listed housing companies remain the buyers with the highest accumulation of residential property assets (of 2.8 billion). Without this mega deal, however, asset accumulation would only amount to 85 million. The companies are increasingly experiencing difficulty in expanding through portfolio purchases. The perfect product eludes them. In the current market situation, they are left only with the option of international growth, as demonstrated by Vonovia in Austria, for example, or portfolio development, including the purchase of project developments. With regard to project developments, the companies face intensive competition from banks, insurance companies, pension funds and German special funds. These investor groups built up more than 1.7 billion in the first quarter and are able to pay high prices because of their long investment horizons. They regard residential property as a substitute for fixed income investments with limited risk, such as sovereign bonds. This development highlights one of the main drivers of the residential market: As long as interest rates within the eurozone do not increase significantly, the stable German housing market will remain an attractive investment target for long-term oriented investors owing to its predictable rental income and low new construction volume. Taking into account specific housing products such as micro apartments, which are particularly interesting for international investors, it can be expected that the transaction volume will again exceed 15 billion in Even though tradable portfolios will remain scarce, price levels will continue to rise. Investment Market Overview 1 st quarter

10 Contacts Kontakt Willi Weis Head of Industrial Investment Name Germany, Team Leader Industrial Title/Function Investment Munich City Frankfurt tel (0) (0) Sandra Ludwig Head of Retail Investment Germany Hamburg Marcus Lütgering Head of Office Investment Germany Munich +49 (0) Dr. Konstantin Kortmann Head of Residential Investment Germany Frankfurt +49 (0) Helge Scheunemann Head of Research Germany Hamburg +49 (0) jll.de Alle Informationen rund um JLL und unsere Dienstleistungen jll.de/research Alle Research-Berichte zu aktuellen Marktzahlen und Spezialthemen jll.de/immo Gewerbeimmobilienangebote zur Miete und zum Kauf deutschlandweit jll.de Information regarding JLL and our services jll.de/research All research reports on current market figures and special topics jll.de/immo Commercial real estate properties for sale or to let throughout Germany Copyright JONES LANG LASALLE SE, Dieser Bericht wurde mit größtmöglicher Sorgfalt erstellt und basiert auf Informationen aus Quellen, die wir für zuverlässig erachten, aber für deren Genauigkeit, Vollständigkeit und Richtigkeit wir keine Haftung übernehmen. Die enthaltenen Meinungen stellen unsere Einschätzung zum Zeitpunkt der Erstellung dieses Berichtes dar und können sich ohne Vorankündigung ändern. Historische Entwicklungen sind kein Indiz für zukünftige Ergebnisse. Dieser Bericht ist nicht für den Vertrieb oder die Empfehlung zum Kauf oder Verkauf einer bestimmten Finanzanlage bestimmt. Die Copyright in diesem JONES Bericht LANG zum Ausdruck LASALLE gebrachten SE, Meinungen und Empfehlungen berücksichtigen nicht individuelle Kundensituationen, -ziele oder -bedürfnisse und sind nicht für die Empfehlung einzelner Wertpapiere, No part of this publication Finanzanlagen may oder be reproduced Strategien or einzelner transmitted Kunden in any bestimmt. form or by any Der means Empfänger without dieses prior written Berichtes consent muss of seine Jones eigenen Lang LaSalle. unabhängigen It is based Entscheidungen on material that we hinsichtlich believe to be einzelner reliable. Wertpapiere Whilst every effort oder Finanzanlagen has been made to treffen. ensure Jones its accuracy, Lang LaSalle we cannot übernimmt offer any keine warranty Haftung that it für contains direkte no oder factual indirekte errors. We Schäden, would like die to aus be Ungenauigkeiten, told of any such errors Unvollständigkeiten in order to correct oder them. Fehlern in diesem Bericht entstehen.