German 2017 CRE investment hits record €57bn, 2018 to depend on rates, bonds - JLL

Timo Tschammler © LinkedIn

Investment in German commercial property last year hit €56.8 bn, shattering the prior record set in 2015 by €1.7 bn, and up 7% from 2016, says international adviser JLL Germany. Although demand remains intact, progress this year will depend on interest rates and bond yield moves.

JLL Germany Head of Research Helge Scheunemann described 2017 as remarkable considering a shortage of commercial property supply, and increased prices. "We assume that some investors refrained from making an allocation because prices were too high," he said in a release. "On the other hand, higher price levels played a considerable role in enabling the transaction volume to reach a new record." This would not have been breached at 2015 prices.

JLL said economic conditions for German CRE investment remained uniformly positive during 2017. In addition to continuing low interest rates, a thriving economy and strong lettings helped drive demand. Even the breakdown in discussions among the CDU/CSU, FDP and Greens over forming a coalition government did not disrupt the investment flow. "In the view of property investors, political issues in any case have relatively little impact," the advisor said.

One feature of the past year was scarcity of product, particularly evident in office property. As a result, investors turned to markets outside the Big 7 urban centres while more focused on attractive opportunities in project developments, mainly in these cities. These forward-funding arrangements doubled in volume within two years to account for 12% of total. The largest deals in 2017 included the sale of the German part of Blackstone's Logicor logistics platform in second quarter - for more than €1.9bn - and that of the Berlin Sony Center for €1.1bn in third quarter. Two other major portfolio transactions were the acquisition by Vienna's Signa group of a portfolio from New York-based RFR for about €1.5bn and a sale of assets by US-based private equity fund Apollo to Israeli-based Intown for about €1.2bn.

Little changed last year in terms of the popularity of the asset classes. Office remained in first place with an unchanged share of 44% or €25bn, the second highest volume after 2007. Retail as again in second place, falling to just over 20% - but offset by strong demand for logistics properties at around €8.7bn. In addition, an increasing number of urban neighbourhoods and buildings with mixed use are being established, especially in central city areas. Almost €5.4bn (9%) was invested in this property asset type.

Looking at cities and regions, JLL said foreign investors continued to favour Germany, and tended to stay in the Big 7 major property strongholds of Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne, Munich and Stuttgart with their allocations - around €31bn in total there. Berlin remained market leader at more than €7.7bn and growth of 56%yy, followed by Frankfurt at €7.1bn.

In his outlook for 2018, JLL Germany CEO Timo Tschammler said: "The essential criterion for investors is and remains the likely rise in interest rates... After all, 2017 marked the 10th anniversary of the start of the last major financial crisis and, at least in terms of monetary policy, the European Central Bank remains in crisis mode with its zero-rate policy." At the same time, the ECB has signalled that it will begin to reduce bond purchases significantly. "Whichever way we interpret this decision, in my view it represents a first step towards the normalisation of monetary policy in the Eurozone." However he does not expect a change in rates before late 2019.

Tschammler added: "Demand is still present and intact, fuelled by the significant gap in yields .. between real estate and government bonds. The gap will narrow in the medium-term but this will be caused by rising bond yields rather than rising property yields. It seems reasonable to assume that with a further narrowing of the gap - and when the difference becomes much smaller than at present - the point will be reached when property no longer appears to be commensurate with the risks relative to bonds." Under these circumstances traditional bond investors such as insurers are likely to turn more to that market and focus less on property investments.

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