Prime yields may have reached the low point - and remain there for a long - time.
Commercial investment market
Although German commercial real estate is more expensive than ever, demand from investors is unrelenting. Consequently, properties are becoming even more expensive. However, we are increasingly observing that investors are no longer willing to pay the prices quoted in the prime segment and, hence, an increasing proportion of capital allocated to real estate is seeking property outside of the small core segment. Consequently, there is higher yield compression on such properties than in the prime segment.
In view of this observation and rising bond yields, we believe that prime yields have essentially bottomed out, although they could remain at this level for a prolonged period. Yields on shopping centres and high-street properties may soften as early as next year, however, since no further rental growth is expected on these properties for the most part.
Residential investment market
In recent months, numerous investors have announced the launch of (further) residential funds. Furthermore, with many existing funds still in ‘buy mode’, demand for residential property is expected to remain high beyond the end of this year. On the supply side, however, it appears that the transaction volume is limited to €15bn.
To a certain extent, the increased competition is forcing investors to shift their attention to B-cities and C-cities, for example, or the micro apartment/student apartment sub-segment, which has witnessed investment of approximately €600m during the current year. The larger supply in these markets also allows significantly more capital to be invested. This excess demand is causing prices to rise further, albeit at a slower rate.
Source : Savills