More new build, more development
Commercial and residential property in Germany changed hands for approximately €4.1bn in February. The rolling twelve-month volume stood at approximately €77.7bn, representing a 1% decline on the previous month (Table 1).
The supercycle that commenced more than a decade ago is being reflected in rising development activity in 2019. According to preliminary figures, more apartments in apartment buildings have been approved in the last year than in any of the last 22 years. A total of around 3.38 million sq m of office space is scheduled for completion in the top seven office markets this year and next year. The last time we witnessed a pipeline of such magnitude was 26 years ago (3.45 million sq m in 1993/94). This buoyant construction activity is also manifesting itself in a high proportion of development transactions in the investment market. Such deals have accounted for around 15% of the transaction volume over the last 12 months, compared with a five-year average of around 11%. Early acquisition of development projects offers investors the opportunity to secure a sought-after (core) property for their portfolios. In such new builds the achievable rents in the office markets are on their highest level for 27 years. Prime rents in Frankfurt, for example, stood at €40.50 per sq m/month at the end of 2018 while those in Munich stood at €36.50 per sq m/month. Further rental growth of 6% to 7% is likely over the next twelve months. In the apartment market, new builds have a legal advantage in terms of achievable rents compared with existing properties, insofar as these are covered by the rental cap.
Acquisitions of properties under construction or in planning accounted for approximately a quarter of the transaction volume in the residential investment market over the last twelve months, compared with 12% in the commercial investment market. However, there are significant differen-ces within the commercial real estate market. Development acquisitions accounted for 16% of the transaction volume for office properties over the last twelve months, which is the highest figure in the current market cycle. In the retail sector, the corresponding figure is only around 3%. This is a reflection of the significant differences in new-build activity across the various uses. Meanwhile, 11% of the transaction volume for high-street properties over the last twelve months was attributable to acquisitions by developers. This is likely a manifestation of the increase in construction projects in high-street locations.
Developers have also been very active as purchasers in the investment market for logistics and industrial property, accounting for around 13% of the transaction volume over the last twelve months. Some 61% of their acquisition volume was attributable to properties purchased with the intention of a change of use. Often, a residential development is planned in an urban commercial area, which is a consequence of the strained housing markets and the associated demand for building land.