Savills News

German commercial investment market in 2018

New record transaction volume marks probable peak of the current cycle – investment activity expected to remain above average in 2019

New record transaction volume marks probable peak of the current cycle – investment activity expected to remain above average in 2019

Strong take-up in the final quarter and the highest annual take-up of all time
The German investment market for commercial property has a new record in its annals. The transaction volume in 2018 totalled €60.4bn, breaking the €60bn barrier for the first time ever. Properties changed hands for more than €17bn in the final quarter alone, making the fourth quarter of the year the strongest for investment in line with most years. “Even more remarkable than the record level of investment last year is the fact that more than €50bn has now been invested in German commercial property for the fourth year in succession. This is unprecedented in the history of the German investment market and underlines Germany’s status as a safe haven for investment even more emphatically than the record transaction volume,” says Marcus Lemli, CEO Germany and Head of Investment Europe for Savills of last year's total. Looking ahead to 2019, he adds: “The prospects are good that investment this year will also break the €50bn mark.”

Clear focus on offices in the top seven markets
The top seven cities alone accounted for just over half (55%) of the overall transaction volume. Frankfurt stood out from the pack once again with investment of almost €9bn. Berlin, the previous year's frontrunner in the investment market, had to settle for second place last year with a transaction volume of approximately €6.8bn. The dominance of the top seven markets is also a product of the high level of investment activity in the office sector. Office property accounted for almost 45% of overall investment, the highest proportion over the last decade (10-year average: 38%), while retail property was responsible for 22% (10-year average: 31%) and industrial and logistics property accounted for 11% (10-year average: 9%). Investment in development sites witnessed particularly strong growth with an increase of 55% compared with the previous year. More than €2bn was invested in this segment for the first time during the current cycle.

German investors expand their portfolios, Americans reduce holdings
In line with the high level of investment in development sites, developers made acquisitions totalling €5bn, making these the fourth most active purchaser group. Only asset managers/investment managers (€12.6bn), special funds (€12.5bn) and property companies/REITs (€8.6bn) invested more. In terms of purchasers' country of origin, domestic investors further expanded their strong position from the previous year. German purchasers accounted for 56% of the overall transaction volume, the highest proportion since 2013. Domestic investors were also responsible for the highest net investment (acquisitions minus disposals) with €2.2bn, followed by investors from France (€1.7bn), Austria and Switzerland (€1.5bn each). Asian investors active in the German market also made an overall net increase to their holdings of German commercial property last year. Conversely, American investors made net disposals of €4.3bn, making these by far the largest net vendor nation. With acquisitions totalling €4.9bn, Americans were also the second largest purchaser nation. Nevertheless, their disposals totalled almost double this amount at more than €9.2bn.

50 over 50 – a high number of first-time purchasers
Of those investors that acquired German commercial property for at least €50m last year, around fifty were making their first investment in Germany in a decade. “The large number of new investors demonstrates the attractiveness of commercial property in general and the German market in particular,” says Marcus Lemli. More than one in five of these new investors was an insurance company, pension scheme or pension fund. “The German market continues to be predominantly defined by risk-averse, equity-rich investors. Such investors take favourable opportunities to make disposals when they present themselves but fundamentally have a long-term investment horizon and remain focused on stable rental income,” adds Lemli.

2019 will not be better but very good nonetheless
The composition of investors, combined with the continued favourable environment to date, is likely to ensure that market activity remains buoyant this year. Interest rates in the eurozone will probably remain unchanged at their low levels throughout the year and the German economy promises moderate growth, albeit the downside risks have recently increased somewhat. In any event, we expect a modest decrease in the transaction volume. Even last year, the number of transactions fell by 5% compared with the previous year. However, this was more than offset by strong growth in sale prices. Consequently, prime yields hardened noticeably further across all segments with the exception of shopping centres during the year. In the case of offices, this was further enhanced by strong rental growth, driving prices per square metre higher. “In 2019, yield compression is largely expected to come to a halt across all segments while office rents are likely to witness somewhat more moderate growth in view of the increasing completion volume. At the same time, pressure to invest is likely to subside for a number of reasons. These include the correction in the equity markets, resulting in proportionately larger real estate holdings in the portfolios of multi-asset investors. The end of the net purchasing of securities by the ECB in December 2018 is also likely to weaken the purchaser side in the real estate market. However, all of these are dampeners on an exceptionally high level of investment,” says Matthias Pink, Director and Head of Research Germany for Savills on the outlook for the year ahead. Savills expects the transaction volume for 2019 to reach approximately €50bn.

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