A never-ending supercycle?
Properties in the German commercial real estate investment market changed hands for approximately €24.2bn in the first half of the year, which is approximately 12% lower than in the first half of 2018. The transaction volume for residential property totalled approximately €6.2bn, representing a decrease of around 36% year on year. The rolling twelve-month volume in the German real estate market stood at €74.2bn at the end of June, rising marginally compared with the previous month (Table 1).
Although transaction volumes have been in a downward trend since November 2018 (Graph 1), there is no significant downturn in the German real estate investment market on the horizon, even in the eleventh year of the supercycle. Consequently, the commercial transaction volume is once again likely to exceed €50bn by the end of the year, which would be the fifth year in succession that this threshold has been surpassed. The sustained high level of investment activity is also explained by the lack of attractive alternative investments. Yields on ten-year German government bonds are currently negative, with the prime yield on German office property around 340 basis points higher at present (Graph 3). This is the third highest yield differential in the last 30 years. Furthermore, not only have interest rate hikes been deferred, a rate cut is currently being discussed in the USA. This will mean penalty interest on large, short-term bank deposits and, as a result, investors will remain under high pressure to invest. Global capital flows into real estate are, therefore, likely to continue and Germany will benefit as one of the most liquid markets.
A total of around 1,150 transactions were completed in the first half of the year, which is 9% lower than in the corresponding period last year. The average transaction size also fell (-8%) to around €26.5m over the last six months. This decline is primarily attributable to the fact that there have been significantly fewer sales in excess of €100m. A total of 68 transactions of this magnitude were completed in the first half of the year, which is 11 fewer than in the corresponding period last year. The volume of these transactions fell by 22%. Particularly in the commercial real estate market, high-value core properties have changed hands almost exclusively to long-term investors in recent years and are, therefore, rarely offered for sale.
Meanwhile, capital values have risen across the board. The median office transaction in the first half of the year stood at €18.9m, representing an increase of 26% year on year. Capital values are no longer being driven by hardening yields but by the pricing in of rental growth potential. While no significant further yield compression is expected over the next twelve months (Graph 3), average office rents across the top seven cities are likely to rise by around 6%.