Still more building activity in B-locations
Commercial and residential properties changed hands for a total of approximately €6.4bn in the German real estate investment market in July (Table 1). This is 5.2% above the average monthly transaction volume over the last five years. The rolling twelve-month volume stood at €76.1bn at the end of July, rising marginally compared with the previous month (Graph 1), underlining the sustained strong momentum in the investment market.
With the US central bank cutting its key interest rate and all German government bonds showing negative yields for the first time, the yield differential with real estate has widened. Hence, from a yield perspective, investing in German property has become more attractive. This should contribute towards ensuring that many investors continue to favour real estate investments (see also Market in Minutes Investment Market Germany July 2019).
Economic risks have increased further. German industrial production has fallen appreciably, the Ifo Business Climate Index has deteriorated significantly and, in the labour market, the decline in unemployment appears to be over. However, recent developments are yet to have any noticeable negative impact on the office lettings markets. Based upon the latest data, in fact, the top seven cities are expected to witness further growth in the number of office employees. It appears likely in most locations that demand will continue to rise more sharply than supply, which should also cause rents to increase further (see also Top Six German Office Markets in Minutes).
In view of the strong demand for real estate, there is intensive competition for development sites. Undeveloped commercial sites changed hands for approximately €2.3bn over the last twelve months, representing an increase of 20% year on year. Consequently, commercial development sites registered the second highest growth in the German investment market, exceeded only by the office sector. Around 44% of the transaction volume was attributable to the top seven cities, with Hamburg and Berlin witnessing by far the highest investment volumes of €344m and €334m respectively. B-cities accounted for around 21% of investment, which is significantly above the five-year average (11%). A significant proportion of this investment was due to the disposal of the Leipzig Freiladebahnhof site, however. If this stand-out deal is excluded, there is no significant change in investment activity in any locations outside of the top seven cities. This reflects the relatively high risk aversion in the current stage of the market cycle.
Within the top seven cities, on the other hand, it is notable that a large proportion of sites that changed hands over the last twelve months were situated in B-locations. This suggests that the current increase in development activity outside of the CBDs will be sustained going forward.