Investment activity in the German commercial real estate market reached €22.9 billion in the first half of 2021, according to Savills.
At around €13bn, the investment volume in Q2 was the second highest of any quarter since the outbreak of the COVID-19 pandemic in the country but remained around 17% below the five-year average quarterly volume prior to the pandemic.
Savills expects the transaction volume to rise to more than €50 billion by the end of the year.
“Activity in the investment market has stabilised overall since the fourth quarter of 2020. However, the third wave of the pandemic at the start of the year has been a hindrance,” says Marcus Lemli, Savills CEO Germany and Head of Investment Europe, adding: “With vaccines being rolled out and restrictions being loosened, there are already signs that significantly more product will be brought to the market in the second half of the year. Since investor demand remains very high, we expect a significant upturn in the investment market.”
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Offices traded for approx. €9.1bn, 40% of the overall volume. Industrial and logistics transacted for €3.5bn/16% and mixed-use property for €3.4bn/15%, ahead of retail (€3.3bn/14%).
“Modern offices with long-term tenants remain highly sought-after by investors despite all the discussions surrounding hybrid working. The high proportion of logistics properties reflects the structural growth in demand for such space, which is creating a massive increase in demand from investors,” says Matti Schenk, Associate Research at Savills Germany, adding: “The fact that mixed-use property has pushed retail property into fourth place is due to a number of very large transactions, such as the “Fürst” development project in Berlin. However, it is also a reflection of a long-term trend towards mixed-use urban quarters. Both urban planning policy and strong demand from investors is driving such developments.”
Ongoing appetite for core property and particularly for certain use types put further pressure on yields in the second quarter. The average prime office yield across the top six German cities hardened by a further 6 basis points to 2.7%. Prime yields for logistics hardened by 4 basis points and stands at 3.5%. “In view of the obstacles last year and at the beginning of this year, many investors have been unable to allocate their capital as planned. The pressure to invest and competition among bidders is even greater. Consequently, yields are tending to harden further, particularly on highly sought-after core product,” says Lemli.
The top six cities accounted for around 49% of the overall volume in the first half of the year. This is in line with the average over the last five years. Berlin and Munich were by far the strongest markets. Commercial property in the German capital changed hands for around €4.3bn, which is the third strongest half year of all time. The acquisition of the Fürst development project by Aggregate Holding for more than €1bn in Berlin was the largest transaction in Germany. This was also the largest single-asset transaction in the city since the sale of Potsdamer Platz in 2015.
Munich (excluding the surrounding region) enjoyed its strongest first half year with a transaction volume of approx. €3.1bn. The sales of the Highlight Towers, MediaWorks and Uptown Tower (including Campus C) alone accounted for approximately €2bn. The transaction volume in Hamburg totalled €1.3bn while Frankfurt (excluding the surrounding region) registered just €1bn of investment, making this the city’s weakest half year since 2014. Investment volumes in Düsseldorf and Cologne totalled approx. €850m and €775m respectively.
Besides an increasing number of transactions and rising volumes as a whole, the remainder of the year is likely to be characterised by two key developments. Risk-averse capital will continue to dominate the demand side and create further yield compression for core property. At the same time, structural upheaval in the occupier markets is creating increasing opportunities for investors with a stronger appetite for risk.
“In addition to the large volume of risk-averse capital, we are also witnessing more capital for non-core investment strategies,” says Lemli, adding: “In view of both the increased quality requirements for office space and importance of ESG, there will be a growing need to upgrade offices. In the retail sector, the long-standing upheaval offers potential for the conversion of centrally located properties. The same applies to the hotel sector, where we are witnessing an increasing number of conversion projects.”