Investment Market Overview - JLL · Investment Market Overview | 3rd quarter 2018 2 Record...

Investment Market Overview

Germany | 3rd quarter 2018 Published in October 2018

Investment Market Overview | 3rd quarter 2018 2

Record transaction volume possible in current year

In any event, the political landscape is unlikely to stabilise anywhere in the world, but Germany’s economic upturn endures. The central banks will be of particular interest in fu-ture when it comes to assessing the capital market outlook in the coming months. Inflation trends and the exit from the ultra-loose monetary policy will be at the centre of attention. Investors wonder when Mario Draghi will raise interest rates, and by how much. It is to be assumed, however, that the European Central Bank will adapt flexibly to developments in the foreseeable future and react accordingly. So we expect to see a gradual and cautious process, and peak interest rates should be lower in the coming cycle than in the past.

Strong transaction volume in the third quarter – €55-60 billion expected in the full yearThe somewhat uncertain circumstances have so far left no traces on the German investment market. On the contrary, the transaction volume for commercial real estate increa-

sed 8% year-on-year to €42 billion in the first nine months of 2018. Never before has a third quarter performed this well, and the transaction volume of €16.4 billion also posi-tions it as the fourth-strongest quarter in the ranking of the past five years. Among other deals, the Kaufhof/Karstadt transaction contributed towards this exceptional result with a value of €1.8 billion. Of course, such transactions do not take place every quarter. Given that the market is usually very active in the last three months, and the expectation that some of the many transactions still in the negotiation phase will be realised in the final weeks of the year, a transaction volume of up to €60 billion seems possible. As is so often the case, the probability that such a forecast will be realised depends particularly on the implementation of large-volume trans-actions. But aside from that, the momentum beyond mega-transactions also points towards an exceptional investment year in 2018.

Transaction Volume Germany


Dominance of the Big 7 intensifies – investors focus on office propertiesThe third quarter not only witnessed a consolidation of the half-yearly trend, but also an acceleration of this develop-ment. More than ever, investors are focusing on the Big 7. While an aggregated volume of more than €26 billion (60% of the transaction volume of the first three quarters) was invested in all seven strongholds, corresponding to an in-crease of 27%, around €16 billion was invested outside these markets. This was around 13% below the previous year’s volume.In our view, this reflects the dynamic development that is particularly evident in the office lettings markets in the Big 7. Investors are increasingly relying on rental growth in the face of declining yield compression in order to meet their

return targets and generate value. This is one of the reasons why value-added properties with short remaining leases or properties with vacancies are currently in demand, as higher rents are most likely to be realised here through new con-tract agreements.When a large amount of capital is to be invested at once, there are very few alternatives to the Big 7. Of the 67 indivi-dual transactions in the three-digit million range that took place in the first three quarters, the Big 7 accounted for 62. In terms of the biggest individual transactions in the nine-month period, the largest deal outside the Big 7 is only ranked 37th with about €150 million.Office property remains the most popular asset class, ac-counting for around 45%. Approximately €19 billion was invested in this type of real estate from January to Septem-ber. In the search for investment options, sub-markets outside city centres and CBDs in the Big 7 seem to be the preferred choice of investors ahead of smaller and therefore riskier markets. Here, it is possible to realise significantly higher rental increases on a selective basis than in the prime locations. Retail property is in second place, accounting for over 20% of the total thanks to the billion-euro department store transaction. Otherwise, the focus of investors in the retail segment is predominantly on specialist retail pro-ducts with anchor tenants from the food industry that have so far been relatively unaffected by online compe- tition. This is also one of the reasons why very large trans-actions in the retail segment have become relatively rare. Most transactions range between €20 million and €60 mil-lion and, unlike in the office sector, are geographically more widely dispersed.

Transaction Volume by Risk Profile of the Investments


Transaction Volume Commercial Real Estate 2017 Q4 – 2018 Q3

SCHLESWIG-HOLSTEIN

LOWER SAXONY

NORTHRHINE-WESTPHALIA

HESSE

RHINELAND-PALATINATE

BADEN-WURTTEMBERG

BAVARIASAARLAND

BRANDENBURG

MECKLENBURG-WESTPOMERANIA

SAXONY

SAXONY-ANHALT

THURINGIA

Hamburg

Hanover

Bremen

Düsseldorf

Essen

Cologne

Dortmund

Frankfurt/ Main

Wiesbaden

Stuttgart

Karlsruhe

Mannheim

Munich

Nuremberg

Augsburg

Berlin

Dresden

Leipzig

Transaction Volume inmillion € *

0

above 0 to 20

above 20 to 150

above 150 to 300

above 300

Investment Volume Commercial Real Estate 2017 Q4 - 2018 Q3

JLL Research

* aggregated in 40 x 40 km grids


Frankfurt and Hamburg with strongest momentum in the third quarter“Frankfurt is back”, we claimed at the end of the first half of the year, and this applies all the more to the third quarter (€3.16 billion). After the first nine months of the year, the ban-king metropolis is the undisputed leader among Germany’s investment strongholds with a volume of about €6.9 billion. Compared to the previous year, the figure has more than doubled owing to a series of large-volume transactions: out of Germany’s ten largest individual deals this year, seven took place in Frankfurt. Berlin is next with €4.9 billion and Munich is in third place with €4.5 billion. While Munich regis-tered a slight increase of 8% compared to the previous year, the German capital suffered a decline of about 17% despite the €1.7 billion that was invested in the period from July to September. Hamburg also exceeded the €4 billion mark with an increase of 70% – boosted by the strongest third-quarter performance (€1.72 billion) after Frankfurt.At the end of the third quarter, there was no change in the ratio of German to foreign buyers, with foreign capital sour-ces accounting for around 45% (just under €19 billion). An increase in the share of foreign investors would have been expected considering that the department store merger was registered as an Austrian investment. However, this was balanced out by numerous purchases by domestic institutional investors especially in the €100 million-plus range, in particular during the third quarter.

Purchases of foreign investors

Continuing momentum causes further decline in yieldsDuring the third quarter the office property segment, which accounts for the highest transaction volume, continued to see only moderate declines in yields for top products in the best locations. The prime yield averaged across all seven strongholds narrowed slightly to 3.20% compared to the previous quarter. In a 12-month comparison, the yield dec-lined by 19 basis points. In view of the continuing strong momentum, we have again slightly revised downward our forecast for the end of the year. Across all seven strong-holds, we expect to see a prime yield of 3.15% by the end of the year.The fact remains that top products are scarce and demand is still very high. The trend described above regarding the shift in investor preferences to products or locations in the Big 7 that do not meet the definitions of “prime” is also reflected in the yield development. The yield for properties in prime locations, but with a poorer building quality and shorter remaining leases, is only 3.95%, which is just 75 basis points below the prime yield. Top properties in sub-markets outside the prime locations also experienced further yield compression to 3.54% on aggregate. This represents the lowest level in more than five years and is only 34 basis points below the prime yield – the smallest gap ever seen.However, the strongest momentum in yields is still evident in the logistics property segment. Currently, the average


Transaction volume Big 7 (€ mn)

Q1-3 2017 Q1-3 2018 %

Berlin 5,880 4,890 -17%

Düsseldorf 1,965 3,000 53%

Frankfurt/M 3,360 6,930 106%

Hamburg 2,430 4,125 70%

Cologne 1,720 1,445 -16%

Munich 4,120 4,450 8%

Stuttgart 1,085 1,300 20%

Total 20,560 26,140 27%

Transaction volume Germany (€ mn)

Q1-3 2017 Q1-3 2018 %

Single assets 26,900 29,830 11%

Portfolios 11,870 12,190 3%

Total 38,770 42,020 8%

prime yield for the top 7 logistics regions stands at 4.10%, which is a further 15 basis points lower than at the end of the second quarter. The thriving online retail trade and its positive outlook for the future are attracting foreign inves-tors to this asset class, which is no longer a niche product. By the end of the year, we expect a further decline to 4.00%.

Residential portfolio investment market stays buoyant even without mega dealsThe fact remains that the Vonovia mega deal completed in the first quarter of 2018 continues to influence the trans-action volume on the German residential portfolio invest-ment market*. In the third quarter of the year, the volume reached €3.5 billion and was therefore far below the €7.2 billion registered at the start of the year. It was also lower than the second quarter result of €4.1 billion. However, the overall transaction volume for the period from January to

Transaction Volume Germany by Type of Use

Impact of change in Rents and Yields on Office Capital Value Growth

Aggregated Numbers for Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munichand Stuttgart without combinatory effects

* Hotels, Sites, Special Properties

Prime yields in 1a-locations (aggregated net initial yield in Big 7 in %)

Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018

Office 3.39 3.27 3.26 3.24 3.20

Retail: Shopping center 4.00 3.90 3.90 3.90 3.90

Retail: Warehousing parks 4.70 4.60 4.50 4.50 4.50

Retail: Warehousing solus units 5.40 5.30 5.20 5.20 5.20

Retail: High street 2.96 2.96 2.93 2.91 2.90

Warehousing/Logistics 4.70 4.50 4.40 4.25 4.10

Transaction Volume by Vendor and Purchaser Type (€ mn)

Office prime yields in %

Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018

Berlin 3.00 2.90 2.90 2.90 2.90

Düsseldorf 3.75 3.45 3.45 3.35 3.25

Frankfurt/M 3.25 3.25 3.25 3.25 3.25

Hamburg 3.25 3.05 3.05 3.05 3.05

Cologne 3.65 3.45 3.45 3.45 3.45

Munich Region 3.30 3.30 3.20 3.20 3.20

Stuttgart 3.50 3.50 3.50 3.50 3.30


lisation of the German market, and the fact that there are still few alternative investment options with attractive risk-return profiles, this percentage will certainly increase.As well as Denmark, investors from the USA (€700 million), the UK (€660 million) and France (€470 million) were particularly active in 2018. It’s worth noting here that international investors are increasingly interested in the domes-tic rental housing market despite the increased number of regulations on the German residential property invest-ment market.International insurance companies and pension funds also clearly remain under enormous pressure to invest. This in-vestor group is still strategically underinvested in the real estate market, and long-term government bonds that are about to expire must in turn be reinvested for a return that

end-September still amounted to €14.9 billion (about 103,000 residential units), which compares well with previous years. Indeed, the result is 37% above the year-ago volume, 27% higher than the five-year average, and also exceeds the 10-year average by as much as 81%.LEG NRW, which acquired 3,750 units in the Ruhr region, was responsible for the transaction with the largest num-ber of residential units in the third quarter of 2018. How-ever, the purchase of 3,600 units by a Danish pension fund from a fund managed by Industria came with a higher price tag of €900 million. Other international investors are also seeking an entry to the German residential property market, even at the price of a low initial yield. Overall, the share of international in-vestors was unchanged at 25%. Owing to the internationa-

Residential Investment Market


Ø-Transaction Volume 2013-2017:

€ 16.9 bn


at least maintains value. The German residential property market offers the ideal conditions for these rather con- servative and long-term oriented investors because of its stable cash flow and high level of tenant protection. This trend is also evident from the analysis of the accumu-lation and reduction of residential property assets. Here, the insurance companies/pension funds group is ranked in second place after listed residential property companies (plus €4 billion) with almost €2.5 billion in accumulatedassets – the highest volume since 2005. In addition, many pension funds have invested in the market through special funds. The strong demand is also continuing to push up prices. The average price for existing properties increased by a further 20% to about €1,850/sqm. For project develop-ments, an average price of more than €4,000/sqm has been attained for the first time, representing a 5.4% increase compared to 2017. Even if no major mergers and mega-deals take place in the residential portfolio investment market during the last three months of the year, not least because of the high prices, the overall result in 2018 will be impressive. More than €18 billion is expected to be achieved primarily through portfolio adjustments and off-plan sales in project developments. There is also growing interest in micro-apartment complexes.

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Dieser Bericht wurde mit größtmöglicher Sorgfalt erstellt und basiert auf Informationen aus Quellen, die wir für zuverlässig erachten, aber für deren Genauigkeit, Vollständigkeit und Richtigkeit wir keine Haftung übernehmen. Die enthaltenen Meinungen stellen unsere Einschätzung zum Zeitpunkt der Erstellung dieses Berichtes dar und können sich ohne Vorankündigung ändern. Historische Entwicklungen sind kein Indiz für zukünftige Ergebnisse. Dieser Bericht ist nicht für den Vertrieb oder die Empfehlung zum Kauf oder Verkauf einer bestimmten Finanzanlage bestimmt. Die in diesem Bericht zum Ausdruck gebrachten Meinungen und Empfehlungen berücksichtigen nicht individuelle Kundensituationen, -ziele oder -bedürfnisse und sind nicht für die Empfehlung einzelner Wertpapiere, Finanzanlagen oder Strategien einzelner Kunden bestimmt. Der Empfänger dieses Berichtes muss seine eigenen unabhängigen Entscheidungen hinsichtlich einzelner Wertpapiere oder Finanzanlagen treffen. Jones Lang LaSalle übernimmt keine Haftung für direkte oder indirekte Schäden, die aus Ungenauigkeiten, Unvollständigkeiten oder Fehlern in diesem Bericht entstehen.

Willi Weis Head of Industrial Investment GermanyFrankfurt+49 (0) 69 2003 [email protected]

Dr. Konstantin KortmannHead of Residential Investment GermanyFrankfurt+49 (0) 69 2003 [email protected]

ContactsSandra Ludwig Head of Retail Investment Germany Hamburg +49 40 350011 207 [email protected]

Helge ScheunemannHead of Research GermanyHamburg+49 (0) 40 350011 [email protected]

Marcus LütgeringHead of Office Investment Germany Munich+49 (0) 89 290088 [email protected]

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