Politically stable and economically robust, Germany is becoming increasingly attractive for foreign investors, especially in commercial real estate…
Berlin counts among the most popular investment locations
allthings berlin \ Flickr \ Public Domain
Up until the start of this millennium, the German commercial real estate market was still dominated by domestic investors. International investors, that is predominantly institutional investors such as pension funds, insurance companies and other funds, were rare. Various reasons were put forward for this, including lack of transparency due to a still rather rudimentary system for recording transactions in comparison to other real estate markets with a high level of institutionalization, such as Great Britain. Other factors mentioned were Germany’s federal structure and the associated complexity of the marketplace, as well as low expected returns.
Since then, both the commercial real estate market in Germany and international investors’ perceptions of Germany have evolved positively. The professionalization of market research means that adequate market information is now available. It is precisely because risk is distributed across a number of investment locations that foreign investors now hold Germany in high regard. In addition, the low interest rate environment is contributing to the view that there is virtually no alternative to real estate investment (the so called “wall of money”).
Based on transaction volume, in 2017 Germany ranked second in Europe, behind Great Britain and well ahead of France, which for a long time held second place.
There are further factors that make Germany attractive as an investment location, in addition to the points already mentioned above.
Political stability
These principally include, beside Germany’s political stability, its solid and diversified economy, which has recorded economic growth for the eighth successive year. Employment is at a record high (45.3 million). The unemployment rate of 6.3% is at its lowest level since German reunification. Combined with this, user (tenancy) markets are in good shape, with low risk combined with low property vacancy rates and rents that are continuing to rise moderately. In this regard, Germany again has an advantage in comparison to other countries. One example is Great Britain, where the results of the Brexit referendum are being felt in the London office market and various investments have either not gone ahead or have been made in other countries instead.
Furthermore, Germany has a stable financing market with over 1,800 banks, which demonstrably provide the economy with sufficient liquidity even in periods of crisis.
All of the above arguments have led to Germany count as a secure investment location (“safe haven”), and therefore consequently the share of international investors in commercial transaction volumes has risen in the last few years. In 2017, almost every second euro in Germany was invested by international investors. Alongside investors from the rest of Europe, investors from the US and Asia are particularly active. It is striking that in 2017 Asian investors invested almost three times as much in Germany as they did in 2016.
The most popular investment locations in Germany in 2017 were the regions of Berlin (€ 11.9 billion / 17.6% of transaction volume) and Frankfurt (€ 8.3 billion / 12.3%), followed by Munich (€ 5.9 billion / 8.7%). In this regard, international investors prefer in particular high-value and sizable office properties (49.9% of the transaction volume of international investors), logistics portfolios (17.1%) and retail properties (15.2%) in established and property-specific locations.
Rising demand
In line with this, the two largest transactions in Germany over the past year were both carried out by international investors. The Sony Center in Berlin was acquired by Blackstone (US) for € 1.11 billion and the Commerzbank Tower in Frankfurt by Samsung Life Insurance (Korea) for € 0.73 billion.
Rising domestic and international demand for real estate has pushed purchase prices up across Europe and thus also in Germany. At approx. 6.4%, average purchase yields of all real estate classes are at a historically low level. Average yields for absolute prime properties in major European cities are under 4%. Over the last 12 months, purchase yields for top office properties in Germany fell by 20% and are at a historically low 3%.
In spite of these historically low yields, and despite an environment of slightly rising interest rates since the start of the year, real estate continues to constitute an unparalleled form of investment. Investment pressure among investors thus remains high, such that demand will also remain high. Various international investors from Asia have already announced their intention to invest several hundred billion euros in European real estate markets over the next ten years. A price correction and an end to the run on real estate in the commercial sector are therefore not expected. ■
Bernhard Heinlein is Member of the Board of Management, Münchener Hypothekenbank eG; Thomas Völker is Head of Commercial Real Estate Clients International, Münchener Hypothekenbank eG. Münchener Hypothekenbank eG (MünchenerHyp) is one of Germany’s major real estate financing institutions. As part of the cooperative financial sector in Germany, it acts as the close partner of Germany’s regional cooperative banks (Volksbanken and Raiffeisenbanken). In commercial real estate finance business, the bank’s target markets include Germany, Great Britain, France, Spain, Benelux and Austria.