• All-time-high transaction volume of €70.8bn (+9% year on year)
• Over one hundred individual property transactions for more than €100m for the first time ever
• Initial yields mostly hardened with further yield compression likely going forward
• Conditions to remain largely unchanged in 2020 with the cycle expected to continue

The German commercial property investment market closed out the 2010s with a new record. The transaction volume for the year just ended totalled around €70.8bn (+9% compared with 2018), exceeding the €70bn mark for the first time. Investment in December alone totalled approximately €16.1bn, which equates to the highest monthly investment volume of all time. “When you consider that the shortage of product was a dominant issue for investors throughout the year, the record transaction volume is all the more remarkable. Ultimately, however, it was this very shortage of product that contributed to the record investment since prices rose significantly higher as a result.

Other contributing factors included the strong pressure on investors to invest capital and Germany’s continued attractiveness as a safe haven,” says Marcus Lemli, CEO Germany and Head of Investment Europe for Savills.

Focus on office properties in A-cities
Almost half (around 48%) of the record investment volume was attributable to office property, which was by far the most active sector for investment and increased its share of overall investment yet further compared with last year’s already high figure (44%). “The office sector is benefiting from the favourable rental growth prospects and the fact that most retail properties no longer offer such rental growth potential,” explains Lemli. The retail sector, traditionally the main rival to office property in the competition for investors’ capital, lost further ground and accounted for only 20% of investment, the lowest figure in the current cycle. This was followed by logistics property and mixed-use property (each with 10%). The latter sector produced two of the largest transactions of the year with the Tucherpark in Munich and the Squaire in Frankfurt. Regardless of the sector, there was a clear investor focus on the top seven cities, which were responsible for 56% of the overall transaction volume in 2019 compared with a five-year average of 51%. “The dominance of the A-cities is both a reflection of the high proportion of office properties in the transaction volume and the continued high risk aversion of most investors,” says Matthias Pink, Head of Research Germany for Savills, adding: “The strong pressure to invest is causing investors to prefer high-volume acquisitions. The top seven markets offer the best conditions for this approach.” Berlin and Munich (excluding the surrounding regions) stand out among the top seven cities once again with transaction volumes of €11.7bn and €9.4bn respectively.

Over one hundred individual transactions for more than €100m for the first time ever
Investors’ preference for large volumes is also reflected in the average volume per transaction, which reached a new all-time high of around €33m. Although the three largest transactions last year involved portfolios (Dream Global, Millennium and the interest in Aroundtown), this increase was predominantly driven by large individual transactions. More than a hundred individual properties were sold for over €100m during a calendar year for the first time ever. A good forty portfolio transactions also fell into this size category.

Initial yields hardened further
Another reason for the high number of large transactions is the further increase in capital values. The continued surplus demand and cancelled reversal in interest rate policy caused initial yields on office and logistics property to harden further in the fourth quarter. At the end of December, the prime yield for office property across the top seven markets averaged 2.9%, which was 10 basis points lower than in the previous quarter. Over the full year, office yields hardened by around 20 basis points. The prime yield for logistics property also hardened by 10 basis points during the final quarter and by 40 basis points over the full year to stand at 3.7%. In addition, both sectors witnessed very strong rental growth, driving capital values correspondingly higher. Values of prime office property across the top seven markets rose by an average of around 15% to approximately EUR 13,500 per sq m. Prime yields for retail property formats remained unchanged during the last three months. The prime yield on high-street properties stood at 3% at the end of the year (-10 basis points year on year), compared with 3.9% (-10 bps) on retail parks and 4.3% (+10 bps) on shopping centres.

Domestic and foreign purchasers equally active
Despite the record-high price levels, the German real estate market attracted domestic and foreign purchasers in equal measure. In keeping with the previous five years, German purchasers accounted for more than half of the transaction volume. “Both domestic and foreign investors invested more capital in Germany than in previous years. For international investors, the German market remains attractive owing to its status as a safe haven for investment, which is particularly important in view of the high risk aversion of many investors. Germany also benefited from the fact that, in view of the Brexit debate that spanned the entire year, some risk-averse capital was redirected from London to continental Europe,” says Lemli.

Americans remained the most active purchaser nation among foreign investors with a 13% share. European purchasers increased their proportion of overall investment to 31% (five-year average: 27%), while Asian investors were less active (2019: 3%; five-year average: 5%). Across all nations, asset managers/investment managers were the largest purchaser group with an acquisition volume of approximately €32.3bn. The vendor side, meanwhile, was dominated by developers with a disposal volume of €13.5bn.

Sustained favourable conditions should mean a continuation of the cycle in 2020
From today's perspective, there is nothing to suggest that the cycle will end this year. In fact, since the zero interest rate environment will be sustained for the foreseeable future, the cycle could continue for many years to come despite the weaker economic outlook. “For 2020, we once again expect more capital to be available for real estate investments in Germany than can possibly be invested. Consequently, with the exception of the retail sector, we expect further hardening of initial yields,” says Lemli. Nevertheless, in view of lower rental growth, capital values may no longer rise to the same degree witnessed in previous years, meaning that the transaction volume should be somewhat lower than last year. However, the €60bn mark is likely to be reached once again.

All facts and figures in our
Market in Minutes Investment Market Germany - January 2020