• Despite a significant decline in the second quarter, investment volume for the first six months is up 15% year on year
• Number of transactions down by a fifth while the percentage of portfolio deals hits a multi-year high
• Foreign investors only accounted for 20% of investment in June
• Prices in the prime segment remain predominantly stable
• The transaction volume has probably yet to bottom but the trend reversal is in sight

The COVID-19 pandemic continues to hold large parts of the world firmly in its grasp and the German economy is currently enduring the greatest economic slump in post-war history. Under these conditions, the half-year figures for the German commercial property investment market are impressive. The transaction volume totalled approx. €29.2bn, representing an increase of 15% year on year. Prime yields were unchanged across most property segments, remaining at historically low levels. “The German real estate investment market has proven robust thus far,” says Marcus Lemli, CEO Germany and Head of Investment Europe for Savills of the figures, adding: “Of course, it is important to consider that the time lag of the market figures compared with current market activity means that they do not reflect the full extent of the crisis. The bottom is probably still ahead of us. In terms of market activity, however, we have already seen the bottom. For a few weeks now, we have observed an increasing number of sale processes being initiated or resumed. Subject to a second wave of infection, we are therefore optimistic about the medium-term prospects.”

Significant decline in Q2 investment despite large portfolio transactions
Upon closer examination, the half-year figures undoubtedly exhibit significant signs of the crisis. The transaction volume for the second quarter totalled €9.8bn, which was only around half the amount invested in the first three months of the year. This is the weakest quarterly investment total for four years. Of the ten largest single property sales, only one was completed in the second quarter. Of the ten largest portfolio transactions, four were completed in the same period. Portfolios made an unusually large contribution to the transaction volume in the first half year, accounting for almost half the overall volume (10-year average: 31%). The largest portfolio deals, the acquisitions of TLG by Aroundtown, Godewind by Covivio and Real by a consortium of X+Bricks and SCP Group, were all acquisitions of or investments in companies. The transaction volume for such investments and acquisitions totalled more than €7.5bn; another unusually high figure.

Many foreign investors are temporarily inactive
While the numerous large transactions supported a relatively high transaction volume, the number of transactions declined by around a fifth in the first half year compared with the corresponding period last year. The second quarter was particularly affected, although there have been signs of stabilisation in recent weeks. This decline was largely attributable to the continued travel restrictions, which primarily affect foreign investors. Consequently, foreign purchasers have accounted for a consistently lower percentage of the transaction volume during the year to date, with foreign investment falling from 50% in Q1 to just 36% in Q2. In the month of June, only 20% of the transaction volume was attributable to foreign purchasers. “While investors with a team in Germany remain capable of investing, those investors with no local presence have been cut off from the German market for a while to a certain extent and some of them remain so,” says Lemli. The latter is true of many Asian investors, who were practically inactive as either purchasers or vendors in the second quarter. Over the coming months, Savills expects many foreign investors to return to the market, albeit with a below-average level of investment this year.

Prices in the prime segment remain predominantly stable
Despite a temporarily lower number of purchasers, there is sustained surplus demand in the market at least in the core segment. “Many investors, particularly domestic players, are now simply waiting for sale processes to re-commence and for product to come to the market,” says Lemli. “In view of the recent low number of transactions, it is difficult to make any credible statements on price trends, particularly in the non-core segment. There are several indications that initial yields will soften, although this cannot yet be quantified. With the exception of hotels and shopping centres, however, prime yields held at their historically low levels in the second quarter,” says Matthias Pink, Head of Research Germany for Savills, adding: “Further developments will depend on the extent to which the recession impacts the lettings markets. And the picture there remains inconsistent to date.”

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