• Investment volume down 9% year on year: €41.1bn
• Insurance companies were the only investor group to increase their acquisition volume
• Prices stable in the prime segment and even rose in the logistics sector
• The price differential between core and non-core widened
• The outlook is increasingly bright but the transaction volume for 2020 will be significantly lower than last year’s

Germany has withstood the coronavirus crisis better than most countries to date, both as a society and an economy as well as in terms of the real estate market. The commercial real estate investment market recorded a transaction volume of €41.1bn in the first nine months of the year. This is approximately in line with the five-year average and represents a decline of only 9% year on year. Prices remained predominantly stable, at least in the prime segment. “The fact that we are in the middle of a year of crisis is not evident from a superficial look at the figures on the German investment market. Signs of the crisis only become apparent upon closer inspection. This alone demonstrates how well the German market is faring despite the crisis,” says Matthias Pink, Head of Research Germany for Savills.

Low mid-year investment volume but transactions have since stabilised
A glance at some figures reveals signs of the crisis. The second and third quarters registered relatively weak transaction volumes of around €11bn per quarter. Two successive quarters with such low investment totals were last seen in 2016. The decline in the number of transactions is even more pronounced. The third quarter produced the lowest number of transactions (approx. 380) since the first quarter of 2013. Both the transaction volume and number of transactions have since stabilised, however, and are likely rise again in the fourth quarter. Not only is there an increasing amount of product in the market, but the number of active investors is also increasing. Nevertheless, the transaction volume will not reach pre-crisis levels by the end of the year.
 
European purchasers have recently dominated the market and insurance companies are particularly active
Asian investors in particular have been almost absent as purchasers in recent months. North American investors were less present than usual in the 2nd and 3rd quarters with only 8% of overall transaction volume (five-year average: 12%). Consequently, German (60%) and other European purchasers (32%) have dominated the market in the last two quarters. Property companies/REITs, special funds and insurance companies/pension funds in particular showed above-average activity during this period. The latter have already invested around €2.5bn this year, which is more than in the whole of 2019. The same cannot be said of any other investor group. The most active purchasers included Allianz as well as eleven other institutions with an acquisition volume over €100m.

Investment volume down in almost all sectors except for care property and mixed-use properties
Almost three quarters of the acquisition volume from insurance companies/pension funds flowed into office properties, contributing to offices remaining by far the dominant sector. Office property accounted for 44% of the overall transaction volume in the first three quarters, followed by retail (23%) and industrial property (11%). In all three sectors, the transaction volume was lower than in the corresponding period last year. However, hotels showed the strongest decrease, with the transaction volume falling to around half of last year’s level. The reverse is true of mixed-use properties (+21% year on year) and care property (+26%), which showed an increase in transaction volume. Development sites also enjoyed marginally higher investment year on year (+8%).

Yields remain stable overall with further yield compression on logistics property
Despite the overall subdued transaction activity, prime yields remained stable in the third quarter. In the case of logistics property, the yield compression of recent years even continued. The prime yield hardened by 20 basis points quarter on quarter to 3.5%. However, even in the “crisis beneficiary” that is the logistics sector, only the absolute prime properties witnessed an increased in prices. When it comes to evaluating risk, tenants and their credit ratings are once again playing a greater role for investors than prior to the crisis. This is true across all sectors. “Prior to the crisis, prime properties in prime locations were often attracting top prices regardless of the letting situation since investors had no qualms as to re-letting,” says Marcus Lemli, CEO Germany and Head of Investment Europe, adding: “In view of the increased uncertainty surrounding the lettings markets, shorter lease terms or weaker credit ratings are now being reflected to a far greater extent in occupiers’ willingness to pay.” In terms of office properties, for example, prime yields are now only being achieved on properties with long-term leases to public-sector occupiers or tenants of similar creditworthiness. “On office properties let to the State for ten years or longer, we are even seeing higher prices than at the start of the year in some instances. Otherwise, the core segment has become narrower and the price differential with the rest of the market has widened,” says Lemli.

Stronger investment foreseeable in the fourth quarter; strong base for 2021
The transaction volume in the fourth quarter will depend on how quickly the sale price expectations of owners converge with the willingness to pay of potential purchasers in the non-core segment. Regardless of this, the transaction volume is likely to be higher than in the last two quarters. Savills expects the transaction volume for the full year to reach around €55bn (2019: €71bn; five-year average: €62bn). “Even if investors make further acquisitions by the year end, only a few are likely to achieve their acquisition targets for this year and will go into next year with a corresponding backlog. Should the lettings markets prove as robust as they have done so far, then we expect the transaction volume next year to reach €50 to €60bn euros,” says Lemli.

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Market in Minutes Investment Market Germany - October 2020