• Transaction volume of €19.7bn (+12% compared with 2019)
• Volume in the eastern (non-city) federal states rose by 70%
• Private equity funds registered their highest acquisition volume since 2012
• Subsidised apartments featured in almost one in seven transactions
• Significant decline in investment in student apartments and micro-apartments

2020 was the second strongest year of all time in the residential investment market (transactions for at least 50 apartments).

Residential property changed hands for a total of approximately €19.7bn last year. This represents an increase of 12% compared with the previous year as well as a 14% increase on the five-year average. The number of units transacted totalled almost 150,600, which is 26% higher than in the previous year. “The COVID-19 pandemic has led to a flight to the most stable investments possible among many investors,” says Karsten Nemecek,

Managing Director of Corporate Finance – Valuation for Savills Germany, adding: “In the real estate market, it is primarily residential properties that have proven stable during the crisis, as evidenced by the extremely low loss of rent and further rental growth in many locations. The already strong demand among domestic and foreign investors has risen further during the pandemic and is likely to increase again in 2021.”

Proportion of portfolios rises – higher activity in eastern Germany
The proportion of portfolios in the transaction volume fell successively from 92% to just 63% between 2015 and 2019. Last year, however, this proportion increased again, with portfolio sales accounting for around €13.9bn or 71% of the transaction volume.

The acquisition of Adler Real Estate by Ado Properties, the second largest transaction in the German residential property market to date, was responsible for a large proportion of this. There were also a further 20 portfolio sales in excess of €100m. Portfolio transactions in particular showed above-average activity in almost all of the eastern (non-city) federal states last year. Overall, the transaction volume in these five federal states rose by 70% year on year. Lower Saxony also witnessed an above-average transaction volume last year. Accordingly, the average prices of existing apartments transacted last year fell by around 7% (compared with 2019), averaging approximately €115,000 per residential unit. “Some investors are now increasingly looking at locations outside of the major metropolitan regions. Should the popular hypothesis that the pandemic is structurally increasing demand for residential property prove accurate, such locations are also likely to benefit from this growth. In addition, initial yields in these locations are appreciably higher,” says Nemecek.

Highest investment from private equity funds in many years
Investors from Germany continued to dominate market activity, accounting for around 83% of the transaction volume. This represents a modest decrease of around six percentage points year on year. Property companies / REITs were by far the most active purchaser group, accounting for approximately 48% of the transaction volume. These were followed in second and third places by open-ended special funds and housing associations with 16% and 10% of the overall volume respectively. One striking figure was the acquisition volume from private equity funds of €800m, their highest investment total since 2012. “The fact that international institutional investors are increasingly active again reflects the greater interest in German residential property worldwide and promises further growth in capital values,” says Nemecek.

Significant decline in investment in student apartments and micro-apartments
In contrast with traditional residential property, student apartments and micro-apartments have been affected by growing uncertainties during the COVID-19 pandemic. The transaction volume for these property types totalled around €563m, which is only around half the amount in the previous year. “A high degree of flexibility and short-term agreements are fundamental components of temporary living concepts. In view of the pandemic, these very features have resulted in greater uncertainty among investors compared with traditional residential property,” says Matti Schenk, Associate Research Germany for Savills, adding: “The second lockdown and digital university semester have delivered another major test for the segment and investors are being more selective in terms of locations and operator concepts. However, it would not be appropriate to speak of a withdrawal of investors from this market at present. Activity in the investment market is likely to pick up again, at the latest, once demand returns in the occupier market, which is expected in the second half of the year,” says Schenk.

Subsidised housing featured in almost one in seven transactions
While student apartments and micro-apartments entail greater fluctuation and hence more rapid adjustment of rents, the subsidised housing segment is characterised by greater stability but also by regulation. In view of the high priority investors are currently assigning to stability, we are observing growing investor demand throughout Europe for subsidised residential property or residential properties let at relatively low rents. With regard to the lack of social housing, this market segment is also likely to receive greater attention in Germany. In addition, new-build projects must feature a minimum proportion of subsidised apartments in many locations in any case. Around one in seven residential transactions in Germany featured at least a proportion of subsidised apartments in 2020. This was around the same level as the previous year but significantly above the five-year average, according to which only one in seventeen transactions featured subsidised housing.

High volume expected in 2021
Savills expects the transaction volume in the current year to be above-average once again, potentially in line with 2020. “Many institutional investors worldwide would like to increase their allocations to real estate. However, the pandemic has increased the imponderables among many commercial uses, such as offices, retail and hotels, making future demand and value trends more difficult to assess. Residential property, on the other hand, is likely to have gained in importance among occupiers, which could produce structural growth in demand. Consequently, residential property stands to benefit most from the redirection of capital into the real estate market. As one of the most liquid and established markets, Germany will therefore attract particularly strong demand.” predicts Nemecek.

However, even the residential market will not survive the pandemic unscathed. Changes in living preferences are likely to be initiated or accelerated, both with regard to the size and design of residential units as well as locations. “The pandemic is accelerating digitalisation. Working from home to a greater extent will be an option for significantly more people going forward. This could cause workspace markets and residential markets to increasingly decouple geographically. Observing this process closely and identifying increasingly sought-after locations at any early stage is likely to be a dominant theme in the residential property market this year and over the coming years,” says Schenk.

Further information:
Market in Minutes - Investment Market Germany - January 2021