• Transaction volume of €59bn (-20% compared with 2019)
• Growing yield spread
• Relatively weak year-end rally
• Insurance companies increased their acquisition volume against the market trend
• Projection for 2021: volume to reach €50bn once again

Commercial property in Germany changed hands for almost €59bn last year, representing a decrease of 20% on the record volume from the previous year. However, the transaction volume was only 6% below the five-year average, which appears remarkable in view of the outbreak of the pandemic. The investment volumes in the second and third quarters of around €10bn and €12bn respectively were the lowest since 2016. While the final quarter showed a higher volume once again of around €16.6bn, the year-end rally was significantly weaker than in the previous year. The final quarter last year accounted for 28% of the overall annual volume compared with 39% in 2019.

“The initial state of shock in the real estate market has now been overcome and investors are implementing their, in many cases adapted, investment strategies,” says Marcus Lemli, CEO Savills Germany and Head of Investment Savills Europe, adding: “The stability of rental income is playing an even more decisive role than prior to the outbreak of the pandemic and the higher risk aversion of investors is meeting with increasing risks in the occupier markets. Consequently, the number of properties having core status in the eyes of investors is decreasing. The investment universe for risk-averse investors has, therefore, contracted at least temporarily and competition among bidders in this risk category will intensify.”

Yields are diverging
As a result, a large proportion of demand is being concentrated on those properties that offer stable cash flow during the crisis and promise the same once the pandemic is over. This includes logistics properties, food retail properties and offices let on long leases to public sector tenants or other occupiers with strong covenants as well as niche properties such as data centres. Yields in the afore-mentioned sectors hardened further during the course of the year. The prime yield for logistics property stood at 3.5% at the end of the year, which is 20 basis points lower than the corresponding figure in 2019. The prime yield on supermarkets and discounters also hardened by 20 during the course of last year, standing at 4.9% at the end of December. In the top six cities, prime yields on offices averaged 2.8% (-3 basis points compared with Q4 19). Conversely, yields on shopping centres and retail parks softened by 70 basis points and 35 basis points respectively. “The changed assessment of the sectors has manifested itself in a polarisation of yield movements that is likely to continue,” says Matti Schenk, Associate Research Germany for Savills, adding: “We expect initial yields on core office properties, logistics properties and food retail properties to harden further this year. In contrast, yields on non-core office properties and high-street properties are likely to soften.”

Sharp decline in the hotel sector – only care property witnessed an increase in investment
Investors were once again focused on office properties last year, which accounted for around €27.6bn of investment or 47% of the overall volume. Retail property and industrial and logistics property followed in second and third places with transaction volumes of €12bn and around €6.6bn respectively. Care property was the only sector to register an increase in investment volume last year (+22% compared with 2019). Hotels suffered the sharpest decrease in transaction volume (-66%), followed by mixed-use properties (-26%) and offices (-21%).

Small cities attracted a larger proportion of investment
The seven A-cities once again attracted the majority of capital with around 55% of the transaction volume (2019: 58%). However, locations outside of the ABCD-cities received around 24% of overall investment last year. This was the second highest proportion in the market cycle and a consequence of the growing importance of logistics property, care property and food retail properties.

Purchaser landscape dominated by European players
The proportion of German investors rose last year, which was partly due to the travel restrictions. Domestic purchasers accounted for around 57% of investment volume, which is the highest proportion since 2013. Approximately 71% of foreign capital originated from Europe, followed by around 21% from North America and the rest from the Middle East and Asia. “The proportion of European capital rose over the course of last year, while Asian capital decreased in relative terms,” reports Lemli, adding: “Investors from outside Europe remain highly interested in German commercial property. They are currently focused on investments via fund managers, investment managers and local partners.”

Insurance companies increased their acquisition volume against the market trend
Open-ended special funds were once again the most active purchaser group, accounting for more than 31% of the transaction volume. These were followed by fund managers and asset managers, which were responsible for more than 20% of investment. Property companies / REITs followed in third place with around 9% of the transaction volume. The acquisition volume across all three investor groups declined appreciably compared with the previous year. Conversely, insurance companies and pension funds invested significantly more than in 2019 (+€1.1bn / +49%). “The fact that insurance companies are significantly more active than in the past is a typical phenomenon for a market phase such as the current one. When debt capital is scarcer, equity-rich investors are at an advantage,” says Lemli.

Outlook for 2021
Many investors are unlikely to have achieved their acquisition targets for 2020. In addition, many investors are likely to receive even more investor capital seeking adequate and stable income. “In view of the pressure to invest facing investors and increased risks in the occupier markets, we believe the investment strategies of individual investors beyond the lowest common denominator of ‘logistics, residential and AAA offices‘ will become more differentiated,” says Lemli, adding: “Many investors, for example, are likely to view any downturn in the capital values of offices in B-locations as a counter-cyclical opportunity for acquisitions, while others will regard the same properties as having excessive long-term risk and be active on the vendor side.

The presence of both vendors and available purchasers is likely to ensure a high transaction volume this year.” Savills expects the transaction volume for the full year to reach the €50bn mark once again. “The imponderables have yet to diminish with the start of the new year. While the start of vaccinations provides light at the end of the tunnel, the second wave of infections and the emergence of new, more contagious strains of the virus are imposing even greater restrictions on public life. We expect transaction activity to remain significantly below average in the first half of the year before regaining momentum in the second half of the year,” predicts Schenk.

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