• Transaction volume of €9.4bn (30% below the five-year average)
• 71% of the volume in Q1 21 was attributable to German investors
• Yields in the various sectors are drifting apart
• Logistics usurps retail as the second most sought-after sector
• 2021: Investment volume of at least €50bn with sustained surplus demand

Commercial property in Germany changed hands for approximately €9.4bn during the first quarter of 2021. This represents a decrease of 53% compared with the opening quarter of last year, which was the strongest first quarter of all time with a volume of €20.2bn. When looking at the opening quarters over the last five years, this year’s volume is 30% below the average. “The start to the 2021 real estate year has been generally characterised by a cautious attitude from many owners,” says Marcus Lemli, CEO Germany and Head of Investment Europe, adding: “Many owners are preparing to market properties imminently, leading us to expect significantly higher transaction activity in the second half of the year. Until then, off-market approaches will remain the method of choice for many investors willing to make acquisitions since investor demand remains very high.”

The number of transactions remains below average
The rather subdued activity in the commercial investment market at present is apparent from a glance at the number of transactions. Fewer than 440 individual and portfolio transactions were completed in the first quarter of 2021, which was roughly equal to the transaction figures for the second and third quarters of 2020. In the five years prior to the outbreak of the COVID-19 pandemic, there was an average of 577 transactions per quarter. The number of transactions over the last twelve months (approx. 1,800 deals), was approximately in line with the figures from 2013 and 2014. Hence, since the beginning of the COVID-19 pandemic, the number of transactions has settled at a new, lower level.

Lower prime yields reflect high demand
However, the low number of transactions is attributable to the current external circumstances and the resulting supply shortage rather than being an expression of any declining demand. This is evident from the prime yields. Since the beginning of the pandemic, prime yields on office property in central locations in the top six cities have hardened by a further 6 basis points. Yields on prime office properties in B-cities have even hardened by an average of an additional 15 basis points compared with the top six markets. “Core remains by far the most sought-after risk category in the German investment market and the intensive competition among bidders has driven initial yields to new depths. In B-cities too, however, record prices are also being paid for well-positioned properties let on long leases to tenants with good credit ratings. Office properties with public-sector occupiers in particular are being viewed as a kind of substitute for German government bonds and are being priced accordingly,” says Lemli.

Prime yields on logistics properties have hardened by 20 basis points over the last year. Conversely, yields on shopping centres, hotels and retail parks have softened. However, most yields moved sideways in the opening quarter of the year. The average yields across the top six cities at the end of the quarter stood at 2.8% on office property, 3% on high-street properties in 1a-locations, 4.3% on retail parks and 3.5% on logistics properties. Over the remainder of the year, yields in the various sectors are expected to drift even further apart. “Core office properties, logistics property, care property and food retail properties will become more expensive while prices for most retail properties without strong food anchors will tend to fall further,” expects Matti Schenk, Associate Research Germany for Savills.

Logistics and care property gain further ground
The various trends in the sectors are also reflected in the investment volumes. In the first quarter of 2021, office properties were once again the most sought-after sector with approximately €3.2bn of investment or 34% of the overall volume. Industrial and logistics property followed in second place with around €1.7bn or 18% of the transaction volume, relegating retail property to third place (€1.5bn or 16% of overall volume). “Logistics property has been an increasing focus for many investors in recent years. However, the pandemic has accelerated this trend further and created additional demand in the investment market,” says Lemli, adding: “As a central European logistics hub, Germany offers a range of excellent logistics locations that will be sought after for the foreseeable future. Many of the market-leading logistics operators, online retailers and food chains are also showing excellent credit ratings. The combination of financially sound tenants and locations with long-term demand perfectly fits the investment criteria of many institutional investors.”
Another sector to gain ground was care property, such as nursing homes and assisted living. Such properties accounted for almost 8% of investment volume in the first quarter. Care property was responsible for around 7% of the volume over the last twelve months compared with an average of just 3% between 2015 and 2019. The acquisition of the Atlas Portfolio by Swiss Life for €425m has been allocated to the fourth quarter of 2020 by Savills.

Interest in locations outside of the top six markets remains strong
The top six cities accounted for approximately 51% of overall volume between April 2020 and the end of March 2021. This is in line with the average over the last five years. To date, volumes in the B, C and D-cities have also shown only marginal deviations from the five-year average prior to the outbreak of the COVID-19 pandemic. In view of the increased uncertainty, it would have been reasonable to expect an even greater focus on the liquid top six cities. “It has been apparent that investors are focusing even more intently on the stability of rental income. Where this is highly valued, property in locations outside of the top six cities are also in high demand,” says Schenk. “In the case of logistics property, food retail properties and care property, there are far more locations that meet the acquisition profiles of investors. In that respect, the current exceptional situation has brought long-term fundamental data into the spotlight. With its decentralised structure, Germany offers a wide range of attractive locations in this regard,” adds Schenk.
Conversely, the top six cities accounted for just 38% of volume in the first quarter. The cities with the highest transaction volumes were Berlin with €1.2bn, Hamburg with €676m and Munich and Frankfurt with €572m and €514m (excluding surrounding regions). In contrast, the remaining top-six cities, Düsseldorf and Cologne, placed just sixth and twelfth in the ranking of cities by transaction volume in the opening quarter.

International bidders are in their starting blocks
Owing to travel and contact restrictions, domestic investors or those with offices or partners in Germany are currently at an advantage in the German real estate market. German investors accounted for 71% of investment volume in the first quarter of 2021 and 63% over the last twelve months, which is significantly above the five-year average prior to the pandemic of 52%. “Not only domestic investors but also foreign investors are showing extremely strong interest in German commercial property. Germany is regarded internationally as one of the most stable occupier markets, further reinforcing its status as a safe haven,” says Lemli, adding: “Once travel and contact restrictions are relaxed, we expect a strong return of international investors from southern Europe, the Gulf region and Singapore, for instance.”

Outlook for 2021: The surplus demand in the investment market will persist
Along with the return of many international investors, we also expect many owners to be willing to sell. In anticipation of even more intensive bidding processes, and thus higher prices, a large amount of product is still currently being held back. On non-core properties in particular, pricing remains highly opaque owing to the paucity of completed transactions and the price expectations of vendors and bidders are still often insufficiently close. “We estimate that availability of product will increase significantly from the midpoint of the year, resulting in more transactions for both core and non-core properties. The growing yield evidence will then simplify and accelerate other ongoing sale processes,” predicts Lemli.

On the demand side, risk-averse investors continue to dominate as they seek to reallocate an increasing volume of capital from maturing government bonds with relatively high coupons. Numerous existing or newly launched value-add and core-plus vehicles also have high capital commitments and are seeking product. “Although the supply will grow over the course of the year, the surplus demand in the investment market is likely to persist,” says Lemli, adding: “It is highly likely that this will result in yields on core product hardening further with non-core yields remaining highly stable for the time being at least at least in the office sector.” Savills expects the transaction volume for the full year of 2021 to reach the €50bn mark once again.

All dates and figures:
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