Residential properties in Germany traded for €4.4bn in the first quarter of 2022, with 28,300 apartments changing hands (transactions for at least 50 apartments), according to Savills.

This represents a decline of 22% compared to the opening quarter of last year and is 29% below the quarterly average over the last five years. However, if company acquisitions and investments are excluded, the quarterly volume was around 5% above the five-year average says the international real estate advisor. Savills expects the transaction volume for residential investment properties in Germany for the full year to be significantly more than €20bn.

Karsten Nemecek, Managing Director of Corporate Finance – Valuation for Savills Germany, says: “While there were no major company mergers or acquisitions in the last quarter, there was a high transaction volume in the residential investment market.

“Rising inflation, interest rate hikes and increasing economic risks are clouding the outlook, however, in times of crisis, the desire for the greatest possible stability is likely to be greater than ever. As a commodity that cannot be substituted, residential property may once again become increasingly important in portfolios as an anchor of stability.”

Many investors are focusing strongly on new-build property according to Savills. Development projects accounted for almost 76% of the transaction volume for single property sales in Q1. Overall, developments were responsible for 39% of investment in the first quarter. The five-year average for development projects stands at only around 23% of overall volume.

Matti Schenk, Associate in Savills Germany’s research team, says: “The focus on new build can be explained by the increased emphasis on ESG among many investors. As it stands, ESG criteria can be fulfilled and adhered to more easily with new build properties. The fact that indexed leases are agreed on many development projects also favours new build in view of the extremely high inflation rate. The recently agreed sharing of the CO2 tax burden between landlords and tenants in older existing buildings further favours new-build property from an investor’s perspective.”

Savills expects the focus on new build to further intensify in the short term, causing the price differential between new builds and existing properties to widen further.

In terms of location, investors showed a noticeable appetite for apartments in former East Germany in the first three months of the year. Some 54% of apartments transacted were situated here, which compares with a five-year average of around only 18% of all apartments sold. The most popular cities for investment in this area in the first quarter were Dresden, Leipzig and Halle (Saale). These were followed by cities such as Jena, Erfurt, Chemnitz and Cottbus as well as some surrounding areas of Berlin. Investors in eastern Germany almost exclusively purchased existing apartments.

“Demographic projections may be below average in many regions of the new federal states. However, there are some growing university cities and cities with a net inflow of young people where properties can be acquired at relatively low prices. These price benefits, combined with acceptable fundamental data, may be increasingly attractive for some opportunistic investors,” says Schenk.

The two most active buyer groups were open-ended special funds, accounting for one third of the transaction volume, and other fund managers and assets managers with a 20% share. These were followed by private equity funds with approximately 15% of the investment volume, which compares with a five-year average of just 3%. However, almost 5% of the acquisition volume was attributable to builders and developers, which have consistently accounted for significantly below 2% over the last five years.

“The diverse composition of investors reflects the attractiveness of the German residential market for a wide range of investment strategies,” says Nemecek, adding: “Long-term and risk-averse investors, such as insurance companies and pension funds, remained active in purchasing new residential property, which promises long-term income streams and stable value. At the same time, we are noticing that opportunistic companies are increasingly turning to ‘manage-to-green’ strategies, acquiring existing properties for energy efficient refurbishment for the purpose of resale to investors with corresponding sustainability requirements.”

Find out more: Market in Minutes Investment Market Germany