Germany Sector Outlook
- After the Corona pandemic had taken a heavy toll on the German economy, especially in the first half of the year, Germany's gross domestic product (GDP) recovered at a record pace from July to September from the first Corona shock. According to the latest figures from the Federal Statistical Office, GDP for Q3 2020 rose by 8.5% compared to the previous quarter - adjusted for price, seasonal and calendar effects. Above all, higher private consumer spending, more investment in equipment and a strong increase in exports contributed to this record result.
- For the two previous quarters, values of -9.8% for the second and -1.9% for the first quarter were reported accordingly.
- The labour market has proved to be quite robust during the pandemic. Although the volume of work slumped massively, especially in the first half of 2020, the swings in employment and unemployment were comparatively moderate.
- Unemployment and underemployment (excluding short-time work) have fallen sharply in recent months in the wake of the autumn recovery. Unemployment also fell because companies are holding on to their workforces, some are again using more short-time work - especially in the catering and hotel sector, culture and entertainment and retail - and sectors such as transport and traffic, logistics and health care are creating new jobs.
- The figures on the labour market indicate that it could come through the Corona crisis comparatively well. The unemployment rate fell to 5.9% in November, after 6.0% and 6.2% in the two previous months.
- This development is supported by the German government's multi-billion dollar economic stimulus package, and the short-time work scheme should ensure that companies do not have to part with urgently needed skilled workers and their knowledge. However, the Corona pandemic clearly reveals which companies and business models will be viable in the future, and there will certainly be restructuring and layoffs and companies going bankrupt in some economic sectors (including the accommodation sector, gastronomy, but also the aviation industry and retail). Nevertheless, we are looking realistically and optimistically into the future, especially in Germany, without closing our eyes to the structural and economic challenges. However, it can be assumed that with growing success in combating the pandemic, the willingness of companies to hire should increase from the second half of 2021, but the number of people in unemployment will probably not reach its pre-crisis level again until the beginning of 2023.
- Currently, many leading indicators as well as the real-time indicators available at short notice, sometimes even on a daily basis (e.g. the truck toll mileage index of the Federal Statistical Office), prove that the German economy, despite the temporary setback due to the renewed lockdown, is on a firm footing that supports a strong recovery in the next two years. Thus, according to the latest ZEW survey, economic expectations rose strongly in December due to the imminent availability of a vaccine, although the current assessment of the situation was again slightly weaker.
At the end of the year, the mood in the C-suits of German companies also improved noticeably, as signalled by the rise in the Ifo Business Climate Index. Despite the renewed lockdown, which is hitting individual sectors such as retail and some service providers hard, the German economy continues to show resilience. Positive impulses are coming primarily from manufacturing, the logistics sector and the real estate industry.
- For the year as a whole, we expect the real economy to contract by 5.6% in 2020 - comparable to the slump in the wake of the global financial and economic crisis in 2009 - but we expect growth rates of +3.9% and 4.9% for 2021 and 2022, so that the local economy should return to the pre-Corona growth path.
- Currently, the construction sector in particular is showing strong momentum. Due to several large orders, real (price-adjusted) incoming orders in September 2020 were 3.6% higher than in the previous month, adjusted for seasonal and calendar effects. Compared to the previous year's value, this results in a slight increase of 0.5%. Order intake reached a nominal value of around €7.6 billion in September 2020.
- The encouraging news about the vaccine, which will be available quite soon, increases the likelihood that herd immunity will be achieved sometime in the second half of 2021 and that containment measures can be withdrawn. Germany should then see a comparatively rapid recovery thanks to lower structural vulnerability to the pandemic and a strong fiscal response totaling €1.1 trillion (or 30% of GDP).
- The economic stimulus and crisis management package of up to €130 billion initiated by the German government at the beginning of June and consisting of 57 individual measures will ensure that Germany will leave this crisis behind much more quickly and, in addition, also provide substantial impetus for a pan-European recovery.
- In addition, the programme for bridging aid (financial requirement: up to €25 billion) should secure the future of small and medium-sized enterprises, especially in the hotel and restaurant sector.
- In addition, the €50 billion provided as part of the Future Package should set the course for the overdue energy, digitalisation and mobility turnaround.
- Investments of €56.2bn were channeled into the German real estate investment market in the first three quarters of 2020. Measured by the transaction volume, Germany has therefore firmed up its position, as it did at mid-year, as the second largest real estate investment market after the US. Compared with the first three quarters of 2019, the markets in Germany saw growth of 11%. In the Top 7 markets, however, the investment volume dropped by 11% to €24.2bn over the same period. This trend is exclusively due to the scarce supply of core properties prevailing here that experience even greater demand by domestic and international real estate investors in times of crisis.
Real estate transaction volume Germany total
Source: CBRE Research, October 2020; *Investments in residential properties and platform transactions (from 50 units)
- The sentiment of most investors is also improving in sync with Germany’s economic recovery following the most severe recession since the World War II. This confidence is also reflected by the fact that, even when the Corona pandemic was at its height, transactions were successfully being concluded, despite longer due diligence and decision processes, and negotiations already under way were consistently expedited. High net worth institutional investors, such as open-ended real estate funds, real estate, special funds and insurance companies, were particularly active.
- Germany’s real estate market is seen as an anchor in turbulent times,” Linsin explains. Foreign investors therefore committed €10bn more to German real estate in the current year than they did in the same period last year. Overall, there is a great deal of repressed capital held by collective investment vehicles that want to acquire property in Germany. Since, however, in view of the current situation and their risk assessments, these investors are focusing increasingly on core and core plus products with long rental agreements and tenants with excellent credit ratings, supply cannot keep up with demand.
- Ultimately because of this demand we are not seeing any Corona discount for good properties – instead some asset classes are experiencing a further squeeze on prime yields. The end of the third quarter saw renewed slight yield compression compared with the previous quarter, also for office properties in Munich and Berlin, as well as for contemporary logistics properties. The latter are becoming increasingly important for a wider investor group due to the structural change in retail and the realignment of the global supply chains. The prime yield of logistics properties therefore currently stands at 3.55%, reflecting a decline of 0.15%-points compared with the year-earlier figure. Office properties in the Top 7 locations command yields of 2.85%, ranging from 2.55% in Munich to 3.10% in Cologne. Yields for food-anchored retail properties continued to soften and have slipped further by one quarter of a percentage point year on year. By contrast, yields for asset classes such as shopping centres and hotels that were hit harder by the Corona crisis edged up by 0.75 and 0.5%-points respectively
A matter of asset class
- The strongest asset class in terms of the transaction volume continued to be office properties with just under €18bn. This volume came in 15% lower than in the previous year’s period, which was essentially attributable to the dearth of core properties and not to any flagging of investor interest in this asset class. This is also reflected in the transaction volume that totaled almost €5bn in the third quarter, up 9% compared with the previous quarter.
Real estate transaction volume in Germany: more investments in almost all asset classes in the first three quarters of 2020
Source: CBRE Research, October 2020.
- Residential property also saw sustained, dynamic market activity with a transaction volume that grew 25% to €15.1bn in the first three quarters.
- Logistics properties continued to benefit from the uptrend in e-commerce and from consumer experience during the lockdown, along with the resulting realignment of the supply chain. The transaction volume in this asset class soared by 26%.
- Sharp growth was also registered in trading with development sites (growth of 103% to €4.4bn). Investors see great potential for the future of mixed use district developments, downtown living and commercial/industrial estates.
Also growth in the retail segment
- Retail properties, which were more severely affected by the lockdown, recorded a 32% increase in transaction volume in the first three quarters to €9.4bn. This was driven above all by a few large-scale transactions. The large transaction volume should not, however, disguise the fact that Corona and its impact is still determining the retail property market. The real estate adage of ‘Location, Location, Location’ has been replaced by ‘Food, Food, Food’ – the tenants of food-anchored properties did not suffer any loss of revenue due to closures, and uncertainty about their future is not as great as it is with other sectors.
- The hotel investment market continues to suffer from the effects of the pandemic. Hotel properties were the only asset class to record a decline in transaction volume, by - 34% year-on-year to € 1.63bn. However, there are also positive signals on the hotel market - many hotels in holiday regions such as the North and Baltic Sea and in the mountains had a very successful summer season. The interest in project developments illustrates the confidence investors have in the market. This is because these buyers expect the market to recover in the medium term and travel behaviour to return to normal. We are expecting Germany to continue its sustained economic recovery, which is also corroborated by a large number of leading indicators, confidence surveys and high frequency data, despite infection rates that recently began to rise again. The great pressure on many investors to invest and the ultra-low yields of alternative investment options will keep investors keen on the asset class of real estate, with us registering an increasing number of new market participants wanting their capital to find a home in Germany.
- A transaction volume generally significantly above €70bn can therefore be expected at year-end. The surplus capital suggests that pressure on yields is not set to ease in respect of most real estate asset classes.
- In the first three quarters of 2020, 1.54m sq m were newly let or given to owners in the five most important office markets in Germany. Compared to the same period last year, this is a decrease of almost 40%. There was a decline in all five top markets. While it was most pronounced in Frankfurt am Main at 48%, it was lowest in Munich at 26%. In the Bavarian capital, the letting volume in the first three quarters was also the largest at 464,000 sq m.
- Prime rents remained stable in the third quarter at the level of the previous one; year-on-year there were slight increases in all five markets. It shows that the occupiers are still willing to pay the required market rents for high-quality office space. The downward trend in Hamburg and Düsseldorf can be attributed to the fact that larger transactions at lower rental levels took place outside of the almost fully occupied inner city locations. Overall, the rent level for modern office space remains stable, although more incentives are currently being granted.
Vacancy rate predominantly below the natural fluctuation reserve - especially in CBD locations
Source: CBRE Research, October 2020.
Source: CBRE Research, October 2020.
Source: CBRE Workplace Consulting, 2020.
- The average vacancy rate in the top 5 markets rose slightly compared to the first three quarters of 2019 by 0.1%-points to 3.7%. Despite this slight increase in vacancy, modern spaces in sought-after locations are still in short supply. While the vacancy rates in Berlin (plus 0.3%-points to 1.8%), Munich (plus 0.3%-points to 3.0%) and Düsseldorf (plus 0.1%-points to 6.9%) rose, they even fell slightly in Frankfurt (minus 0.2%-points to 6.9%) and Hamburg (minus 0.1%-points to 2.6%). 63% of the 2.3m sq m of office space that will be created in the top 5 cities by the end of 2021 has already been pre-let.
Source: CBRE Research, October 2020.
- In the meantime, the paralysis of economic shock has been overcome, also thanks to financial aid from the federal government, and there are signs of recovery following the massive slump in the first half of the year. With the return of normality and the return to the office, professional reopening and reoccupy workplace strategies are becoming increasingly important. In the long term, the 100% working from home that some companies have had to introduce in the last few months will not be a final solution - rather, we are expecting a more differentiated and flexible workplace environment. The trend towards an agile and fluid way of working began a decade ago and is now accelerating in the COVID-19 era. Accordingly, the topic of working from home is discussed intensively and controversially.
Source: CBRE Workplace Consulting, 2020.
- The main issue is to adjust the (office) working world to the new needs and requirements, whereby a “one fits all” will certainly not work and each company must decide individually with and for the employees who, when and why will work in the office in the future. This also means, however, that in the future we will need different spaces than those currently used as existing properties. Similarly, there is no such thing as "either office only or home office only". The progressive agreement to work at different locations will give rise to new office concepts that combine, for example, team-oriented work in an office with concentrated work from a coworking space. Although the latter have recently slowed their expansion, partly because of COVID-19, they could be an important addition in the future.
- Against this backdrop, we do not expect any dramatic distortions in the letting markets, but we do expect more concessions on the owners’ side in terms of awarding incentive packages. In addition, there are signs of a trend towards longer lease terms in order to secure cash flow accordingly on the landlord side. Furthermore, landlords are likely to focus even more strongly on the creditworthiness of tenants in the future in order to better assess the risk of a possible loss of rent.
- For the year, we expect a letting volume of around 2m sq m in the top 5 office rental markets. This means that the market will be significantly below the previous year's result but will be around the ten-year average. In view of the crisis and the accompanying cautious behaviour of many companies when renting new space as well as the intensive and sometimes controversial discussion on the topic of working from home, this would be a thoroughly respectable result. It should be noted, however, that ultra-modern space - also in the office towers - continues to be in high demand.
- In the wake of recent decisions taken by the Federal Government and the Länder, retail outlets may remain open nationwide, subject to compliance with hygiene regulations and distance rules. In addition, from 1 December onwards, it will also apply that no more than one person per 10 sq m of sales area may stay in smaller shops. In larger stores with a sales area of 801 sq m or more, only one customer is allowed per 20 sq m sales area. Nevertheless, it remains to be seen how shopping in the Lockdown light develops and whether consumers will go into the city centres in view of closed cafés and restaurants and, in some cases, already cancelled Christmas markets.
- In October, retail sales in Germany rose by 2.6% in real terms in comparison with the previous month, adjusted for calendar and seasonal effects, but the figure rose by 8.2% year-on-year.
Retail sales at constant prices
Source: Destatis, CBRE Research, December 2020.
- Depending on the sector, however, developments continue to vary considerably. Trade in textiles, clothing, footwear and leather goods fell by 21.6% in real terms in January-October compared to January-September 1999. The retail sale of miscellaneous goods (mainly department shops) also recorded a year-on-year decline of 10.4% so far this year. In contrast, retail sales of food and beverages grew by 5.5% in real terms over the same period. The largest year-on-year increase in turnover was recorded by internet and mail order. Since the beginning of the year, real sales growth of 22,2% has been achieved here.
- The pressure on over-the-counter retail thus remains high, forcing retailers here to invest more heavily in innovative, technology-supported concepts in view of an omni-channel strategy.
- The temporary reduction in value-added tax until the end of 2020 contained in the economic stimulus package is largely passed on directly to customers by the retailers, thus providing further purchasing impulses that should further support the retail trade.
- Accordingly, the German Retail Federation (HDE) recently forecast sound revenue growth of nominal 1.5% to €522bn. Along with e-commerce and food-anchored retail, the winners here include concepts that have understood how to cater to changed consumer requirements with a seamless omni-channel approach.
- However, retailers are increasingly turning to landlords with requests for deferral of rent payments, rent reductions and temporary contract adjustments or for a shift to turnover-based rent instead of basic rent.
- An increased risk of insolvency (especially of small and medium-sized retailers without a functioning online channel as well as catering businesses) can be assumed; the examples known so far show that companies that were already in economic difficulties before the pandemic are particularly affected.
- At present, lease contract extensions or new leases are only found for absolute top properties or for certain sectors that benefit from the current situation (such as telecommunications).
- New leases especially in small and medium-sized towns and in secondary locations in large cities are likely to be concluded at a significantly lower rent level in the future than before the crisis; the position of retailers in these areas is correspondingly strong when it comes to lease extensions and renegotiations.
- Accordingly, hardly any contracts are being concluded at present, as tenants and landlords have different expectations and must first come together again at a level acceptable to both sides.
- But there are exceptions:
- the luxury locations, which present themselves as crisis-resistant and show a development that is decoupled from the development of the consumer locations
- supermarkets, hypermarkets and specialist retail centres, which have proven to be systemically relevant and are not affected by the crisis at all
- In Germany's top cities in particular, tenant defaults and vacancies will only be noticeable for a short time and will be quickly absorbed by the market, especially as foreign concepts in particular are still looking to tap into the German market with its huge purchasing power potential.
- Logistics is considered one of the best asset classes to weather the current storm, especially as structural changes in the retail sector and the growing importance of online trading are strengthening the logistics sector for the long term.
- In fact, the corona pandemic has had only a very weak impact on the market. There was neither massive demand for space nor did the crisis lead to a collapse in demand. This means that the current situation differs significantly from that of the last crisis in 2008 and 2009, when demand dropped noticeably. In the first three quarters of 2020, the German industrial and logistics real estate market achieved a take-up of 4.92m sq m. Compared to the previous year, this represents a decline of seven percent. Nevertheless, the market is still slightly above the five-year average for the first three quarters of 4.78m sq m. In the current year, take-up in the industrial and logistics real estate market has risen continuously. While the first quarter was still quite weak, the third quarter only just missed a record - in the past ten years only the fourth quarter of 2016 was slightly better. Take-up was driven primarily by trade sector. A large part of the demand for logistics space from the retail sector stems from online trading. This accounts for 50% of take-up in the trade sector - an increase of ten percentage points over the previous year.
- Rental levels are stable as demand has not collapsed, there are no major vacancies and the shortage of space remains acute. Finally, there are too few new buildings in prime locations, as there are virtually no plots of land where logistics space can still be developed. Correspondingly, there are few new lettings in modern spaces in top locations, so that there is no sufficient data basis to justify an increase in top rents. Rising rents are therefore mainly to be found outside the top 5 markets, where land prices are also rising.
The industrial and logistics market defies the crisis on both the investment and the occupier side
Source: CBRE Research, October 2020.
- The result is that the vast majority of existing logistics real estate investors continue to be extremely interested in the asset class - and that new investors, who were previously focused on other segments, are now also showing strong interest in logistics real estate and thus want to diversify. For example, there have been hardly any rent losses in this asset class in recent months compared to other real estate asset classes.
- The market is being dominated more than ever by product shortages. But even if properties in all risk classes - from large distribution centres to light industrial properties and urban logistics units - are currently attracting broad-based buyer interest, assets are still being scrutinised meticulously before purchase.
- The trend towards large single transactions continued in the third quarter and now stands at 67% for the first three quarters of this year. However, there are signs that more portfolios could come onto the market again towards the end of the year, which in turn will attract foreign buyers.
- It is becoming clear just how systemically relevant logistics is for our society and our economy. Logistics management in this context and thus also the requirements for logistics properties are thus becoming more strongly perceived by the general public. However, the increasing degree of complexity here requires an even more detailed, data-based market and property analysis for sustainable location decisions.
- In the medium term, we expect demand for storage space to rise. The drivers of this development will be the even stronger reorientation of global supply chains, various re/nearshoring strategies, the introduction of buffer warehouses and the continuing growth in online trading. These trends will manifest themselves with different intensity and at different times in the various sectors in Germany.
- The effects of the corona crisis on tourism in Germany continue to be felt and the hotel sector is only slowly recovering from the lockdown-related distortions which, as expected, have hit the industry hard. According to Destatis, the number of overnight stays in September 2020 was 41.2 million overnight stays by domestic and foreign guests, 13.7 % below the comparable figure in September 2019.
Significantly higher occupancy rates and thus rising revenues were recently recorded in comparison to the previous month in Dresden, Freiburg i. Br., Hamburg, Heidelberg and Rostock, among others - an indication that domestic and city tourism is slowly returning to normal.
- The easing measures introduced slowly led to a certain revival in the hotel industry, although the sector is facing a wave of insolvencies due to the loss of revenues and weak liquidity - especially among smaller hotel operators. Due to the now – albeit temporary – second lockdown the hotel industry could be even more affected and a recovery could take correspondingly longer. Larger hotel chains have also approached the owners to seek solutions together with investors. Many hoteliers wish to share the operating risk with the investor during the crisis.
- Hoteliers argue that they cannot bear the operating risk alone if operations are severely restricted. Thus, the issue of operating risk, liquidity and creditworthiness of the operator is moving into the focus of investors and will certainly have a major impact on the future contract design and thus the hotel investment market, future players and returns. Thus, operators will aim to share future pandemics risks and comparable risks with investors by contract from the outset.
- Except for a few individual transactions, the hotel investment market has almost come to a standstill recently. At present, it is difficult for most traditional institutional investors to give positive feedback on hotel purchases in their boards. The exceptions are hotels and projects in the core segment, which continue to be traded at high prices due to their resistance to the crisis. In the other segments, uncertainty is great, and many are in wait-and-see mode. With the improving situation in the German hotel business, events in the hotel investment market should also pick up again in the further course of the year. Our discussions on the market also show that most players are convinced of the medium- to long-term attractiveness of the hotel real estate asset class. However, the fairly large project pipeline could become a challenge for the market, as most new properties are likely to be completed before the market fully recovers.
- In the short term, the hotel investment market will therefore take a breather, partly due to the current reluctance of banks to lend.
- On the banking side, the financing of hotel properties has become more restrictive, which is reflected in higher margins and lower loan-to-value ratios. For the time being, banks will probably concentrate on providing their existing top covenant customers with financing for hotels in good locations.
- Since mid-June, the restrictions on hotel and holiday operations in the individual federal states have been relaxed. In general, we expect a gradual recovery in demand in the most important major travel segments, although the extent of this will vary:
- Domestic/city travel will be the fastest to benefit from the further easing (lifting of some travel restrictions). By international comparison, tourism in Germany is very strongly influenced by domestic tourism and could grow further due to corona-related factors.
- The recovery of demand in international travel will take longer, with short-haul traffic recovering before long-haul traffic. This also to a large extent depends on the opening of the respective borders and the pandemic course of the countries of origin. With the end of the travel warning since 15 June for most EU and Schengen countries, Germany's borders are also open again.
- Leisure travel is likely to experience an immediate surge in demand, although surveys show that one in three Germans does not want to travel under the corona rules. In addition, many employees are on short-time work and are worried about their professional future, so that some of them will forego expensive holiday trips.
- As general economic activity picks up, business travel will also increase again. However, we expect booking figures to remain below the previous year's level in the short to medium term due to the recession.
- We expect events to only recover in the medium term. This is because of on the one hand cost-cutting programs of the companies and on the other the intensive use of digital media, which has made virtual meetings the norm in recent months.
- The residential sector can already be named as winner of the crisis, as housing is considered one of the most important basic needs. Due to the atomized tenant structure and high granularity of rental payments, the residential segment is a very defensive and stable asset class with high rent collection rates, also because the social state support systems have helped to secure and stabilize rental payments. Current studies confirm this statement. Actual rent defaults and rent deferral requests are at a very low level among the major housing groups. Depending on the portfolio, the share of rent deferral applications was around 0.3% to 1.0%, with only a fraction of these actually being taken up.
- The German rental housing market has long been characterized by extremely low vacancy rates. Moreover, the already low fluctuation rate in German cities has fallen further in recent months. This can be seen from the sharp drop in the supply of new apartments in existing housing stock. In some cases, this is 10% to20 % below the previous year's level. In Berlin, this is compounded by the effect of the rent freeze law, which came into force at the beginning of the year. Here, the supply of existing apartments has even fallen by almost 40%. It can be assumed that vacancy rates in the major cities will tend to fall rather than rise further in the foreseeable future.
- Given the continuing low level of new construction activity and the absence of speculative developments, the ongoing high level of demand in the influx regions ensures a high degree of rental price stability. The trend towards rising rents could continue in the coming months. Additional dynamics are developing in peripheral locations and B-cities. The focus here is on cities with universities, successful companies, a high quality of life or good connections to the major cities.
- A special situation exists in Berlin, where the aforementioned rent freeze on existing apartments has led to stagnation of rents in the first month of 2020. Currently, legal action is being prepared before the Federal Court of Justice (Bundesgerichtshof) to determine the extent to which the federal states have the right to set the cap on residential rents independently or whether this is the sole responsibility of the federal government. The outcome of this decision will also have long-term consequences for the capping of rents in the other major cities. In Munich, for example, there is a strong lobby for rent caps. In a first decision, the Constitutional Court in Bavaria has already rejected a petition for a referendum with reference to the responsibility of the federal government.
- It remains to be seen whether potential immigration from (economically weakened) countries on the European periphery will further increase the long-term demand for housing in German metropolitan areas.
- Long-term additional demand for housing in German metropolitan areas by potential immigrants from the (economically weakened) periphery of Europe
- The Multifamily transaction market remains unaffected by the current situation. In the first nine months of the year, multifamily assets and portfolios (50 or more residential units) were traded for around €15.1bn. The bulk of this figure was attributable to the merger between the housing groups Ado Properties and Adler Real Estate with a value of around €6bn. But even without this major transaction, it can be seen that the transaction market is well on the way to reaching €20bn by the end of the year, the second highest figure since 2015.
Multi-family transactions and company takeovers Germany (> 50 units)
Source: CBRE Research, October 2020.
- In the first three quarters, 21 transactions with a value of more than €100m each were traded, which amounted to almost €10.1bn, compared to 26 transactions in the same period of the previous year with a total of €10bn. Foreign investors are currently increasingly active in the German real estate market. They are currently looking for and finding platforms in the residential segment, as evidenced by transactions worth more than €250m in some cases. The demand from long-term oriented and equity-driven investors, among others from the insurance and pension fund sector, as well as investors who want to diversify and stabilize their predominantly commercial real estate portfolio is growing strongly. The market is therefore characterized by solid dynamics with a lot of new business. In addition to the acquisition of existing portfolios, buyers continue to focus on project developments. In addition to forward deals, numerous land banking activities in all project statuses have been observed in recent months.
- The Corona pandemic has simply heightened the interest of investors in properties with secure streams of rental and lease payments, as offered by healthcare properties.
- The market for healthcare property in Germany generated an investment volume of almost €2bn in the first three quarters of 2020, signifying growth of 45% compared with the year-earlier period. Almost half of the investment volume was attributable to the dynamic third quarter alone.
Strong demand for healthcare real estate as a solid investment product
Source: CBRE Research, October 2020.
- This increase was mainly attributable to care homes that accounted for €1.34bn and, with a share of almost 69%, maintained their dominant position in the asset class as a result. The transaction volume in the assisted living segment also rose sharply, from €23m to €378m, which translates into a good 19% of the overall investment volume. The much less stringent regulation in comparison with care facilities enhances the appeal of this sub-asset class for institutional investors. Taken together, clinics and rehab clinics accounted for a share of eight percent (around €153m).
- The maxim of supply determines the investment volume on the market for healthcare properties continues to apply. Demographic change that guarantees investors strong demand from society over a long horizon is keeping investor demand at a high level. Since not one of the large portfolio holders has reported rental losses so far, and as the actual ratio of Covid cases is very low not only in a European comparison, we estimate that investors will reassess the risks positively. Particularly in turbulent times, allocations are reconsidered, and the dead wood is cut out. We hope that the lending industry will also approach this asset class with more interest now.
- As opposed to the year-earlier period, portfolio transactions also gained in significance. Their share rose by 34%-points to 73% of the investment volume. The proportion of foreign investors has therefore also risen by 5%-points to 64%. Investors from the Benelux countries participated in the market with 28 percent, followed by France with 15%. The sale of the “Bellevue” portfolio to GHS Senior Housing Immobilien II AG – a deal brokered by CBRE – whose investors included a syndicate of Austrian pension funds, among others, meant that this group of investors took an above-average share in the market compared with previous years. Investors from the German-speaking region were not only more optimistic, but also in a better position to act during the phase of the pan-European lockdown. In the next 12 months CBRE is expecting greater numbers of investors from France and the Benelux countries. Bidder terrain has become much broader based generally speaking and transaction activity is no longer dominated by a handful of large investors.
- Prime yield for care homes came in at 4.25% in the third quarter. While this corresponds to yield compression of 0.5%-points compared with the third quarter of 2019, the yield has remained stable since the first quarter of the current year. Consequently, the prime yield for operator-run care homes now equates to the same level as first-rate hotel properties. Since investors are increasingly keen, and given the continued supply shortage, we assume that pressure on net initial yield is set to increase.
- Following the fourth quarter, the accumulated investment volume is likely to significantly exceed the €2.1bn mark achieved in the previous year on the back of dynamic market activity, as suggested by the deal pipeline. The result will nevertheless fall short of the record years of 2016 and 2018 that were dominated by very large-scale portfolio transactions.
- The recently renewed debate in the political arena of financing the costs of care not only via nursing care insurance and those in need of care, but also by the state could secure operators’ business. This is likely to mitigate the greatest risk aspect of investing in healthcare properties, i.e. the operator risk, thus adding to the appeal of the asset class for investors. The problem of not enough care homes would, however, remain unresolved. Solving this problem would urgently require harmonizing the minimum standards applied to construction and the refinancing conditions – the latter aspect particularly with regard to the indexing of rental and leasing contracts, the aim being to keep the country’s healthcare property market attractive for private investors and to curb the latent shortfall in the supply of nursing care places. Without private investment in new construction and maintaining the infrastructure, Germany will be faced with the threat of a nursing crisis.