Germany Sector Outlook
Economic developmentEven if we start the new year on a more subdued note in terms of the overall economy due to the extended lockdown, we expect much stronger momentum again from the spring, with real GDP growing by 3.7% in 2021 and recovering strongly by 4.5% in 2022.
The labor market remains robust, although there are certainly significant setbacks in individual sectors - mainly in the hotel and catering sector, the events industry and parts of the stationary retail sector. Nonetheless, employment subject to social security contributions has recently risen further and the number of short-time workers is far from the peak recorded in April 2020. For the first time since February 2019, more companies in the manufacturing sector are planning to increase staff numbers than reduce them. German industry, which is a strong exporter - and here mainly the automotive and mechanical engineering sectors as well as the electrical engineering and chemicals sectors - is benefiting in particular from the rapid recovery of important trading partners outside the euro zone. Accordingly, the mood among German exporters is as good as it was last in January 2011 and thus during the economic peak phase after the global financial and economic crisis. The IT sector, management consultancies and, despite the wintry conditions, the construction sector also have expansive plans. According to a recent survey, more than half of Germany's major companies also expect large parts of the pandemic-related sales declines to be made up for this year, with the growth impetus coming from Europe due to the catch-up effects and Germany playing a key role here.
This development will be supported by various economic stimulus packages, a revival in world trade and, not least, by the vaccination campaigns launched worldwide and the ramp-up of vaccine production, including Made in Germany.
Above all, the continuing very expansive monetary policy of the leading central banks is providing ample liquidity and thus also an attractive interest rate environment, which will remain low for the rest of the year, and the "lower for even longer" scenario will certainly accompany us until 2023.
Currently, there is also talk of higher inflation again, but the core rate is still very low, which accordingly ensures a continued favorable interest rate environment. Accordingly, the spreads between the risk-free benchmark yield and the real estate yields remain highly interesting and thus ensure a further increase in interest, especially among institutional investors, to allocate even more capital to the real estate asset class.
Real GDP growth Germany (%, p.a.)
The office markets continue to feel the effects of the pandemic. In view of the major social challenges and in comparison with previous economic crises the decline in take-up, which is only slightly below that of the same quarter of the previous year, is moderate.
In Q1 2021, the letting volume in Germany's top 5 office markets amounted to 533,900 sq m, which corresponds to a decrease of 8% year-on-year. In addition to these new contracts, around 124,000 sq m of lease extensions were registered - especially in Frankfurt and Munich with 59,900 sq m and 49,600 sq m, respectively.
The significantly stronger demand for office space in Q1 2021, which can be seen in the requests, indicates that more and more confidence is returning to the companies with regard to economic development and that they are accordingly again dealing more intensively with the topic of office space.
In a year-on-year comparison, prime rents only increased in Berlin (+3%) while they remained stable in the other markets. However, weighted average rents fell in most of the top 5 markets. The reasons for this were, on the one hand, low-price large-scale leases in the city-fringe locations, but also delays in leasing decisions the high-price segment. In Hamburg alone, the weighted average rent increased (+6% year-on-year).
The slight increase in vacancies in the large German office centers since the beginning of the pandemic continued in Q1 2021 but slowed significantly in some markets. In the past twelve months, the vacancy rate rose by 0.7 %-points to 4% and thus 3.1m sq m. This is due, on the one hand, to more free space, but on the other hand, to less space absorption.
In Q1 2021, most leasing activity was registered at those sectors of the economy that were largely spared from the pandemic. The proportionately strongest sector was the financial sector with 18%, which can also be traced back to three large deals in Berlin project developments. This is followed by the digitally affine TMT sector with 15%, the public sector with 14%, the industrial sector with 11% and trade with 7%, thanks to the booming e-commerce.
Since modern, high-quality space, which in future will have to meet the criteria of the agile Future of Work even more, is still scarce, project developments will continue to be of great importance in 2021. By the end of 2023, a total of almost 6m sq m of new office space is in the pipeline, 36% of which has already been pre-let. Of the 1.5m sq m of new or completely refurbished space expected by the end of 2021, 63% are currently pre-let. This pre-letting rate is highest in Frankfurt and Hamburg with 79% and 83%, respectively.
Source: CBRE Research, 2021.
The year 2021 will see the task of managing office properties undergoing professionalization by leaps and bounds. Workplace consultants will collaborate with portfolio managers on creating strategies for the optimal use of space, which does not necessarily mean less space. In order to minimize the risk of costs and to be able to react quickly to changing demands, increasing flexibility of the existing office space portfolio is expected in 2021. After a take-up of space by providers of flexible office space in 2020, which was around 10% of the previous year's volume, take-up in Q1 2021 was 9,100 sq m. Flex Offices are specialized in meeting requirements of different users, accordingly we expect further differentiation of the Flex Office market in terms of individual user needs (Space-as-a-Service).
Factors most important when engaging with a flexible space operator
Working solely from home has not proven to be practicable for most companies. However, the collective experience of enforced remote working has massively accelerated many trends that will shape the return to the office in 2021.
- Employees will increasingly have a choice in future as to where they work from. Companies will have to solve technical as well as organizational challenges and invest in a contemporary, technology supported office infrastructure.
- Physical office premises have been shown to be more practical and efficient in promoting spontaneous communication in contexts not determined in advance. Employees will look for office space to do precisely this. Open plan design will remain on trend.
- In competition with remote working, well-being aspects may influence the decision favouring the office. Contemporary properties that are able to promote the health and well-being of occupiers will increasingly be the preferred choice.
- Prestige is still one of an office location’s most important tasks creating corporate identity externally vis à vis the customers and internally as well. Having a uniform design will be increasingly desirable. The location is also part of this image. We assume that many companies will continue to want prime locations, which will put steady pressure on this segment.
The market for healthcare and social real estate is still a robust growth market in Germany. This is evident firstly from the demand and supply fundamentals, and secondly from the stable financial position of operators that has been at least partly secured also by the German government reimbursement of additional expenses incurred by the pandemic. Other factors include high occupancy rates, also in times of Corona, and virtually non-existent rental default. The interest of domestic and foreign investors is commensurately high – this group is increasingly expanding their previous niche role in this asset class that is moving towards becoming an established real estate asset class for professional investors. The growing interest is also based on the relative independence of the healthcare asset class from the general economic trend.
Due to an ageing society and the increased number of people in need of care from 3.41m in 2017 to 4.13m in 2019, expenditure on Germany’s healthcare system is also growing steadily. In 2018, these amounted to €390.6bn, reflecting year-on-year growth of 4% in comparison with 2017 with the previous year reporting a rise of 4.7%. In 2019, healthcare spending amounted to €410.8bn, up 4.8% on the previous year. This exceeded the €400bn mark, having only reached the €300bn mark in 2012 and the €200bn mark before that in 1998. The time gap until the next €100bn mark is reached has thus been halved since 1998 from 14 to 7 years. The share of healthcare spending in gross domestic product was 11.9% in 2019, 20 bps higher than in 2018. In view of the exceptional situation caused by the pandemic, the growth rates for 2020 and 2021 are likely to significantly exceed the average growth rates in the recent past.
Growing importance of healthcare property – healthcare real estate investment market experiences strongest opening quarter
- The investment volume on the German healthcare real estate market soared by 67% year-on-year to €790m in Q1 2021, recording the strongest opening quarter since records began.
- Healthcare properties were the only asset class on Germany’s real estate investment market that was able to grow in Q1 2021 in terms of the transaction volume compared with the previous year’s quarter. This growth reflects investor interest and the resulting massive demand in a market dominated by short supply. Given the relatively low absolute investment volume and the high proportion of portfolios, the investment volume in healthcare properties is still subject to strong fluctuations in some quarters. Accordingly, the share of portfolios came in at 68 % in Q1 2021 (up 16%-points). This was mainly attributable to the purchase of a portfolio by Aedifica that consisted of 19 care homes and an investment volume of around €245m.
- Consequently, care homes dominated the investment market for healthcare properties again with 57% of the investment volume, followed by a significant increase in the market share of assisted living that accounted for 32%, up 22%-points compared with the first three months of 2020. Medical centers took third place with a share of around 11%.
- Not least due to bans on international travel and on-site inspections, German investors were responsible for half of the investment volume, clocking up growth of almost 16 %-points in comparison with the year-earlier period. Around 37% was nevertheless attributable to market participants from the Benelux countries, signifying a lower share but, in terms of the absolute investment volume, marking growth of 18%.
- The German healthcare real estate market is interesting to foreign investors as it offers long-term financing, and also because the operator market is becoming increasingly professional and consolidation is progressing. An increase in the number of operators domiciled abroad also plays a part. As the consolidation processes continue, larger, financially more sustainable and, from an investor standpoint, more transparent operator structures will emerge. The commitment of European market leaders in particular will generate growing interest in the German market for healthcare properties, thus ensuring stronger momentum in the M&A sector.
- In Q1 2021, care home prime yield decreased by 0.25%-points to 4% compared with the year-earlier period, unchanged from the level achieved at the end of 2020. This yield compression has been ongoing for some years now, not only because of the pressure on investors to invest and the low interest rate environment, but also due to investors reassessing the risk of this asset class. Here the process of ongoing professionalization and consolidation in the operating environment have had a positive impact. Reliable cash flows delivering proof of their worth in the current crisis are also an important factor. Prime yield for care homes is likely to harden toward the end of the year, which will mean a three before the decimal point for the first time. The operator market’s growing professionalization and the yield spread compared with other investment alternatives is enhancing the appeal of healthcare properties for domestic institutional investors as well. Our current survey on German institutional investors revealed that every fourth investor would be keen on investing in this segment in 2021. They view healthcare properties as a good alternative to other established real estate investments confronted by greater challenges in the crisis and are attracted by the defensive and non-cyclical nature of the healthcare asset class. Against the backdrop of Germany’s demographic development and the strong demand for professional care places and forms of age-appropriate assisted living, private real estate capital is urgently needed to meet the challenges in society and to deal with the threat of a nursing crisis that is also reflected by the lack of personnel.
- As before, the greatest challenges faced by the healthcare real estate market include the low level of new build activity. Here, there is no lack of capital or of demand from society. Instead it’s more a question of finding affordable land for building and operators with a strong credit standing. Success hinges on the financial viability of their concepts, as well as the availability of potential caregivers. If acquisition and construction costs are too high, subsequent renting or leasing is often not attractive for operators.
Retail sales at constant prices
Source: Destatis, CBRE Research, 2021.
Retail sales February 2021 at constant prices – change compared to the prior-year period in %*
Source: Destatis, CBRE Research, 2021. *Note: not calendar and seasonally adjusted
Source: GfK Consumer Climate Study, CBRE Research, 2021.
A short-lived economic shock in the spring of 2020, accompanied by the slump in consumption and sales across almost all segments, was followed by an equally rapid recovery before rising infection figures once again forced stores to close in the pre-Christmas period, which is so important for the retail sector.
Nevertheless, the overall retail sales result for 2020 is positive. In 2020, sales increased by 3.9% year-on-year in real terms overall according to calculations by the Federal Statistical Office (Destatis). However, not all sectors were able to benefit from the overall positive development. There was a significant increase in food retailing, with sales up 5.1% compared with the previous year. In the non-food sector, there was growth in the retail of furnishings and household goods (+5.0%), in other retail, such as bicycles and books (+1.1%), and in pharmacy sales (+1.3%). By contrast, the textiles, clothing, footwear and leather goods segment recorded substantial sales losses of 23.4%. The clear winner in 2020 is the internet and mail order retail. Compared to 2019, sales increased by 24.1%.
Overall, according to HDE calculations online retail generated sales of €71.5bn in 2020, compared with sales of €505.9bnby the stationary retail. Compared to the previous year, online retail's share of retail sales increased from 10.9% to 12.4%.
Retail sales in total and in differentiation between offline and online 2019 & 2020 in comparison (€ billion)
Source: HDE, CBRE Research, 2021.
There is no doubt that the second lockdown, with mandatory closure of a wide range of sub-sectors (non-food, gastronomy, customer-oriented services etc.) from December, will leave a clear mark on the retail landscape. Not only has consumer sentiment deteriorated significantly, but retail sales have also fallen sharply compared with the previous months. Accordingly, despite extensive government support in the form of bridging aid or the write-off of fixed costs, particularly by international standards, further insolvencies are expected in the retail sector.
The consequences of the pandemic for the retail real estate market are already clear.
- Prime rents in top city locations and in shopping centers have fallen significantly in the course of the pandemic, although stabilization at the level now achieved can be assumed for the coming years.
- For shopping centers prime yields have risen significantly in recent months and properties in the high street have also increased.
However, not all sectors, locations and retail concepts are per se negatively affected by the pandemic. Thus, the current situation also offers various opportunities.
- Grocery-anchored retail that was already experiencing strong investor demand before the pandemic has been able to enhance its appeal further over the course of the year. In the meantime, retail investors who previously had no exposure to this sub-segment are also active here.
- Rents in decline in the prime locations of German cities offer opportunities for price-sensitive concepts. For instance, locations in the city center with high footfall are attracting the attention of food discounters and even of furniture dealers.
- Rising yields and correspondingly low purchase prices in some segments offer interesting openings for opportunistic investors seeking to invest in one of world’s largest real estate investment markets.
- The repurposing or repositioning in particular of properties with large surface areas in city center locations have attracted greater attention again from portfolio holders and investors. Particularly properties with large surface areas such as department stores with good delivery facilities offer the potential for urban logistics on floors no longer required for retail, and thus for the blending of retail and logistics (“last mile”).
- Digitization in the retail sector is advancing faster and faster. Be it self-scanning, contactless payment, own online shops or apps.
- The merging of brick-and-mortar retail and online retail continues to progress. Click & Collect is being expanded and cooperation between stationary retailers and online portals is being extended.
In addition, catch-up effects are to be expected in numerous sectors. Live shopping will then once again become an experience for which stationary retailers should already be preparing. The food service sector can also look forward to catch-up effects and positive business development. The industry should prepare itself for this.
At present, however, the retail market in Germany is still heavily impacted by the pandemic and the resulting restrictions:
- Retailers are increasingly approaching landlords with requests for postponement of rent payments, rent reductions and temporary contract adjustments or a switch to turnover rent instead of base rent.
- An increased risk of insolvency (particularly among smaller and medium-sized retailers without a functioning online channel as well as catering businesses) can be assumed; the examples that have come to light so far show that companies that have already been in economic difficulties are particularly affected.
- Lease extensions or new leases are currently being signed in particular for top properties or for certain sectors that are benefiting from the current situation (such as telecommunications).
- New leases are likely to be concluded in future at a significantly lower rent level than before the crisis - especially in small and medium-sized towns and cities and in secondary locations in major cities; the position of retailers in lease extensions and renegotiations is correspondingly strong there.
- Accordingly, fewer leases are currently being concluded, as tenants and landlords have different expectations and must first reconvene here at a level acceptable to both sides.
- Exceptions are, however:
- The luxury locations, which present themselves as crisis-resistant and show a development that is decoupled from the development of the consumer locations.
- International retail concepts are particularly active on the German market and are trying to take advantage of the opportunity to establish themselves on one of the largest and most attractive markets in the world.
- Supermarkets, hypermarkets and retail parks that have proven to be system-relevant and have not been affected by the crisis at all
- Particularly in Germany's top cities, tenant losses and vacancies will only be noticeable for a short time and will be quickly absorbed by the market, especially as foreign concepts in particular continue to seek to tap into the German market with its huge purchasing power potential.
However, when the Covid-19 pandemic led to Germany’s first lockdown in March 2020, the hotel business took a harder hit than any other sector. Travel restrictions, quarantine measures and a prohibition on hosting tourists had a severe impact on the operating result as well as on the investment volume. Many hotels had so few guests in some months that they were forced to close temporarily. Some operators that traditionally concluded long-term lease agreements are only able to survive thanks to government-backed aid programs such as the furloughing of employees and access to state-supported credit facilities at very low interest rates. Furthermore, investors have begun to agree to lease suspensions and reductions.
In the period through to October 2020, hotel occupancy dropped to 36% compared with 72% the year before. The average daily rate declined by 12% compared with the same period in 2019, sending RevPAR down by 57%. Major cities such as Munich and Berlin suffered the most, while destinations with a high proportion of domestic and leisure travellers, such as Rostock, Freiburg and Dresden, performed better. According to the latest results from Destatis, the number of overnight stays in 2020 was 302.3m. This means a decrease of 39% compared to the previous year.
DOMESTIC TRAVEL WILL BE THE FIRST TO RECOVER
There is a firm belief that the market will recover from this deep crisis. People have a strong desire for travel, for sightseeing, as well as for meeting business partners in person. Europe will need a few years to recover, however. The German hotel market is likely to rebound somewhat faster than others. This is largely explained by the high proportion of domestic travellers who will most probably be the first to take to the roads again once the severe restrictions have been lifted. This applies particularly to the leisure segment. As the strong summer of 2020 showed, Germany’s coastal and alpine regions in particular will see demand pick up again. Guests will generally travel by car, which will minimize their CO-2-footprint in comparison with long haul flights.
By contrast, international tourism and the MICE segment (meetings, incentives, conferences & events) will be slower to recover. Companies will be forced to save on travel due to the economic recession. Business meetings will partly be replaced by video sessions. There will nevertheless be a need to meet personally, for conferences and networking, which will also gradually increase again.
in the German hotel investment market, €480m was invested in Q1 2021. Compared with the particularly strong Q1 of the previous year, this represents a decline of 47%. At €19.2m, the average transaction size fell slightly. Due to the billion-euro acquisition of TLG by Aroundtown at the beginning of last year, which also included a large number of hotels, the comparison is only possible to a limited extent. In total, Q1 2021 did not reach the volumes of the last boom years, but overall the market performed well despite Corona.
The strategically oriented investors are not deterred by the pandemic and continue to secure good locations. Accordingly, a total of 61% of the investment volume in Q1 2021 fell on core or core-plus properties. A large proportion of this was in the top 7 locations, which together accounted for €207m or 43% of the total transaction volume in the first three months. As a result of the Corona situation, the majority of purchases were dominated by domestic investors. They accounted for almost 76% of the transaction volume, compared with just 36% in the prior-year quarter.
The most recent transaction on the Stuttgart hotel investment market, which took place in April, also points the way ahead: In a forward deal, Union Investment acquired the hotel tower at Mailänder Platz in Stuttgart from Strabag Real Estate (SRE) for around €137mn for its "Uniimmo: Deutschland" retail fund. The tower, which is over 60 meters high and has a gross floor area of around 30,000 sq m, is being built in the Europaviertel district not far from the main train station and is scheduled for completion at the end of 2021. The hotel space is leased to the two hotel chains Premier Inn (1st to 6th floors) and Adina Apartment Hotels (7th to 21st floors).
Investments of €14.8bnwere channeled into the German real estate investment market in Q1 2021. Compared with the same period a year ago that was dominated above all by takeovers in the billion-euro range, with majority stakes acquired by Ado Properties in Adler Real Estate and by Aroundtown in TLG Immobilien, the transaction volume shed 48%. Without these takeovers, the investment volume is only 20% lower than the previous year's figure. The transaction volume in Q1 2021 is therefore 5% higher than the level posted in the same period in 2019. In a 10-year comparison of first quarters as well, the result, as it stands, is only 1% below the long-term average.
Source: CBRE Research, 2021; *Multi-family transactions and company takeovers with 50 and more units
- Investment activity was very subdued in the first six weeks of the opening quarter due to tight restrictions on international travel and on-site inspections as a result of the extended lockdown and following on from the very dynamic final quarter. Since mid-February, however, the market has picked up significant momentum again.
- The appeal of Germany’s real estate investment market is also affirmed by our most recent survey of European investors who anticipate that, on a pan-European scale, Germany’s transaction market will be the fastest to recover.
- With the prospect of imminent success from the vaccine rollout, the economy is showing signs of a general recovery, which will also boost the real estate markets. Accordingly, the share indices, including the DAX, have hit new record highs in recent weeks. Business confidence is making a comeback, above all in industry at large. The ifo Business Climate Index continued to improve slightly in April, although the outlook was more subdued due to the third wave of infection and bottlenecks in intermediate products, which are particularly important for the industrial sector. After rising by 3.9 points to 96.6 points in March compared with the previous month, the index increased by a further 0.2 points in April. The employment barometer also took a leap in March. Along with industry, logistics, and the IT sector are increasingly creating new jobs. Despite the lockdown, the labor market is in recovery mode and the economy has a spring in its step.
Real estate transaction volume Germany: Less investments in almost all asset classes
Multi-family properties currently lead, ahead of office properties
In Q1 2021, the transaction volume of institutional residential property investment took over the lead from office, the asset class that generally captures the largest investment volume. While office accounted for €3.2bn, the multifamily market came in at €5.7bn.
Source: CBRE Research, 2021.
- Office property will remain a leading asset class on Germany’s real estate investment market. Seeing as employees in most companies aspire to social interaction, and companies are seeking to benefit as soon as they can from the advantages of stationary and collaborative work, it has become apparent that a broad-based return to the office is merely a question of how successful the vaccination program is.
- Both logistics and industrial properties, along with retail properties, reported an investment volume of €1.9bn.
- In view of the massive increase in importance that logistics has experienced in recent quarters, the declining transaction volume may initially come as a surprise. In fact, this decline is due to a temporary intensification of the product shortage. Due to the lockdowns, various marketing processes have been delayed, so that the associated properties and portfolios only increasingly come onto the market from mid-February onwards. Since then, the dynamics on the logistics investment market have increased significantly.
- In tandem with the various permutations of the ongoing lockdown, the development on the retail property investment market has also basically persisted in recent quarters. Investor appetite for food markets and food-anchored retail properties is particularly strong as these properties are little affected by the restrictions imposed by the coronavirus. In the case of shopping centers, however, investors have adopted a wait-and-see position until rents have settled down. As regards high street retail properties, super-prime properties are meanwhile especially in demand.
- Almost €700mwas allocated to land for development, while hotel properties accounted for almost €500m. Many hotels are currently closed. We expect that with the success of the vaccination campaigns and the lifting of travel restrictions, all hotels will reopen. When guests return, the momentum in the hotel investment market will also increase, as the fundamental interest in hotel real estate is unbroken. The transaction volume in all these asset classes fell short of the level seen in Q1 2020. Healthcare properties were the only asset class on Germany’s real estate investment market that was able to grow in Q1 2021 in terms of the transaction volume compared with the previous year’s quarter. This growth reflects investor interest and the resulting massive demand in a market dominated by short supply.
Excess demand leads to further yield compression in some asset classes
- At the end of Q1 2021, the benchmark yield of 10-year government bonds edged up to minus 0.26%. Investing in real estate therefore remains attractive. As far as commercial property is concerned, an example being still highly desirable office properties generating sustainable and stable cash flows in investment centers and in the booming logistics sector, the risk-adjusted yield spread therefore stands at 311 and 366 bps respectively.
- Compared with the previous quarter, prime yields remained largely stable. In the case of multifamily properties, this figure corresponds to the average of the top 7 markets at 2.31%and office properties at 2.84% and is therefore down 5 bps year on year. The prime yield for logistics and industrial properties came in at 3.40%, reflecting a decline of 25 bps. By contrast, the prime yield of high street retail property has climbed 18 bps on average to 3.30%in the top 7 markets over the past 12 months; in the shopping center segment, prime yield increased 85 bps over the same period.
Emphasis on risk-averse strategies - outlook for the full year
In Q1 2021, risk-averse investment strategies became increasingly prominent. As a result, 71%of the transaction volume was allocated to core and core plus properties. There are signs of a dynamic trend in the investment market in 2021, although the transaction volume, above all in the core and core plus segment, will remain constrained by limited supply. Yield compression is therefore likely to continue in the aforementioned usage types. We are looking at an investment volume of a good €70bn, with institutional residential property investments taking a share of €20bn. ESG criteria are playing an increasingly significant role in the investment decisions of a growing number of institutional investors. The demand for real estate that has been built and can be operated sustainably, as well as occupier wellness, is rising accordingly. This trend is set to become even more important in 2021. The accommodating monetary policy of the ECB and other central banks is widening the investor base for German real estate assets. In the premium segment, this ‘wall of money’ is ensuring that yields remain stable or decline, while putting upward pressure on purchase prices.
With more than 1.6m sq m and thus the strongest opening quarter since records began, the industrial and logistics real estate market currently continues to present itself at a very high level. In addition to the resurgent manufacturing sector, the main driver of the high demand for logistics space is the continuing boom in e-commerce sector.
While smoothly functioning supply chains are a priority for industry, online retailers need to ensure that their logistics space is sufficient to cope with the faster growth of online trade. In order to be even closer to the end consumer, city logistics is becoming increasingly important. Almost two-thirds of the online retailers we surveyed said that expansion in urban locations is now a high priority.
These developments imply a continued growing demand for logistics space from various sectors, and not only as a result of online retail. The biggest limiting factor for take-up is an ultra-low vacancy rate of just 1.3% in the top logistics regions and the shortage of space that has existed for years - especially in the top locations, but now also in the surrounding areas of the top locations and in many secondary locations. Greenfield developments are becoming rarer and developers will increasingly have to resort to brownfield developments.
The sustained demand and the simultaneous shortage of space, especially in the most sought-after locations, have also caused rents to rise. Since Q1 2020, the average prime rent for logistics space in the top locations has risen by 2.2% to €6.43/sq m/month. What may look like a small increase is, after all, twice as strong an increase as in previous years. And especially in the low-margin logistics business, this is a relevant order of magnitude.
In the future, take-up is likely to shift more strongly to regions that were previously rather untypical. This is because the availability of large, inexpensive plots of land suitable for logistics is causing more and more players to look for alternatives. For e-commerce uses, however, companies must not only pay attention to location, connectivity, space availability and price level, but also to the ample availability of staff in the region.
The lack of space is a predominant issue in the industry. While new industrial and commercial areas are only being designated at a slow pace and have already been largely allocated to waiting users with effective development plans, brownfields are increasingly becoming the focus of developers in order to build user-specific or speculative projects on them. In view of the massive increase in importance that logistics has experienced in recent quarters, the declining investment volume of around €1.9bn(-26% compared to Q1 2020) may initially come as a surprise. In fact, this decline is due to a temporary worsening of the product shortage. Due to the lockdowns, various marketing processes have been delayed, so that the associated properties and portfolios only increasingly come onto the market from mid-February onwards. Since then, the dynamics on the logistics investment market have increased significantly.
Due to the strong demand pressure, the prime yield for logistics properties has fallen further compared to the same period last year and now stands at 3.40%. Since the end of 2020, however, there has been no further decline in the prime yield. In view of this development and due to the excess demand, many previous core investors are expanding their investment spectrum and are increasingly considering core-plus properties. Accordingly, yields continue to decline in this segment as well.
Former niche products such as refrigerated warehouses or more management-intensive multi-tenant properties such as business parks are also increasingly in demand for portfolio diversification and yield enhancement.
Given the massive investor demand and the good product pipeline, 2021 is shaping up to be a very strong transaction year, possibly even surpassing the strong previous year or even the record year 2017.
- The residential sector stands out as highly crisis-proof asset class, 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%, with only a fraction of these actually being taken up.
- The German rental housing market has long been characterized by extremely low vacancy rates. In the past year, moreover, the already low fluctuation rate in German cities fell once again. This can be seen from the sharp drop in the supply of new apartments in existing housing stock. In 2020, this was around 15% lower than in the previous year. In Berlin, this was 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 fell by about 35%. In Q1 2021, there were signs of a recovery in the supply of newly offered apartments. Compared with the prior-year period, the number of newly offered apartments in the top 7 cities rose by 20%. Only in Berlin did it fall by a further 20%. It can be assumed that following the cassation of the rent freeze law by the Federal Constitutional Court, the supply of new offered rental apartments in Berlin will rise slightly again.
- Nevertheless, due to the continued stagnation in new construction in the top 7 cities, it can be assumed that vacancy rates in the top cities will remain at a very low level for the foreseeable future.
- With the foreseeable end of the pandemic, the continuing high demand for apartments in the influx regions and insufficient new construction activity, rental price momentum is picking up again. In the top 7 cities, median asking rents rose by 3.7% in Q1 2021 compared with Q1 2020, with only Berlin seeing median rents stagnate.
- Additional dynamics are developing at the extended metropolitan fringes. The focus here is on cities with universities, successful companies, a high quality of life and very good connections to the major cities.
- Now that the Federal Constitutional Court has overturned the aforementioned rent freeze law for existing apartments, it can be assumed that rental momentum will also pick up again in Berlin from Q2 2021. There may be one-off sharp rises here, as, among other things, new offers of more expensive apartments that have been held back to date may have an impact on rents.
- It remains to be seen how the state of Berlin will react to the decision. However, it is foreseeable that the rental issue will also become part of the election campaign just beginning for the Bundestag elections in the fall of 2021. Further stricter regulations of potential rent increases in tight housing markets at the federal level cannot be ruled out for the new legislative period.
- 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.
- The Multifamily transaction market remains unaffected by the current situation. In Q1 2021, multifamily assets and portfolios (50 or more residential units) were traded for around €5.7bn. At €1.3bn, the acquisition of a portfolio from Soka-Bau pension fund by a fund from AEW Europe was the largest transaction in Q1 2021. With numerous larger portfolios in the pipeline, a transaction volume of up to €20bn is expected for 2021. This is all the more remarkable given that major mergers such as the one in the previous year between the Adler Real Estate and Ado Properties worth around €6bn are not expected.
- A recovery is discernible in the traded portfolios for micro apartments and student housing. After the transaction volume for micro apartments and student housing dropped in 2020, there are signs of increased demand for this asset class again in 2021. At €400m, more than 50% of the capital allocated to this segment in 2020 as a whole was already achieved in Q1 2021.
Source: CBRE Research, 2021.
A growing number of non-sector investors are still increasingly showing interest and buying in the residential sector. The same applies to international investors. At €1.4bn, the latter had a market share of 25%. The high demand for "German Resi" cannot currently be met in full. It is therefore to be expected that the yield compression will continue again in the middle of the year. Currently, the prime yield compared to Q4 2020 is stable at 2.31% for the top 7 cities.
The largest net buyer groups in Q1 2021 were listed Property companies (up €800m), Public housing companies (up €790m) and German special funds (up €780m In particular, long-term investors such as insurance companies and pension funds, which act as the source of funds behind many investment vehicles, are targeting the fixed income nature of residential investments, viewing them as a desirable alternative to increasingly less attractive government bonds. In addition, the role of the public sector as the second largest investor class in the residential segment should be emphasized. It has acquired residential properties for almost €6bn net since 2016.
In 2021, German housing companies relied particularly on developments in the form of forward deals, on buying by developers, and on land banking. Land with development rights and projects already partly completed were highly sought after. Buyers were able to secure market shares at an early stage and to deploy their own development resources without having to pay the high prices for forward deals. In addition, German companies were also increasingly targeting international markets by acquiring foreign portfolios and companies. German housing corporations are evolving into pan-European groups.