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 3.1% in 2021 and recovering strongly by 5.7% 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. The fact that industrial companies are still planning to hire more employees again is also a source of confidence. 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.
ECONOMIC DEVELOPMENT & LONG-TERM OUTLOOK
Real GDP growth Germany (%, p.a.)
Following the record year of 2019, the prevailing uncertainty about the development of the Corona pandemic filtered through to the Top 5 office letting markets in 2020. With demand for office space slackening, take up dropped 36% to 2.16m sqm in a year on year comparison. The markets nevertheless remain intact, rents are stable, and the increase in vacancies only has been moderate. The year 2021 is likely to see more requests for office space initiated and realized again, ultimately also hand in hand with progress made in the vaccination campaign. Many planned leases were merely put on ice. Take up figures are therefore expected to be higher again as soon as there is a fundamental improvement in the overall business situation.
Rents were on the rise or remained stable in almost all the Top 5 markets. The weighted average rent came in at just under €22.00 per sq m in the Top 5 cities, up 2.8% year on year. Above all, Berlin (up 8.1%), Munich (up 6.7%) and Frankfurt (up 7.4%) are proof that users are still willing to pay the rents demanded, especially in markets where contemporary, high quality space in central locations is a scarce commodity. In Hamburg, the increase was more moderate at one percent. Düsseldorf was the only city where rents were in decline, which is mainly attributable to several large-scale lettings in city fringe locations and submarkets being concluded at lower market rents. Prime rents remain stable though they were recorded higher for first-rate office space in Berlin and Hamburg compared with the previous year. Nevertheless, the leeway for incentives in the current market environment was extended a little.
The pre-Corona period was dominated by extremely low vacancy rates and massive excess demand for premium office premises. This situation was beneficial in that vacancies did not increase dramatically during the pandemic either, and good space was in short supply. The average vacancy rate in the Top 5 markets came in at a mere 3.9% at year-end 2020. The office space pipeline for 2021 includes around two million square meters at present. Thanks to the already high letting rate of currently 57%, the vacancy rate may at most edge up next year.
Source: CBRE Research, 2021.
- 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.
Future of work short term response and long-term strategies
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 favoring 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.
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. Given the goal of minimizing the risk of costs and facilitating a quick response to changing requirements, we anticipate that the flexibilization of existing stock will progress apace in 2021. With take up of flexible office space from providers that only accounted for 10% of the previous year’s volume in 2020, we expect agile workplace concepts to make a comeback in 2021. Flex offices are specialized in the professional implementation of all the afore mentioned aspects, which may constitute a decisive step in the direction of office assets as operator run properties.
- The market for healthcare and social real estate is 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 occupancyThe market for healthcare and social real estate is 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.As the number of people in need of care rises from 3.41min 2017 to 4.13min 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%. The years ahead can be expected to see another increase in healthcare spending, with a rise of 4.3% to more than €407bn forecast for 2019 alone. 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 investment market hits new record high
Source: CBRE Research, 2021.
- The trust of investors in this alternative asset class will also grow hand-in-hand with increasing professionalization and greater transparency of operators. The investment volume on the German healthcare real estate market surged 61% to €3.38bnin a year-on-year comparison in 2020. The final quarter proved to be particularly dynamic, delivering a transaction volume of €1.4bn. This record result signifies that the health-care real estate market significantly outperformed the peak years to date of 2016 and 2018 in 2020, achieving a share of 4.3% in the overall transaction volume. A good 20% of the investment volume in 2020 was attributable to site developments compared with 2019, when the market share came in at 15%. New build activities are nevertheless not keeping up with society’s needs, especially in the care home segment as the capital values of care homes full significantly short of standard housing. Many developers find it difficult to acquire a suitable piece of land for care homes, on the one hand, and then make them turn a profit, on the other. We anticipate growing investor demand for healthcare properties in 2021. Scarce supply will therefore be sole factor curbing investment volume.
- The dominant care home asset class significantly expanded its market share again, lifting it by 16%-points to currently 72%. Assisted living also recorded growth, with an increase in its market share of 12 %-points to 14%. Assisted living has meanwhile become established and holds growing appeal for investors mainly because the regulatory requirements are less stringent compared with care homes. Despite the high transaction count in 2020, there is still excess investor demand.
- International investors were disproportionately represented in 2020 with a market share up eight percentage points to 69%. This development was driven above all by large-scale portfolio transactions: Of the nine healthcare portfolios in excess of the €100mmark traded in 2020, eight were bought by European investors. 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. We anticipate that operators will continue to undergo a consolidation process and that larger, financially more sustainable and, from an investor standpoint, more transparent operator structures will emerge, with foreign players keeping a close eye on the German market for their expansion strategies. The commitment of European market leaders in particular will generate growing interest in the German market for healthcare and especially for healthcare properties, thus ensuring stronger momentum in the M&A sector.
- Growing investor demand, scarce supply, and extremely reliable cash flows in the short and long term, also during the pandemic and economic crisis, are factors that put downward pressure on the prime yields of care homes in 2020 as well. At the end of 2020, care home prime yield stood at 4%, reflecting yield compression of 50 basis points compared with year-end 2019 – and down 25 basis points since the third quarter of 2020 alone. Care home prime yields have therefore continued their unmitigated downtrend – a little more than 10 years ago yields started at just under 8%. Prime yields will stay under pressure in 2021 as well.
- 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.
Retail sales at constant prices
Retail sales 2020 at constant prices - change compared to the prior-year period in %*
After a short-lived economic shock in the spring of 2020, accompanied by the slump in consumption and sales across almost all segments, that was followed by an equally swift recovery, the second lockdown in Germany in the pre-Christmas period, which is so important for the retail sector, is also having a significant impact on the retail sector.
With the hard lockdown and the closure of most stores, on the one hand the consumer climate has to cope with a further setback and on the other hand retail sales have decreased significantly compared to the previous months.
Thereby the overall retail sales result for 2020 is positive. In 2020, sales increased by 3.9% year-on-year in real terms overall. 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, online retail generated sales of €71.5bnin 2020, compared with sales of €505.9 billion by the stationary retail. Compared to the previous year, online retail's share of retail sales increased from 10.9% to 12.4%.
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 until at least March, will leave a clear mark on the retail landscape. Despite extensive government support - particularly by international standards – in the form of interim aid or permitting fixed costs to be written off, further insolvencies in the retail sector are to be expected.
The consequences of the pandemic for the retail real estate market are already clear.
- Prime yields in top city center locations and in shopping centers declined significantly over the course of 2020 and are expected to stabilize in the coming year at the low level already reached.
- The prime yields for shopping centers in particular witnessed a sharp increase as the year progressed. The yield of prime properties in A and B locations rose by 100 basis points respectively year on year. Further growth in 2021 is probable given investors’ more rigorous risk assessment.
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. A savings rate of currently more than 16% should provide a boost for stationary retail as the economy brightens from the second half of 2021. 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 start preparing for this now.
- 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.
- Up until the outbreak of the Corona pandemic, the German hotel sector’s development stood under the auspices of a long-standing upswing, among other aspects. This situation manifested itself in a steady uptrend in profitability, thus eliciting the interest of many investors in this asset class.
- 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 2020, €79.2bn was channelled into Germany’s real estate investment market. Compared with the previous year’s record result, this marks a decline of 5.5% but is nevertheless the second-best result since records began. A good €23bn was invested in the year-end rally in the final quarter of 2020. The fourth quarter therefore outperformed the third by 69% and fell only marginally short of the especially strong first quarter that was dominated by M&A transactions in the billions. While €59.2bn of the investment volume was accounted for by commercial property (-12% Y/Y; 30% above the long-term average), the multi-family housing investment market for portfolios of at least 50 units achieved €20bn (+23% Y/Y; 38% above the long-term average). There is still a great deal of capital and willingness to invest. The huge 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 a growing number of new market participants being registered as wanting their capital to find a home in Germany.
Source: CBRE Research, 2021; *Multi-family transactions and company takeovers with 50 and more units
- Although the various asset classes underwent different developments, the market overall was nevertheless extremely dynamic. German and international investor demand for property in this country continues to run high. Especially institutional investors with strong equity positions are increasingly putting their faith in property that can generate secure cash flows over long periods for their portfolios. In times of crisis, the emphasis is placed much more strongly than otherwise on core locations and core products whose availability is limited, which naturally drives the price.
- In tandem with the start to economic recovery that we anticipate in 2021, Germany as an investment location has the potential to emerge robust from the Corona year 2020. Both the metropolises and the B cities will benefit from the growing commitment of international investors since economic and business fundamentals will develop more positively again. At the same time, the interest rate environment can be expected to remain favorable in the medium term and real estate to generate attractive risk-adjusted yields in comparison with best investment grade government bonds.
Asset classes show differentiated development
Source: CBRE Research, 2021.
- From an investor standpoint, office properties will remain the measure of all things, also in an age of more home office and remote working. The trend is gravitating even more strongly toward core and core plus properties in established locations in the large office market centers, as well as in regional centers and B locations that evidence sustainable value. Long-term leases with strong tenants, such as public-sector occupiers, are particularly desirable outside the metropolitan regions. Given the current situation, these defensive investments are experiencing an additional surge in demand that cannot be covered by supply.
- Dwindling supply in the top cities is increasingly redirecting the attention of investors to peripheral locations and B cities. Land for development is changing hands at a faster rate – especially land suitable for building mixed-used schemes is topping investor lists.
- Even when normality is restored in the wake of the pandemic situation, the share of e-commerce can be expected to stay at a higher level than before as consumers have been quick to adapt. This recalibration in the retail business and the realignment of the global supply chains will enhance the appeal of the logistics property asset class for a broader investor group.
- Investor profiles are changing in the hotel segment. While conservative institutional investors continue to focus on core assets in prime locations, value-add and opportunistic buyers are more on the lookout for attractive opportunities for entering the market. These purchasers assume that the market will recover in the medium term and that travel will resume at normal levels. In the medium to long term, the majority of players view the hotel investment market as fundamentally healthy. The market will naturally not immediately return to pre-crisis levels after a vaccine becomes available but there is nothing that stands in the way of sustainable market recovery.
- Stationary retail in city centres and shopping centers will feel the consequences of the pandemic even longer, ultimately also because of uncertainty about how the business situation of many tenants in these properties will develop. Demand, above all for grocery-anchored retail properties, continues to run at a high level. Investors will continue to focus on properties with a high food and drugstore content, with DIY centers as a source of a reliable cash flow also becoming increasingly important. Aside from this, more deals will be struck with high street properties, with purchasers often aiming to repurpose them.
- The established asset classes will hold their strong appeal, while alternative assets, for instance in the healthcare and data center segments, will also be extremely popular with investors.
- Generally speaking, the lists of bidders on the German real estate investment market are long, and sustained yield compression remains the consequence of excess demand.
- Office property prime yields in the Top 7 cities remained at their all-time low compared with the previous quarter and currently stand at 2.85%. The strong demand for housing put pressure on prime yields in this asset class to move in the direction of the two-percent mark. High investor demand resulted in further yield compression also with retail properties specializing in food (for instance, supermarkets at 4.80%; -0.4%-points), as well as logistics properties (3.40%; -0.2%-points). By contrast, the asset class of shopping centers that is particularly affected by the current challenges saw yields rise 0.25%-points on the previous quarter and by as much as a whole percentage point compared with the year-earlier figure. At currently 4.25%, hotel yields are also half a percentage point higher year on year.
In 2021, we expect institutional investors in particular to reshuffle their real estate portfolios in favor of residential, healthcare and social real estate, along with logistics and light industrial. Against the backdrop of high excess capital, we anticipate further price increases for these asset classes, which will put further downward pressure on yields. Compared with traditional investments in fixed-income securities, however, they will continue to offer very satisfactory and therefore attractive yields. With repricing already completed, shopping centers and hotel properties are also likely to offer appealing investment opportunities as the year progresses. The non-prime sectors will probably need a few quarters for any notable recovery, however.
The much cited nomer of “safe haven” Germany is therefore even more topical than ever, which is why the coming months will see numerous new players entering the German markets. Strong investment momentum driven by domestic and international investors can be anticipated in 2021 as well. We estimate a transaction volume of at least €70bn in 2021.
- 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 retailing are strengthening the logistics sector in the long term.
- Aside from this, the food industry and food retailers were and are little affected by the Corona crisis, for instance. Instead, logistics chains have functioned seamlessly despite restrictions, and the supply of goods for everyday needs was ensured at all times. The logistics industry has delivered impressive proof of its systemic relevance for the economy and society.
- With take-up running at 6.9m sqm on the industry and logistics real estate market, a very good result was achieved that approximated the high level posted in previous years. The proportions of user sectors nevertheless, varied widely. The failure of orders to materialize in the industry in spring are partly reflected in the take-up in the second half of the year. Strategic decisions of occupiers on locations and expanding floor space were shelved due to the prevailing uncertainty. Consequently, industry’s share in take-up shed around 8%-points to 19% in comparison with the first six months. The recent signs of a gradual recovery in industry will allow this share to grow again in 2021. By contrast, tenants from the transport and logistics business held relatively stable slice in take-up throughout the entire year of 2020.
- In comparison with the first half-year, occupiers from the retail sector registered huge growth (up 5.8%-points to 39.8%), with e-commerce in particular emerging in this segment as the winner in the current situation.
- These developments imply that demand from various sectors for logistics space is set to grow – and not only due to e-commerce. The greatest constraint on take-up has been lack of availability for many years now, particularly in the prime locations, but meanwhile also in the environs of A locations and in many B locations. Site developments on green fields are becoming rarer, and developers will have to rely more on brownfield developments. Competition for this land will also be reflected by a price uptrend that developers will then factor into the asking rents. Given an average vacancy rate of 1.3% in the top logistics regions, we anticipate that prime rents will rise further by an average 2% in the next five years.
- Against the background of the fundamentals touched on earlier and the growing appeal of the logistics sector that has proven its crucial importance for society, particularly at the peak of the Corona pandemic, new investors are increasingly turning to this asset class. Rising demand and logistics properties in short supply resulted in a veritable race to make up ground in the second half of 2020 when almost €4 billion of the entire investment volume of €7.6 billion in 2020 was generated. Logistics properties of all kinds and risk classes, from hubs right through to light-industrial properties and on to urban logistics units, will experience broad-based demand in 2021 as well that cannot be satisfied despite the brisker pace of construction activity. The currently low interest rate environment demands a realignment of the portfolio strategy and of risk/return aspects. Investors will therefore display greater interest in properties with upside potential and opportunistic products that will enable them to participate in the growing importance of the logistics market.
Source: CBRE Research, 2021.
- The residential sector can already be named 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 1.0%, 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. This lies approx. 15% 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 about 35%. It can be assumed that vacancy rates in the major cities will tend to be stable on a very low level 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. Additional dynamics are developing in extended metropolitan areas. The focus here is on cities with universities, successful companies, a high quality of life and very good connections to the major cities.
- A special situation exists in Berlin, where the aforementioned rent freeze on existing apartments has led to a slight decrease of rents in 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.
- The Multifamily transaction market remains unaffected by the current situation. In 2020, multifamily assets and portfolios (50 or more residential units) were traded for around €20.0bn. 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. This marks the second-highest transaction volume ever achieved on the German housing market – only surpassed in 2015 when the impetus was even greater, delivering more than €23 billion. For 2021, it can be assumed that a transaction volume of at least €15 billion can be expected due to numerous larger portfolios in the pipeline. This figure may well be exceeded by takeovers that are currently not foreseeable.
Source: CBRE Research, 2021.
Against the backdrop of the pandemic, a growing number of investors otherwise engaged in other real estate asset classes appeared on the housing sector as prospective clients and buyers in 2020. The same applies to international investors whose share in the market jumped from 13%in 2019 to currently more than 60%. Even taking Adler out of the equation, international investors still had a market share of 30%. “German resi” is viewed as a safe haven by investors all over the world.
The largest net buyer groups consisted of listed real estate companies (up €3.3 bn), special funds (up €1.7bn), investment funds (€3.0bn) and institutional investors such as private and company pension funds and insurance companies (up €874m). Especially investors with long-term horizons, such as company and private pension funds, are targeting the fixed income nature of residential investments, viewing them as a desirable alternative to increasingly less attractive government bonds.
In 2020, 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.