Demand for German commercial real estate set to continue in 2021

Commercial real estate transaction volumes in Germany in 2020 were EUR59 billion, only 6 per cent below the five-year average, according to Savills. 

Given that many investors are unlikely to have achieved their acquisition targets last year and could receive even more capital targeting stable income this year, the international real estate advisor expects volumes in 2021 to once again reach EUR50 billion.

Marcus Lemli, CEO Germany and Head of Investment Europe at Savills, says: “In view of many feeling the pressure to invest and an increased risk in the occupier market, we believe the strategies of individual investors beyond the lowest common denominator of ‘logistics, residential and AAA offices’ will become more differentiated.
“For example, many investors are likely to view any downturn in the capital values of offices in B-locations as a counter-cyclical opportunity for acquisitions, while others will regard the same properties as having excessive long-term risk and be active on the vendor side. Active vendors and buyers are likely to ensure a high transaction volume this year.”
A large proportion of demand is concentrated on those properties that offer stable cash flow during the crisis and beyond. This includes logistics assets and offices let on long leases to public sector tenants or other occupiers with strong covenants as well as niche properties such as data centres. Yields in the aforementioned sectors hardened further during the course of last year. The prime yield for logistics properties stood at 3.5 per cent at the end of 2020, which is 20 basis points lower than the corresponding figure in 2019.
The prime yield for supermarkets also hardened by 20 during the course of last year, standing at 4.9 per cent at the end of December. In the top six Germany cities, prime yields for offices averaged 2.8 per cent (-3 basis points compared with Q4 19). Conversely, yields for shopping centres and retail parks softened by 70 basis points and 35 basis points respectively.
“The change in the assessment of sectors has manifested itself in a polarisation of yield movements that is likely to continue,” says Matti Schenk, Associate Research at Savills Germany, adding: “We expect initial yields for core office properties, logistics and food retail assets to harden further this year. In contrast, yields for non-core offices and high-street properties are likely to soften.”
The proportion of German investors rose last year, partly due to travel restrictions. Domestic buyers accounted for around 57 per cent of the investment volume, which is the highest proportion since 2013. Approximately 71 per cent of foreign capital originated from Europe, followed by around 21 per cent from North America and the rest from the Middle East and Asia. Marcus Lemli adds: “Investors from outside Europe remain highly interested in German commercial property. They are currently focused on investments via fund managers, investment managers and local partners.”
Open-ended special funds were once again the most active buyer group, accounting for more than 31 per cent of the transaction volume. These were followed by fund managers and asset managers, which were responsible for more than 20 per cent of investment. Property companies/REITs followed in third place with around 9 per cent of the transaction volume.

Insurance companies and pension funds invested significantly more than in 2019 (+EUR1.1bn/increase of 49 per cent). “The fact that insurance companies are significantly more active than in the past is a typical phenomenon for a market phase such as the current one. When debt capital is scarcer, equity-rich investors are at an advantage,” says Lemli.