Commercial investments are heading to Germany, here’s why

Germany has been shortlisted by investors as an investment hotspot for commercial real estate and Merkel’s motherland hasn’t finished championing the EU states with its economic and political stability, well-regulated markets, steady prices and attractive real estate.

Tens of billions every year

This European powerhouse shows growing investments into commercial property year on year: €39.8 billion in 2014, 31% more than the previous year.

According to JLL, average investments from 2010 to 2014 amounted to €6.93 billion per quarter. They reached €9.5 billion in Q1 2015 (1.4 times the average), just 5% of the Q1 2014 €10 billion total.

The residential property market hasn’t been left out either, it has been increasing continuously since 2010, peaking at €16 billion in 2013. With investments reaching €3 billion in 2009 and 2010, experts expect this year to surpass a number of record highs.

€10.9 billion had already been injected into residential property in Q1 2015 alone, JLL reports. Weighing in at 80% of last year’s investment volume, this is the best first quarter result for the country in recent years.

Demand: nowhere left but up?

Anna Kurianovich, investment advisor at Tranio, has a two-prong explanation for this trend. Real estate yields are bigger, beating returns on other assets, such as bank deposits with high interest rates or securities, and while the global geopolitical situation continues to waver, economic stability is beginning to rhyme with good business for investors, thanks to Germany’s steady economy, transparency, strong regulations and comprehensive laws that mitigate the risk. “The German market is attractive because its economy is stable but also thanks to transparent regulations and a wide ‘product range’. Offices, stores and residential housing, industrial facilities, assisted living facilities for seniors and hotels are all in demand among investors,” says Kurianovich. The many options and cheap banks loans have grown into a successful tandem that generate more interest from leveraged gains, particularly for investors focusing on the internal rate of return (IRR).

Offices take the lion’s share

Office space is attracting the most investments in the commercial real estate market, accounting for 44–45% market share in 2014, with stores ranking a distant second at 21–22% (JLL and Savills estimates differ by 1%).

Investments into other segments are minor: 8% for warehouses, industrial premises as well as hotels and 3% for construction sites.

While there is a dominant real estate segment in each city according to Savills, i.e. retail in Berlin and Stuttgart, office space in Hamburg, Düsseldorf, Munich and Frankfurt and logistic hubs in Cologne, office space remains the most popular throughout the country.

Foreign capital fuelling the commercial market

JLL reports a jump in the market share of foreign investors buying Germany’s commercial property, rising from 10% in 2009 to over 50% in Q1 2015, and experts says it’s not over yet. Forecasts predict a steady inflow of foreign capital throughout the year, particularly from Asian and Middle Eastern institutional investors. Unsurprisingly however, nearly half of all acquisitions in 2014 were German (48%), 15% from the USA, 9% and 6% by the Brits and French respectively.

The most marked difference remains the share of foreign investments in the German property market. With only 8% non-German purchases in the first quarter of 2015, coming mainly from the Swedes, French and Israelis, the residential market is not as popular. In fact, while most property sellers are Germany (48%), the Brits (25%) and Canadians (21%) are also parting with their assets.

According to Savills, the main buyers of commercial property in Germany are special purpose public investment funds, other asset management companies, listed real estate companies, private equity funds, insurance companies and pension funds. The main sellers are developers, property management companies, special purpose public and private investment funds and private equity funds.

The Big Seven market leaders

Now over 50% of all the commercial real estate transactions are made in the “Big Seven”: Cologne, Düsseldorf, Frankfurt-am-Main, Hamburg, Munich and Stuttgart. Last year, 40% of these transactions were closed here and experts surmise this trend is proof that sellers are heading for Germany’s large established markets. Savills puts investments in Frankfurt-am-Main’s commercial real estate at 12% in 2014, Munich at 11% and Berlin in third with 10%.

The first quarter of 2015, however, shows that investors have not made their final choice. Berlin moved into first place with investments of €1.3 billion (14%) in Q1 2015, an increase of 113% against the same period last year. Munich stays steady second with €1.2 billion.

At the same time, the Big Seven’s residential housing market is also popular but investors are branching out into towns too: Gelsenkirchen, Mönchengladbach, Zwickau etc. This appetite for risk will deliver higher returns (6–7%) if these buyers can outmaneuver the well-known pitfalls of residential real estate: small towns attract less tenants, leading to lower returns (4–5%).

Anna Kurianovich from Tranio explains that real estate in large cities has higher liquidity and lower risk affecting demand. “It’s believed that investments into locations with a population of 50,000–100,000 are high risk. That is wrong. For instance, downtown retail property in a small town would be a more reliable investment than the same in a secondary area of a large city,” she says. Kurianovich also notes that there are lower returns on real estate investments in the Big Seven cities, conditioned by higher land prices.

George Kachmazov, Tranio’s founder and managing partner, confirms: “Real estate in Germany will continue to attract domestic and foreign investors. Germany is the EU's largest economy and a focal point for many major and successful companies, which ensures high demand for commercial property and consequently intense interest from investors. The well-established regulations and wide range of vehicles and tools to mitigate acquisition and holding risks are also key here. And, of course, Germany still has the cheapest mortgage rates. Unparalleled and driving up returns, they have given great impetus to the market in recent years.”

Yulia Kozhevnikova, Tranio