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March 5, 2018

Germany cemented its position as a top European real estate destination in 2017, seeing its second highest year of investment on record.

And continued global investor interest signals another bumper year in 2018.

Annual investment volumes soared to US$60.2 billion in 2017, marking the sixth successive year of growth. The full-year results came in nine percent higher than 2016 and almost double 2012 levels.

The results are “remarkable considering the widely reported supply shortage and increased prices,” according to Helge Scheunemann, Head of Research at JLL Germany, who explains that “rising prices are both a help and a hindrance.”

“While it’s likely that some investors limited their activity because prices were too high, these increased prices played a key role in boosting transaction volumes last year.”

Promising economic backdrop
Germany’s stellar real estate performance is, in part, fuelled by a strengthening economic outlook within the wider Eurozone area. During 2017, the Eurozone brushed off questions surrounding both the slowdown in the European Central Bank’s asset purchase program and Brexit negotiations to hit its highest growth level for a decade.

The economic picture within Germany mirrors its regional home, further reassuring commercial real estate investors for whom the outlook “remained uniformly positive during 2017,” according to Scheunemann.

Annual output growth in Germany increased to 2.2 percent, the highest level since 2011. Unemployment is at its lowest level since re-unification and is expected to drop further, while industrial production has surged and consumption is up.

Sectors of choice
Germany’s office and logistics sector continued to prove particular favorites among global investors.

But while the logistics sector attracted more cross-border capital in 2017 than the year before, offshore investors continue to pile primarily into the office market. Indeed, the sector accounted for 43 percent of all cross-border inflows from 2014 to 2017, with Germany’s ‘Big 7’ markets of Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich, and Stuttgart pulling in the lion’s share. Berlin, in particular, received a record US$4.9 billion in cross-border inflows.

The key to the surge, is the sector’s “robust occupational fundamentals,” says Scheunemann. “Labor markets have benefitted from the positive macroeconomic environment, which in turn has translated into strong demand for space by occupiers. A record 4.2 million square meters of office space was taken-up across the Big 7 markets in 2017, seven percent higher than the previous record in 2016.”

Yet increasing demand from expanding companies and a lack of supply has created a significant lack of space, pushing down vacancy rates while simultaneously increasing rents. Prime rents in

Germany’s most desirable submarkets across the Big 7 rose by 4.1 percent in 2017, with Berlin seeing the biggest jump – up 11 percent.

A bigger pool
As its commercial real estate market continues to boom, the pool of investors looking to Germany is widening.

Mirroring the growth in overall transactions, foreign investment rose by a compound annual growth rate of 19 percent between 2010 and 2017. Last year was particularly strong with cross-border capital reaching a post-GFC high of US$30.4 billion.

While European investors have, and continue to be, the biggest contributors to cross-border investment in German real estate markets, Asian markets are adding their money to the mix as they become increasingly more confident with global investment.

In 2017, Asian money was the largest source of inter-regional capital in Germany, with US$6.6 billion in acquisitions – the majority of which came from Chinese, Singaporean, and South Korean investors.

From strength to strength
With continued demand coupled with a strong economic forecast, 2018 is shaping up to be another year of growth.

“The situation looks generally positive,” Scheunemann says. “We’re not expecting a downturn and expect transaction volumes this year to be in line with the 2017 figure.”

Conditions in the office market, meanwhile, are likely to remain tight with limited new supply. While 1.3 million square meters of new space is scheduled to be delivered, nearly 62 percent is already pre-let or will be owner-occupied. “With only 420,000 square meters of space set to hit the market, we expect to see a further decline in vacancy and continued rent growth across much of the Big 7,” adds Scheunemann.

And, existing investors may be forced to look to other sectors in their hunt for yield. Despite already being at all-time lows, strong demand will see yields drop further in the Big 7 cities, says Scheunemann.

Read more about the real estate investment market in Europe.

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Helge Scheunemann

Head of Research at JLL Germany

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