Thanks to the exceptional transaction volume posted in Q1, the German investment market set a new record for H1 at just under €29.4bn, reflecting a 20% yoy increase. Including investments in residential assets (starting at 30 units), which came to just under €12.7bn, total transaction volume was recorded at slightly above €42bn. These figures are based on the latest analysis by BNP Paribas Real Estate. Overview of key results:
- German investment market sets a new record for H1 at just under €29.4bn thanks to exceptionally strong Q1
- Q2 posts €10.8bn in transaction volume, down 19% yoy
- Portfolio deals more than triple results at €14.2bn
- Single-asset deals down to just under €15.2bn (-24%) in contrast
- Office remains most popular asset class with 35% (€10.4bn)
- Berlin maintains standing as most popular investment location (over €3.85bn)
- Net prime yields remain unchanged at mid-year
- Foreign investors post average share buy-side at 41%
- More than 730 deals recorded (commercial only)
“Thanks to the record set in Q1 with transaction volume at over €18.5bn, the majority of which can be attributed to portfolio deals, takeovers and share investments, including Aroundtown’s takeover of TLG, which accounted for roughly €4bn alone, H1 2020 posted a new record transaction volume, reflecting a significant increase yoy. Looking exclusively at Q2, which was heavily affected by the pandemic and the interim lockdown, results were down 19% compared to mid-year 2019. Q2 transaction volume also came in 17% below the 5-year average. These results clearly reflect current uncertainties around future market performance as well as the extensive lockdown restrictions, including extreme difficulties in showing properties and more complicated financing conditions. At the same time, the standstill predicted by some market observers has not come to fruition. Many investors continue to have confidence in German real estate and believe that past favourable trends will continue as soon as the pandemic has been overcome or can be controlled by medicines and vaccines”, explains Piotr Bienkowski, CEO of BNP Paribas Real Estate Germany.
It is generally safe to say that different asset and risk classes have been affected by the pandemic to varying degrees. As a result, investors are currently employing differentiated risk analyses with regard to future performance. Demand remains particularly high for logistics and residential investments. Investors poured more capital into logistics assets in Q2 2020 than in Q2 2019. Decisive in this are expectations that the logistics sector will benefit from the accelerated growth in e-commerce and a possible slight downward trend in global division of labour. There are also no signs of a fundamental shift in excess demand on the housing markets. Cash flow remains quite stable as well and the risk of significant loss of rent is considerably lower in the residential sector than in commercial. “Most buyers continue to view the German office markets favourably. The fact that investors expect Germany to recover faster from the pandemic than other countries, as it did after the financial crisis, is also relevant and should mean a relatively rapid increase in demand. However, we are seeing tangible differences between the different risk classes”, Peter Bienkowski summarises the current mood on the market.
Much of the retail sector was most directly affected by the lockdown and contact restrictions. This reinforced trends that were already in place prior to the pandemic, particularly the rapid growth of e-commerce, which is a factor behind lower sales at brick-and-mortar retailers. Some asset classes, such as shopping centres, which rely on a high footfall, are being impacted by this more severely than others. In light of this trend, we have yet to see a shopping centre deal finalised this year. In contrast, investor interest remains high when it comes to high street assets that are still in business in prime locations of major cities as well as supermarkets and retail warehouses and retail parks with a heavy food slant. This preference is reflected in several larger portfolio deals that changed hands in the food segment. These deals put retail assets well in the lead in terms of portfolio deals with just under €5.1bn.
The pandemic has had a similar direct impact on hotels, which have had to contend with a massive decline in overnight stays due to the lockdown measures. Now that many restrictions have been lifted, however, we are already seeing an upward trend that should prove beneficial to hotel investment activity in the second half of the year. As is the case with other asset classes, investors are likely to pay close attention to risk profile going forward. Proven concepts under long-term lease in prime locations, however, will particularly continue to meet with demand from a variety of investors.
Single-asset deals generated just shy of €15.2bn and accounted for roughly 52% of total transaction volume, reflecting a yoy decrease of roughly 25%. One factor involved in this performance is that a number of single-asset deals were spontaneously put on hold during the lockdown with participants waiting to see how the situation would develop. Many of these deals are now again underway and will most likely be finalised in H2. Portfolio deals generated just under €14.2bn (48%), more than tripling their results. A number of M&A deals and portfolio share acquisitions along with a number of higher-volume portfolio deals that were well into the final negotiation stages pre-pandemic brought about the second-best result seen on the market since 2007’s strong performance. Retail portfolios, many featuring a heavy food-slant, proved most popular, followed by office and logistics portfolios.
Office assets maintained their lead at almost €10.4bn, reflecting 35% of total transaction volume. The fact that office assets saw a yoy dip in market share can in part be attributed to many high-volume asset deals having been placed on hold during the lockdown. Investments could not be thoroughly reviewed during this period due to contact restrictions and the only option was to postpone the process. Retail assets claimed 2nd place at just over €7.1bn, or 24%. Logistics assets managed to increase their share in transaction volume to roughly 13% (€3.7bn). Results for hotel assets were down yoy as expected to just under €1.4bn (5%). Healthcare assets brought in similar results at €1.6bn, or 5.5% of total transaction volume and continue to meet with considerable investor demand even during the crisis.
Foreign investors claimed a market share of just under 41% due to the high number of portfolio deals, a segment in which foreign investors are traditionally very active. These results are higher than those of the past two years. European investors once again pulled ahead in pole position at just over 14% with investors from the Middle East coming in a close second buy-side at just under 14%. Investors from North America claimed third place at 10% buy-side, managing to boost their share slightly yoy.
“H1 transaction volume in Germany’s prime locations (Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart) registered at just shy of €14.4bn, even reflecting a 4% yoy increase. To better understand this result, however, we need to analyse market activity closely. Portfolio deals were responsible for an unusually high share and were therefore the drivers behind this impressive transaction volume. Roughly 38% of transaction volume generated in the country’s prime locations involved portfolio deals compared to a mere 8% in H1 2019. Single-asset deals in Germany’s major cities accounted for just under €9bn, down 29%. This decrease can primarily be attributed to a number of high-volume deals being temporarily put on hold”, explains Marcus Zorn, Deputy CEO of BNP Paribas Real Estate Germany. Berlin again posted the highest transaction volume at €3.85bn (-27%), followed by Frankfurt at just over €2.9bn (+24%) and Hamburg at just under €2.2bn (+92%). Two high-volume core deals were signed in Hamburg despite the crisis: Ericus-Contor, which was brokered by BNP Paribas Real Estate, and Neuer Dovenhof. Munich posted a slight drop to just under €2.1bn (-4%) while Düsseldorf was able to increase its transaction volume by 58% to just over €1.8bn. Transaction volumes in Cologne (€702m, -10%) and Stuttgart (€833m, -15%) only posted moderate drops as well.
“It is important to differentiate between market segments when it comes to pricing trends. We have hardly seen any price adjustments in the core segment thanks to investor demand remaining quite high. The very few cases that we have seen typically tend to involve more expensive financing. In general, however, net prime yields remain stable in the country’s major cities, with the lowest yields still to be found in Berlin and Munich at 2.60%. Frankfurt and Hamburg share third place with yields at 2.80% in both cities. The country’s other top cities, i.e. Cologne, Düsseldorf and Stuttgart, continue to post yields of 3.00%”, Marcus Zorn continues. The situation is somewhat different in the value-add segment where investors are pricing in significant risk premiums due to uncertainties around future market performance. At the same time, however, many investors are not prepared to sell at significantly lower prices, as they expect the markets to continue their fundamentally favourable upward trend once the crisis has passed. With the current situation as such, relatively few deals are being signed at the moment in this market segment, as the parties involved both buy and sell-side have yet to reach a ‘market agreement’ in regard to appropriate purchase price levels. We are likely to see this pricing phase continue throughout the second half of the year.
“Q2 transaction volume and pricing trends indicate that the pandemic is having a significant impact on the investment markets as expected. Current uncertainties as to when a vaccine or effective medication will become available, whether the crisis will trigger fundamental changes in occupier behaviour and how quickly the economy will recover are all impacting investment decisions. However, we are also seeing considerable differences between the different asset classes. And in all of this, it is also becoming increasingly apparent that investors continue to think of Germany as a safe haven. Most investors assume that Germany is likely to experience the fastest recovery as was the case in the financial crisis and that the recession in 2020 will be less severe in Germany than in most other countries. This assumption is also supported by the fact that the economic support being provided by the German government is not only in absolute terms but also in relation to GDP, putting it significantly higher than the comparable level in a number of other countries. In these difficult and uncertain times, investors also value the fact that Germany has a long track record of legal certainty and a history of political stability,” explains Piotr Bienkowski.
In summary one can say that, although the situation has been tangibly dampened by the pandemic, the markets are still far from coming to a standstill or experiencing a crash. If we consider the fact that the mood has begun to brighten in recent weeks and that a number of high-volume deals that were put on hold are now fully in underway and in the final stages, there are a number of indications we will see market activity pick up noticeably again in Q3. “As there are still some risks that cannot yet be factored out entirely, such as a second wave, predicting total annual results remain challenging. However, there is much that would point to annual transaction volume possibly exceeding €50bn, a result that would top the 10-year average considerably. As things currently stand, the most likely scenario is stability in the core segment combined with ongoing pricing considerations in the value-add segment”, summarises Piotr Bienkowski.
