BRIEFING: Demand for German real estate outstrips supply

Investment appetite for German real estate is likely to continue, but value can be hard to find and there are too many investors chasing opportunities, a panel of leading experts agreed at PropertyEU’s Germany Investment Briefing which was held in London on Thursday.

‘2014 was the best-ever year for German real estate returns,’ said Peter Hobbs, managing director of Real Estate Research at MSCI UK. ‘The 6% return has been the best performance since the inception of DIX, the German real estate index. This is a historic trend, as it has been delivering solid returns for a long time, but it has been suffering from value decline for a few years. All things considered, Germany seems less aggressively priced than other big markets.’

From a global perspective, Germany is seen as a stable and dependable market, in contrast to the volatility experienced in Asia and the US but also closer to home in the UK and Ireland. Its attractiveness is underpinned by solid fundamentals and a positive outlook on the economy and employment, the briefing heard.

‘The upbeat mood filters through into real estate, and makes it a market which may not be dynamic, but is stable and attractive, whichever side of the investment spectrum you are on,’ said Philip La Pierre, head of investment management Europe at Union Investment Real Estate.

‘While in the US there has been a worrying trend towards lower yields, Germany is in a better situation as yields have been rising and there are fantastic spreads now with bond yields,’ said Hobbs. Direct real estate performance last year was 12% based on international valuations and 6% based on local valuations, he noted.

While there is a noticeable volatility in the valuation index compared to the transaction index, both are lower compared to other countries. ‘There is a huge debate on valuation methodology, but even adjusting for the smoothing of valuations, Germany is a relatively stable market, far more stable than the US,’ said Hobbs.

Looking at the German market from the inside, the picture gets more fragmented and complicated. ‘The market is stable but there are huge variations between the best and the worst-performing funds, with industrial the best performer at 12.2% and offices the worst at 4.2% last year, and residential at 7.9% and retail at 7.2% in the middle,’ Hobbs pointed out. However industrial is still a very small section of the German market, with office and retail forming the biggest part and residential coming steadily up through the ranks.

‘Until recently office income return has been higher than residential, but not in terms of value growth,’ said Hobbs. ‘In fact, over the last 18 years offices have shown significant depreciation. Retail has tended to outperform all property, with high street retail as the strongest performer, shopping centres doing well and hypermarkets as the worst performers.’

The city performance index for 2014 sees Munich at the top as the star of the market and Hamburg at the bottom.