Prime real estate yields have fallen to record lows in Germany and are set to remain at these levels or decrease even further, delegates at PropertyEU’s Germany investment briefing in London heard on Tuesday.
Prime real estate yields have fallen to record lows in Germany and are set to remain at these levels or decrease even further, delegates at PropertyEU’s Germany investment briefing in London heard on Tuesday.
Germany’s long-held position as a safe investment destination has lost none of its shine, in fact it has been further burnished by recent events. The low unemployment rate and the boost to real incomes from the plunge in oil prices have boosted household spending, and the forecast is for GDP growth of 2.4% this year.
‘Germany will benefit from the safe haven effect like never before and attract increased levels of investment,’ said Thomas Beyerle, managing director and group head of research at Catella. ‘The country has stability and good growth prospects, the easing of the Greek crisis has helped sentiment and it also benefits from the contrast with other countries like France where the situation is not improving in the same way.’
Figures back up these claims: according to Catella research, investments in the German real estate market have reached €24.1 bn in the first half of this year, a 41% increase on the same period of 2014.
Offices continue to be the most sought-after asset class, with many large transactions over €100 mln, but retail volumes have also increased significantly in the first six months of 2015. The forecast is for commercial transactions to surpass the €50 bn mark by the end of this year.
While domestic demand is driving Germany’s economic recovery, foreign demand for investments is powering the real estate market, the briefing heard.
Cross-border investments have shot up by 55% this year to €13.3 bn for H1, a 55% increase on the previous year. The most active foreign investors are from the UK and US, and they are mainly targeting the top five cities which accounted for 53% of foreign investments in the first half, compared to 38% last year.
The downside of high investor demand is that prices and competition are high while yields are low. ‘Due to high investment demand, prime net yields have decreased to a new record level, and they will remain at these lows or even decrease further,’ said Beyerle.
This does not appear to be discouraging investors: for example, despite prime office yields falling to around 4.5%, the vast majority - 82% - of foreign investments in Frankfurt in the first six months of the year have been in the office sector.
‘I would like to think most of the yield compression has already happened but I fear it will continue,’ said Tony Smedley, head of Continental European investment at Schroders Real Estate. ‘We must try to be defensive against the inevitable rise in interest rates’.
He also had a word of caution for delegates: ‘Germany has a well-earned reputation as a safe haven but “safe haven” is a dangerous terminology because no investment is safe, not even in Germany,’ he said. ‘The best we can do is to always evaluate and manage risk.’