German real estate bounces back to pre-crisis levels

Prices for prime real estate in Germany have returned to near-peak levels but values of secondary assets continue to falter.

Fuelled by several large-ticket deals, Germany’s transactional market soared 25-30% year-on-year in the first six months of 2013 to surpass the €10 bn threshold. The sector reported more than a dozen deals over €200 mln, highlighting the availability of financing as well as growing investor confidence.

In terms of buyer groups, the first half clearly indicated renewed interest from cash-rich investors from Asia, with South Korean institutions acquiring a 135-metre office tower in Frankfurt in a deal arranged by IVG Immobilien. Market experts say other Asian investors are actively looking to take part in the German investment market. ‘Investors mainly from Korea and Taiwan are showing strong appetite for quality real estate in Germany. The Galileo transaction is an example of a larger volume of Asian capital coming to our country,’ commented Marcus Lemli, head of investment at Savills Germany.

Core, well-let properties remain the most sought-after products, as institutional investors continue to focus on income to offset their liabilities. Recent transactions reflecting this rationale include the sale of the Skyper office complex in the heart of Frankfurt’s banking district to Allianz Real Estate for €300 mln and IVG Immobilien’s acquisition of a €500 mln development portfolio on behalf of a German pension fund.

‘There is an abundance of liquidity and a lack of product in the market,’ commented Ignaz Trombello, managing partner and head of investment at Colliers Germany. In the main cities, growing competition has pushed yields down to levels seen only before the crisis, he added. ‘We are nearly at 2006-2007 levels and while we could see further movement here and there, I believe yields have bottomed out as much as possible.’

TAKING RISK
Germany’s big seven cities are seeing prime yields below 5%, forcing some investors to look into regional markets. ‘Investors targeting higher returns are starting to move away from the top seven markets and taking secondary cities with over 200,000 inhabitants into consideration,’ Trombello said.

The strong performance of the Düsseldorf office market in the past few months can be seen in this light. With yields at 5.25% and prices still showing upside potential, Düsseldorf reported a string of big acquisitions in the first six months, and investment volumes in this period reached the same level as in the whole of 2012. According to well-informed market sources, two major assets are currently on the market – the Commerzbank and the Deutsche Bank regional headquarters, which should again sustain transactional volumes in the second half of the year.

Lemli of Savills noted that higher risk strategies are also taking shape in the market due to a combination of a shortage of best-in-class product and investors’ appetite for more attractive yields. ‘Investors are widening their focus and taking a closer look at quality assets in secondary locations providing attractive yields between 6 and 8%,’ he said.

Colliers’ Trombello also sees increasing appetite for value-add investment opportunities, where buyers choose to take some letting risk with a view to sell in two-three years’ time after having repositioned the property. ‘This is not a very aggressive play so far, but will likely increase in importance in the future,’ he noted.

While prices for core product have been steadily on the rise over the past couple of years, the market for secondary assets has continued to suffer. Recent transactional activity on secondary properties seems to point to lower values and higher yields, indicating the need for a further adjustment in value. In a recent valuation report, Colliers said that last year secondary assets traded at an average discount of approximately 12% below its valuation. ‘This confirmed the need for a reassessment of the overall portfolio value,' the broker added, commenting on its decision to mark down the value of one of its appraised funds, London & Capital’s German Real Estate Fund.

GREF’s 12 properties saw their value drop by €63 mln in April to €210 mln from €273 mln the month before, reflecting a 23% drop in the gross value of the vehicle. Appraiser Colliers said many of the retail properties in the portfolio are located in areas which are suffering both from high rates of unemployment, low purchasing power as well as negative population growth. In total, GREF owns a 257,000 m2 portfolio with a vacancy rate of 8.85%.