German real estate market remains extremely popular Surge in prices for new residential real estate
The publication of this year’s EY Real Estate ‘Trend Barometer Real Estate Investment Market Germany’ showed that demand for investment property in Germany will remain strong in 2017, but will decline only moderately due to lack of supply. Demand for office buildings, particularly in Berlin, Stuttgart, Hamburg and Munich is high, while Frankfurt is the centre of demand for condominiums.
EY’s survey of 135 investors also revealed that the transaction volume for real estate in Germany looks set to reach between EUR 60 and 65 billion this year. There are also indications that uncertainty could lead to increasing volatility in the real estate market over the next 12 months.
“We are not expecting a crash or crisis scenario,” said Christian Schulz-Wulkow from EY Real Estate. Nevertheless, he advises investors to keep liquidity in reserve in order to avoid any bottlenecks in refinancing, for example, to soften the impact of rising interest rates or tenant fluctuations.
About 96% of respondents rate the German real estate market as ‘attractive’ to ‘very attractive’. Due to the tight supply, however, there will be a continued decline in the transaction volume. Investors are increasingly interested in what used to be peripheral asset classes, such as car parks, nursing homes, student residences and micro-apartments. Offices and apartments in prime locations are likely to become even more expensive, for example in Berlin.
Given that the EY survey was carried out in October and November 2016, i.e. before Trump’s victory in the US presidential elections and before the chances of a hard Brexit became so great, it is likely that the result would be quite different, reflecting more fully current political risks, if the survey were carried out again today.
Trump’s declarations that free trade is not necessarily a good thing do have the potential to cause problems for the German economy, which could feed through to the country’s real estate markets. And yet, thanks to its reputation as a safe investment haven, the current political uncertainty could actually be beneficial to Germany.
EY’s Schulz-Wulkow advised investors to play through a range of negative scenarios and prepare their portfolios for any potential shocks. He suggests building adequate liquidity reserves to create a financial buffer big enough to cope with the loss of a major tenant.
2016 saw a total of EUR 65.7 billion of commercial and residential property portfolios change hands, down somewhat from the previous year’s EUR 79 billion. EY forecasts a further moderate decline in transactions in 2017, and expects a full-year total of around EUR 60 to 65 billion. Despite the decline, the total will still be very healthy in relation to the long-term trend.
The major reason for the lower transaction volume is the shortage of available real estate product as more and more owners decide to hold on to their real estate for longer. There has been no change in the high level of demand for German real estate.
“The fact that prices have risen and some sub-sectors are exhibiting signs of overheating has done nothing to dent Germany’s attractiveness,” said Paul von Drygalski from EY Real Estate.
Almost all of the surveys respondents believe that the low interest rate environment will continue throughout 2017. A majority of respondents also agree that prices will remain stable or continue to increase. They agree that the pent up excess demand is particularly good for project developers and 90% of respondents expect further growth in the volume of forward deals.
According to a Zeitung, empirica advertised prices report
has in I mmobilien compared the of newbuild condominiums in Q4 2016 with the same quarter of 2015, revealing a 9.9% price surge in Germany’s urban districts and an increase of 7.6% in suburban and exurban areas. For the same period, empirica reports that the prices of detached and semi-detached houses rose by 9.1% in urban areas and 7.7% in the suburbs.
In comparison with Q1 2004, the first quarter recorded in empirica’s price index, asking prices for newbuild condominiums in urban districts have increased by a total of 52.6%, and newbuild detached and semidetached houses are 33.8% more expensive, while advertised rents in the newbuild sector have increased by around a third. Munich retains its position as the most expensive city in Germany. In Q4 2016, a new condominium in Munich cost an average of EUR 7,062/sqm, and a detached or semidetached house EUR 7,261/sqm.
According to research from CBRE, transactions involving German care homes totalled EUR 3 billion in 2016. The large volume of portfolio deals, which accounted for almost 90% of all transactions, was the major reason for the record total. As a result, the care home market accounted for 6% of the overall transaction volume in the commercial real estate sector.
Yields averaging 5.5% in the care home sector continue to outperform those of many other asset classes. The prime yield for care homes is 190 basis points higher than the prime office yield and 210 basis points higher than retail real estate.
CBRE’s Jan Linsin expects that, “the market for care homes will continue to develop dynamically throughout 2017: A transaction volume of around EUR 1 billion is well within the realms of possibility.”