Is the war in Ukraine likely to cause a scare on Germany’s investment markets? “Without a doubt, the Russian aggression will have long-term consequences for the political and economic landscape in Europe,” said Rainer Schorr, Managing Director of PRS Family Trust. “As the year progresses, we are probably going to face a higher rate of inflation and slower economic growth than originally predicted. It is unlikely now that we will actually see the four percent that were forecast by the Bundesbank for 2022, and even the growth in 2023 will be more muted than initially assumed.” He added that the situation is compounded by the many challenges that the strategic shift in orientation will present for the German economy, for instance if Russia ceases to be available as energy provider or if the supply chains of the automobile industry need to be reorganised.
But despite the shock and the economic uncertainties it is causing, Germany’s commercial occupier markets and transaction activity continue to be defined by a clear sense of optimism. The principally upbeat sentiment is illustrated by the take-up seen on Berlin’s office market during the closing quarter of last year. “Market demand in Berlin, which COVID-19 had caused to stall for a while, rebounded in October 2021 and has surged ever since,” Rainer Schorr reported. During the three final months of last years, eight large-scale leases of 10,000 square metres or more were signed in the German capital, while the total take-up was 322,600 square metres. It brought the annual absorption up to a total of 870,800 square metres. This implies a year-on-year increase by roughly 17 percent for Berlin’s office rental markets, compared to the take-up total of 2020.
Nationwide, nearly 3.3 million square metres of floor area were let in the “Big 7” cities (Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart) in 2021. This implies an increase by 23.3 percent since 2019. “The robust take-up total explains why investors active in Germany continue to have faith in office real estate despite the much-debated trend toward working from home,” said Rainer Schorr. Over 30 billion euros, eleven percent more than the year before, were invested in this asset class in 2021. Light industrial and logistics real estate investments added up to 10 billion euros, gaining by 34 percent and replacing retail real estate as the third-most-popular asset class (-22 percent). The sale of the real estate holdings of Deutsche Wohnen for 3.8 billion euros, which included healthcare real estate, actually set a new record for the segment of retirement homes and healthcare properties (+11 percent) in 2021.
The sale helped to bring the transaction volume in commercial real estate sales up to a year-end total of 62.1 billion euros in 2021, marking a year-on-year increase by almost five percent and falling just eight percent short of the banner year of 2019. According to CBRE, the ten-year average was topped by 36 percent overall. “The German market for commercial real estate investments is rapidly recovering from the pandemic,” said Rainer Schorr. “That being said, short supply remains the limiting factor especially in the core and core-plus segments, so that the persistently strong investor demand for suitable products goes unmet, and rising prices generally cause a hardening of prime rents.” Insiders therefore assume that market players will become more risk-tolerant and consider value-add or opportunistic investments again.
For the year now underway, Rainer Schorr predicts that international investments will reclaim a bigger share of the market in Germany. “During the past year, the German market was strongly dominated by domestic players, which prompted a drop in the proportion of foreign investments in Germany from 46 down to 39 percent,” as Schorr reported. “But German real estate remains highly attractive for international investors. As the pandemic winds down, there is a growing chance that they will start to win more bidding contests again. In addition to office properties in the metropolises, internationally active investors will focus on the opportunity that logistics and healthcare properties present with their lucrative risk-return profiles. And they will keep focusing on them despite the drastic shift in the global situation.”
