Market overview: A huge potential market
The German economy achieved its strongest growth rate for five years in 2016, with a GDP rise of 1.9%. This is expected to continue into 2017, with encouraging business conditions continuing. The forecast of 1.35% is lower than 2016, but strong domestic demand, low interest rates and strong employment should continue to drive growth. There are uncertainties, including Brexit and potential protectionism in the US, which are a concern within two of Germany’s largest trading partners. Consumer sentiment remains strong and resistant to external developments due to salary rises, low interest rates and high employment. Private consumption should remain a driver of business growth, with stable retail turnover, even with higher inflation, from rising energy costs and residential rents.
The political situation will continue to create some uncertainty, with 2016 events (Brexit and Trump’s election) continuing to have an impact. The lack of clarity over refugee policy still divides Europe and has seen increased populism in the region. Polls show that the CDU/CSU alliance and the SPD should gain a large majority, even if the AfD is the third strongest party. Coalition negotiations could extend the uncertainty for investors, but this is unlikely to affect volumes in the German real estate investment market, according to CBRE.
Another important trend has been the low returns in the bond markets in the past few years, relative to property in its core markets. This has generated significant investment appetite from both European and North American investors and saw investment volumes exceed the previous 2008 peak in 2016. As a result, of the US$66bn raised for closed-end real estate funds in the first nine months of 2016, 29% was raised for Europe. In a recent survey of investor intentions Europe is actually expected to exceed North America as a regional investment target over the next 12 months.
Exhibit 8: German real estate investment volume (€bn)
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Exhibit 9: German real estate investment 2016 (€bn)
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Exhibit 8: German real estate investment volume (€bn)
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Exhibit 9: German real estate investment 2016 (€bn)
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German real estate has been seen as a safe haven for property investors globally. Despite the limited supply available, transaction volumes are expected to reach €50bn in 2017, similar to the €52.5bn invested in 2016. Nearly €20bn was invested in Q416 alone. These are the highest volumes since the boom years of 2006-07. Volumes are only limited by the lack of supply of marketable properties, so domestic and international investor demand has been unsatisfied.
The attractions, as well as the strong economic fundamentals, are the positive letting trends and rental growth in the office, retail and logistics markets. International investors remain focused on prime locations, but are increasingly looking at regional and secondary locations. The strong fundamentals in the office sector have seen attention move to lower-value assets and other well-located properties outside the central locations. Investors are also now more willing to invest in developments and forward-funded projects, as prime office yields have fallen so far. This does mean that holding periods have fallen, as investors take advantage of the opportunity to dispose of portfolios that have already met their targeted returns.
A market worth billions of euros
publity focuses on the property used to secure banks’ non-performing loans. The global financial crisis and its aftermath created a huge opportunity in this area. Banks have large portfolios of receivables from loans that have been terminated and property that served as collateral on them. Against this background the pressure to sell can be high and has resulted in banks, state banks and savings banks having to sell a portion of their property, as they reduce their credit exposure. It is all part of the process of the banks restructuring their loan businesses and improving their performance.
Some estimates of the value of the property used as collateral by banks, which could be released, are as high as several hundred billion euros. This has been appreciated by international investors for a while, but remains a potentially lucrative market for publity. The intention is not to acquire property from compulsory auctions, but via direct acquisitions from the refinancing of distressed property, at prices well below market, in order to resell them swiftly and profitably. In the meantime, it can earn a decent return from the rental income prior to disposal. publity only invests if the quality, location and returns from the property are sufficiently attractive. As it is important to have in-depth knowledge of the market, publity only invests in the German property market.