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Bounce back expected in the German investment market

Thomas Veith, Partner, Real Estate, PwC

It has been a sluggish start to the year for the German investment market, but the expectation is of a strong bounce back as soon as the economy can open up again, delegates heard at Real Asset Media’s Germany Investment Briefing, which was held online yesterday.

“Investment volumes in January and February were €5.5 billion, a 56.6% decline on the high levels of the same months in 2020 before Covid-19 hit,” said Thomas Veith, Partner, Real Estate, PricewaterhouseCoopers.

The figure increases to €7.8 billion taking into account deals that are still pending. The rate of decline seems to have accelerated, as 2020 volumes were €65.4 billion, a 19.4% fall compared to the previous year.

Domestic investors are still dominant, accounting for 58% of deals so far this year compared to 42% for foreign capital. “Cross-border investments recorded a stronger decline than domestic investors this year,” said Veith. “But we expect an increase in international capital coming to Germany as soon as borders open again.”

That is the overall picture, but there are big variations between asset classes. In a context of reduced risk appetite because of the pandemic, residential has attracted the most investments.

“Residential and senior housing are much more resilient than other asset classes, which is one of the reasons why portfolio allocations are shifting towards resi,” he said.

Offices are in second place

The office sector is second on the German investment volumes list, followed by industrial, retail, senior housing and hotels. Another sector that is attracting a lot of interest is data centres, said Veith: “They used to be a niche product but now they are firmly in focus, thanks to the working from home trend brought on by the pandemic.”

It is still a small and very fragmented market in Europe, that lacks the big data centre platforms that exist in the US and Asia.

“So far they are mainly owned by the operating companies and there are very low levels of knowledge about the sector and of its special requirements,” Veith explained.

“However, one in three real estate investors wants to deploy capital in the sector in the next two years and 60% plan direct investments.”

Yield expectations are between 4% and 6%.One thing that has not changed during the pandemic is that Germany’s capital continues to attract the most investments.

According to PwC rankings, the Berlin-Brandenburg area is in first place, followed by Rhine-Ruhr in second and Frankfurt/Rhine-Main in third, then Hamburg and Stuttgart.