Rise in demand for operational sectors in German market

Having the first-mover advantage can pay dividends in Germany, delegates heard at Real Asset Media’s Germany Investment briefing, which took place recently at JLL’s London headquarters.

Rebekah Tobias, Managing Director IR & Business Development, Marcol

“We focus on operational sectors and realised that Germany had the most under-supplied market in self-storage”, said Rebekah Tobias, Managing Director Investor Relations & Business Development, Marcol. “We saw an opportunity to bring institutional product to the main cities and to secondary markets in the region as well”.

It was not all plain sailing, she said: “The lack of digitization at public sector level makes it difficult to track the process of planning permits and we had to explain what self-storage was to city officials, an education process that took time”.

On the positive side, good local advisors were on hand, alternative lenders were willing to work with Marcol and there were obsolete retail assets that could be converted to self-storage so there was no knocking down or building from scratch to be done.

“Now we are up to 15 locations and we’ve been able to execute a business plan in a sector that is becoming competitive, as other companies are now trying to enter”, said Tobias. “We like investing at an early stage, providing the necessary growth capital and bridging that gap before institutional money is ready to come in. We’re looking at senior living rental products next”.

Senior living, student housing and all operational living products – which require people management as well as asset management – continue to be in demand across Germany.

“We’ve had three consecutive years of double digit increases in rents in the PBSA sector”, said Rainer Nonnengässer, Senior Managing Director, Head Germany & Netherlands, AMRO Partners. “I wouldn’t be surprised if rents went up by 11-12% this year as well.”

There is some pushback and a lot of debate, as managed living sectors are criticized by some for taking away space from traditional residential, which is in very short supply.

“Residential is a sure bet in Germany, as the issue of growing demand and undersupply must be addressed at some point”, said Jan Eckert, CEO Switzerland & Head of Capital Markets DACH, Jones Lang LaSalle. “It’s a great macro play, but it’s difficult to do anything because of political and regulatory issues”.

Office transactions, which in 2019 were €32 billion, have suffered a sharp decline due to uncertainty over the working from home trend and strong skepticism about the sector in the US.

“We won’t get to those volumes again but by 2026/7 we predict an increase in office transactions in an increasingly selective market”, said Eckert. “Rental increases are halting prime capital values declines, as for the first time tenants have been prepared to pay inflation-linked rental increases of 8-9%, which was not expected.”

The retail sector, long out of favour, is making a bit of a comeback, driven by attractive yields. “Yields are well above financing costs, so retail is ahead of the curve and there are healthy transactions happening, but it is still a small sector”, said Eckert. “Shopping centres are back: several have been traded in the last few months and there are more in the pipeline.”

It is good for the market that niche sectors like data centres and life sciences are back on investors’ radar screens, said Eckert, “but  the residential and office markets must bounce back to make a difference and lead to a real recovery in the German market”.