The country’s key fundamentals will remain in the long term, say experts. Nicol Dynes reports.
Germany’s strong fundamentals and safe haven status remain unrivalled in Europe, so now is the time to find opportunities in the German market, before the expected bounce back, say experts.
“Soon things will be normal again so act now and grab the opportunities, because they will be gone in six months’ time,” says Christian Zilly, managing partner of Waterway Investments. “Don’t underestimate the speed of the return to normality. We bounced back from the GFC and this time it will be the same.”
The speed of the recovery will depend on how fast the vaccine rollout will be. Progress so far has been slower than expected. “This will be an interesting year, as countries with better vaccination programmes will open up their markets earlier and will recover faster,” suggests Philipp Ellebracht, group head of sales at Corestate Capital Group. “But the German market has the liquidity and size that others don’t have and, from an economic growth point of view, 2021 should be a good year.”
More on German markets
“The economy will have a boost this year,” adds Zilly. “The industrial sector is doing well and Asian countries have recovered strongly, which has been positive for German exporters. The recovery is underway and there’ll be a boom in consumer spending: consumers have accumulated €20 billion in savings and there’s a lot of pent-up demand.”
Two question marks hang over the recovery: the vaccine rollout and the political situation. It’s a crucial year for Germany, with a general election in September and local elections in the run-up. “The future is less clear now compared to six months ago, because with Covid things move very fast and the number of people vaccinated has become a real issue,” says Zilly. “We, like everyone in business, hope for a strong coalition.”
‘The recovery is underway and there’ll be a boom in consumer spending: consumers have accumulated €20 billion in savings and there’s a lot of pent-up demand.’
Christian Zilly, Waterway Investments
A lurch to the extreme right or to the extreme left would unsettle the political stability Germany has enjoyed and this in turn would impact business confidence and the economic recovery.
But such an outcome is seen as unlikely. “I’m optimistic. I’m excited about the return to a new normal,” says Holger Schmalfuß, senior originator, international investors, at Berlin Hyp.
The residential sector attracted the most investments in Germany last year and it is likely to repeat the positive performance this year. “The investment market, especially for core residential, has kicked back into life,” says Schmalfuß. “The financing market has been surprisingly stable. Banks are flexible and have adapted as needed.”
Both investors and lenders have shown a strong belief in residential and a willingness to look beyond short-term challenges. “In Germany most investors take the long view and can see the upside ahead,” says Christian Scheuerl, partner at developer and consultant Antoni Real Asset Holding. “Student housing, for example, has taken a hit in the last year because universities closed down and investors can see that cashflow and occupancy rates are not what they expected, but they know that’s going to change. There’s no prospect of fire sales.”
Demand for education
A crisis always leads to more demand for education as a route to finding a better job, says Ellebracht: “That’s why mid-term to long-term we expect demand for student housing to increase. Another positive factor is that it can be turned into serviced apartments or co-living spaces, providing more stability and cashflow during a crisis.”
Student housing and senior living have built up a track record in Germany, but the situation is different for co-living, for which the jury is still out, says Scheuerl: “Many operators and investors believe co-living will be a strong trend, but there is some concern because there’s not enough product in the market and not enough transactions to be able to divest if necessary.”
PwC’s seven scenarios for the office of the future in Germany
- Flexible working will account for a much larger proportion of working hours across all industries than before the pandemic;
- Companies will need 20-30% less office space in the future;
- The office is becoming a ‘business club’, a collaborative space for working;
- In German private homes, demand for space and rooms for home office work will increase, so larger apartments will be in demand;
- Employees will put up with longer commutes to work if they have to make them less frequently;
- Employees expect support for flexible working, which means that employers must provide appropriate training, regulations, and the necessary office and IT infrastructure;
- ESG criteria will play a bigger role in offices, from using sustainable materials to promoting the wellbeing of employees.
Volume and liquidity give investors confidence, but at present the market leader in this segment has 500 beds, he points out: “It’s still an asset class in a start-up phase, with great ideas and great potential but it’s too early to say.”
Institutional investors are split, with half avoiding operational resi altogether and the other half eager to invest because they see the demographics and the likely increase in demand.
“International capital, even Asian institutions, are looking at creating big platforms and they are comfortable with it, provided they find an operator with a good track record,” says Thomas Veith, partner, real estate, at PricewaterhouseCoopers Germany.
‘Rent controls are here to stay because they are too popular with the electorate. It’s a real issue for the resi sector.’
Holger Schmalfuß, Berlin Hyp
In this election year politics could interfere with the more traditional resi market, especially on the sensitive subject of rent controls, with more cities following Berlin’s example in imposing them. “Rent controls are here to stay because they are too popular with the electorate,” says Schmalfuß. “It’s a real issue for the resi sector.”
Investors are concerned and will be looking closely at the outcome of local and national elections this year. “Every single investor asks us about rent controls,” says Veith. “With the wrong coalition in power resi would be under discussion again.”
No office sector crisis
Last year, despite Covid-19 and the lockdown, the office sector attracted investment volumes second only to residential. “The office is definitely not dead,” says Veith. “Vacancy rates are lower in Germany than in other countries and we’ve had strong rent increases, so if rents stabilise now at these high levels it won’t be a disaster.”
The consensus seems to be that people are keen to go back to the office, but not five days a week, so employers must be flexible and provide solutions.
“If the economy cools, the demand for offices will decline but it’s definitely premature to talk about the death of the office,” says Schmalfuß. “During the pandemic remote working has been tried and tested, so there’s a shift in what people need to do in the office, which will become more of a collaboration space.”
‘The German market has the liquidity and size that others don’t have. From an economic growth point of view, 2021 should be a good year.’
Philipp Ellebracht, Corestate Capital Group
New concepts will emerge, such as bigger spaces, smaller offices or more co-working. “The office is recognised as a key component in promoting creativity in an organisation,” says Ellebracht. “Formats will be adjusted, but the demand for amenities is sure to grow.”
A lot of work will have to be done on renovating and upgrading existing buildings. “Germany has a lot of 1960s and 1970s buildings that need to be brought up to scratch and be ESG-compliant, and that’s an opportunity in itself,” says Veith.
The ESG focus will drive this, adds Schmalfuß: “The transformation of existing assets will be
a big trend. Germany will follow the example of the Netherlands, where low-quality buildings cannot be let.”
German investment market expected to rebound
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.
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, says Thomas Veith, partner, real estate, at PricewaterhouseCoopers. The figure increases to €7.8 billion taking into account deals that are still pending.
The rate of decline seems to have increased, as 2020 volumes were €65.4 billion, a 19.4% fall compared to 2019. Domestic investors are still dominant, accounting for 58% of deals so far this year compared to 42% for foreign capital.
‘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.’
Thomas Veith, PwC
“Cross-border investments recorded a stronger decline than domestic investors this year,” adds 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,” says Veith.
Data centre interest
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, says 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,” says Veith. “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 hasn’t changed during the pandemic is that Germany’s capital continues to attract the most investments. According to PwC, the Berlin-Brandenburg area is in first place, followed by Rhine-Ruhr in second and Frankfurt/Rhine-Main in third, then Hamburg and Stuttgart.