The „Marktbericht Deutschland Wohn- und Geschäftshäuser 2020“ (Residential Investment - Property Market Report Germany 2020) provides private and institutional investors a wide overview of the fundamental data regarding offer and demand of this type of assets in Germany.
Positive market dynamics in the residential asset class
Engel & Völkers Commercial examined the investment property market in 67 German cities as part of the „Wohn- und Geschäftshäuser Marktberichts Deutschland 2020“ (Residential Investment - Property Market Report Germany 2020). Across Germany, the transaction volume in 2018 was worth around EUR 33.6 billion - an increase of 12.4 % over the previous year. Residential investment properties thus continue to be very popular for investors. The number of properties traded increased by 3.7 % to around 39,400 transactions in 2018.
Despite the economic slowdown, the market for investment properties is currently developing positively. Engel &Völkers Commercial forecasts that the transaction volume for residential and commercial properties will reach up to EUR 35.5 billion in 2019. In particular, the persistently low level of interest rates is having a supportive effect on the demand for residential investments.
Commercial investment market remains active
In 2019, trading in commercial real estate has so far reached a similarly high level as in 2018, when the trading volume reached a record level of around EUR 60.3 billion. In 2019 a slightly lower transaction volume of around EUR 59.0 billion is likely to be achieved. As the number of transactions declined, more large-volume properties changed the owner. Consequently, the weakening economy has so far hardly been reflected in commercial investment. Office properties continue to make the largest contribution to total turnover.
Trading in residential portfolios is expected to reach a transaction volume of around EUR 17.0 billion in 2019. A higher volume could only be registered in 2015 and 2018. Revenues are generated primarily from sales in the three-digit million range. Project developments are enjoying increasing popularity, even though existing properties continue to dominate the market.
Price increases especially in the metropolitan regions
An analysis of the supply prices for residential and commercial properties at the level of the 401 German city and district authorities shows that from 2014 to 2019 (first half of the year) the average price level has increased by an average of 44.6%. In the period under review, only four districts recorded a decline in supply prices.
The price increase for apartment buildings is not only concentrated in the economically strong metropolitan areas, but increasingly also in the surrounding area, as many investors are looking for neighbouring alternatives due to the lack of products in A-locations. With an increase of 133.3 % to around EUR 2,040/m² , the highest growth was recorded in the district of Potsdam-Mittelmark, which is located in the surrounding area of Berlin.
Yield compression continues
Due to the persistently low interest rate environment, residential investments remain attractive for investors, even if the yield compression has continued across all city categories. A glance at the now negative interest rate level on the capital market, which is reflected in the current yield, makes this clear. In 2019, residential investments in A-cities recorded an average yield of around 3.5% in good residential locations - in 2018, the figure was still around 3.7%.
The surplus demand in A-locations will also continue due to the lack of investment alternatives, especially since security-oriented investors with a long-term investment horizon will continue to focus on the metropolitan areas. The ongoing compression of yields is based on the fact that the purchase prices for residential and commercial properties have risen disproportionately in relation to rents.
This applies in particular to A-locations. For example, rents offered for existing apartments in Berlin rose by around 34.5 % between 2014 and 2019 (first half of the year) - the highest level of all A-locations. In the same period, however, the German capital recorded an increase in the supply price for investment properties (excluding new construction) of 85.0 %. In view of the rental cap coming into force from 1 January 2020, it remains to be seen whether the rent and purchase price ratio in Berlin will be subject to significant changes.
Investment properties remain in demand
Despite a cooling economy and increasing political regulation in the regional housing markets, no distortions are currently to be feared in the German investment property market, as interest rates will not rise in the foreseeable future and demand for residential and commercial properties will remain high, also due to the lack of investment alternatives.
As a result, prices on the residential investment markets of many large and medium-sized cities are expected to continue to rise for the most part - even if the price increase in A-locations will be more moderate. Finally, the potential for appreciation in many locations will lead to a low investment risk, so that the residential asset class will remain an attractive form of investment.
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