The boom still continues
Commercial and residential property in Germany changed hands for approximately €77.3bn over the last twelve months (Table 1). Consequently, the twelve-month rolling volume has exceeded €75bn for the eleventh month in succession, representing an unprecedented boom in the current cycle (Graph 1). The transaction volume is expected to show a modest decline in 2019, however, with yield compression largely coming to a halt (Graph 3). In addition, pressure to invest is likely to relent somewhat for many multi-asset investors, inter alia due to corrections in the equity markets. Furthermore, economic risks have increased in recent times, which is likely to be reflected by more cautious activity among investors. With the US Federal Reserve taking a temporary break from interest rate hikes and the ECB postponing its planned reversal in interest rate policy for the time being, at least there is no imminent change in the interest rate environment in sight.
The residential property investment market produced by far its strongest opening month of the last ten years in January 2019, with the disposal of a minority share in Deutsche Wohnen by Vonovia (Table 2) making a significant contribution to the investment volume. Given the fact that many investors seeking the most defensive possible investments will be focusing on German residential property more than ever before, we expect demand in the sector to remain high throughout 2019. With new-build activity still insufficient, there is currently much to suggest that landlords can expect rental growth in many metropolitan areas over the coming years.
Stuttgart and Frankfurt particularly stood out over the last twelve months with significantly stronger investment activity year-on-year (Graph 2). In both cities, office properties have been the driver of this trend. This corresponds with the overall trend for Germany, with the office transaction volume increasing 17% year-on-year. Conversely, investment volume in logistics and industrial property as well as retail property showed a decline (Graph 1). Office properties are likely to remain high on investors’ agendas in 2019. Record-low vacancies and continued rental growth, albeit slower, promise stable income, which precisely matches the search profile of many investors.
The nine-month downtrend in the number of transactions continued in January, with the last twelve months producing around 6% fewer transactions compared with a year earlier. With yield compression coming to an end, we expect the declining number of transactions to be compensated by higher volume to an increasingly lesser extent, which is also likely to contribute to a decline in transaction volume this year.