Yields hit by liquidity
Following the noticeable decline in the transaction volume in the first quarter
(see: German Investment Market in Minutes April 2019), there was no reversal of the trend in the German commercial and residential property investment markets in April. Properties changed hands for a total of approximately €4.4bn last month (Table 1). The rolling twelve-month volume stood at €73.8bn, declining by 1.8% compared with the previous month (Graph 1).
In terms of locations, investors continue to focus on the top seven cities to an above-average extent. While the overall market, as well as B-cities C-cities and D-cities, registered declining transaction volumes on a short-term basis (i.e. change in volume over the last twelve months compared with the previous year), volumes rose in five of the top seven cities (Graph 2). These seven cities have accounted for around 54% of the overall transaction volume over the last twelve months, which is the highest percentage since August 2016. While yields in these cities are at historic lows (Graph 3), many investors expect rents to continue to rise (see also: Market in Minutes Top-6 Office Markets) and are obviously attaching a very high level of importance to market liquidity.
Although office properties in B-cities, C-cities and D-cities offer higher yields (average 5.7%) along with often relatively low volatility in the occupier markets (see also: European Investment Market in Minutes), the dominance of the top seven cities in the office investment market is particularly high. These seven cities have accounted for approximately 76% of the transaction volume over the last twelve months, although the total office stock in the B-cities, C-cities and D-cities is around a third larger. It is notable that the two dominant purchaser groups in the office property investment market, namely open-ended special funds and asset managers, are focusing particularly strongly on the major markets. Approximately 80% of the capital invested by asset managers in office property over the last twelve months has been invested in the top seven cities. The corresponding figure for open-ended special funds stands at 72%. The financial backers of these purchaser groups are often relatively risk-averse investors with long-term investment horizons who are redeploying capital from the bond market to the real estate market. The same is true of insurance companies and pension funds, with the top seven cities accounting for 91% of their investment volume in the office market. The origin of the capital flows might explain why higher liquidity is of correspondingly high importance. In the event that capital needs to be shifted back from the real estate market to the bond market, a property outside of the top seven cities could potentially find fewer prospective purchasers than a comparable property in one of the core markets. In view of the very good fundamental data is some of these cities, however, investing against this trend could well be a promising strategy (see also: Savills blog - Where to invest over the next six months?).