Real Capital Analytics on how German investment has defied covid-19

Strong domestic demand and the government’s swift response to the pandemic supported Germany’s real estate equity market, writes Tom Leahy, senior director for EMEA analytics at Real Capital Analytics.

This article is sponsored by Real Capital Analytics

Tom Leahy
Tom Leahy

All commercial real estate markets have been affected to some degree by covid-19, but Germany has held up much better than most. Investment deal count has fallen, but to a lesser extent than the European average; and total transaction volumes were actually up in Q2, compared with the same quarter in 2019.

Which sectors?

The pattern of activity in Q2 shifted slightly in comparison with the long-term average: a strong quarter for apartment sales meant they accounted for almost 50 percent of all activity when they are normally less than a quarter. This meant office, industrial and retail investment fell relative to normal levels. However, on an absolute basis, investment in all sectors held up well in comparison with the European average.

The dominance of apartments was largely due to one deal: Berlin-focused landlord ADO’s €5 billion acquisition of local apartment owner Adler Real Estate. However, even without this deal, another €2.6 billion of apartment properties traded, which is not far off the recent quarterly average. German residential landlord LEG Immobilien also acquired €780 million of apartments in Q2, and Meyer Bergman, Catella and Swiss Life all made significant acquisitions.

Unemployment has risen since March, but not to the same extent as in the US. This is due to the government protections provided to workers and businesses, which means the ability to pay rent has not yet been compromised. However, as these protections are removed, the jobless total will start to rise and this may impact people’s ability to service rental obligations. For residential investors, this may be a short-term risk relative to what tends be a long-term investment in the sector.

For commercial assets, Real Capital Analytics data show that prime property has continued to trade at prices that do not appear to have softened. For example, the Ericus Contor office building in Hamburg was acquired by Frankfurt-based investor Union Investment from Triuva, a subsidiary of manager Patrizia, for €185 million at a yield of 2.6 percent. This was one of the lowest yielding offices to trade anywhere in Europe in Q2.

Clearly, there are risks surrounding the future of the office as the focus for service sector employees, which may have a huge impact on long-term demand. There are plenty of voices extolling the virtues of the office, often with justification, but the opportunity to cut fixed overheads may be irresistible for some CFOs. A report by research firm Gartner showed 75 percent of CFOs surveyed expected some portion of their workforce to remain remote post-covid.

Electronics giant Siemens has announced that 140,000 of its global employees will now have the right to work up to three days a week at home. This has been echoed by plenty of other businesses in Europe and the US. Although the chance to work remotely and flexibly has found favour with plenty of employees during this period, it does not work for everyone. It may be that employers will use space less intensively than had become the norm rather than downsize their footprints in a wholesale manner.

Why Germany?

Firstly, the size, scale and sophistication of the domestic investor base seems to have played their part. The data show that more than 60 percent of sales this year were between two Germany-headquartered entities, a figure that increased to 70 percent in Q2. The fact that German investors, both listed and institutional, have continued to buy German property contrasts strongly with the situation in the UK, where domestic investment levels have plunged in the face of the crisis. This also reflects the difficulties presented by travel restrictions, which have, thus far, left a substantial shortfall in markets most-dependent on overseas money.

This is not to say that overseas buyers were completely absent in Q2. South Korean investor NH Investment & Securities acquired three industrial units in May, although they were deals that were likely to have been underway before the start of the pandemic. Nevertheless, the crisis does present a risk to inward investment volumes. Overseas investors have spent just less than €120 billion in the last five years on German real estate, €50 billion of which came from non-European-headquartered organisations.

Many of the major US-headquartered firms have large footprints across Europe and this should enable them to continue to do deals in their local markets; the same is not true for much of the Asian capital. And although many partner with local asset managers, the ongoing effects of the pandemic may stymie investment from these players in the short term.

A second advantage is that Germany’s response to covid has been more effective than those of Europe’s other largest economies. The number of cases and deaths per capita were fewer. From a commercial real estate perspective, the lockdown was less severe and shorter than in the UK, for example. For a physical asset, this can make the difference between deals being done or not.

Thirdly, Germany’s strong public finances mean the initial scale of support they can provide companies and individuals eclipses that provided by other governments. Figures from Brussels thinktank the Bruegel Institute show that Germany’s immediate fiscal response to the crisis totalled 13.3 percent of GDP, compared with 8 percent in the UK and 4.4 percent in France. This injection of capital may have provided real estate players with the reassurance required to keep doing deals after the pandemic had struck.

Finally, property is an income play. Without a tenant, or if the current tenant is not paying rent, the value of a building is greatly affected.

In Germany there was a public outcry when Adidas refused to pay its rent, and it recanted and apologised. Anecdotally, it appears UK landlords have had more issues with rent collection and the use of company voluntary arrangements to renegotiate rental agreements, as per Travelodge, has proved particularly controversial.

Notwithstanding the issues around the landlord and tenant relationship, Germany’s structural advantages mean it should continue to have a larger than usual share of European real estate investment while the world continues to adjust to the impact of the pandemic.

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