Investment market for residential portfolios in Germany: Strong fourth quarter boosts transaction volume to €13.9 billion

NAI apollo group publishes 2016 annual report on the investment market for residential portfolios in Germany:

• Total value of transactions reaches €13.9 billion and represents a decline compared to the record year of 2015 – but exceeds the 2014 figure
• Surprisingly strong fourth quarter delivers several large deals and contributes €6.0 billion to the full-year investment volume
• Open-ended funds and special funds form the strongest group of buyers
• German investors are still the most active on the market, but international players are of growing importance
• Project development sales, price increases and smaller portfolio sizes drive up average purchase price

Frankfurt am Main, 06.01.2017 – According to an analysis by owner-managed real estate consultancy NAI apollo, the investment market for residential portfolios in Germany closed 2016 with a strong fourth quarter when sales reached about €6.0 billion. "The final quarter has thus contributed almost as much to the total investment volume as the first three quarters combined, which generated total sales of €7.9 billion," noted Dr. Konrad Kanzler, Head of Research at the NAI apollo group. In the year as a whole, the total value of transactions amounted to €13.9 billion. Although this was 41.9 % below the previous year's level (€23.9 billion), it still exceeded the 2014 figure (€13.1 billion).

The number of transacted residential units declined by around 59.5 % to 143,340 units in 2016 compared to 354,000 units in 2015. At the same time, the number of transactions increased 5.6 % year-on-year to about 374 (2015: 354). This was due to a decline in the number of large deals, alongside a simultaneous rise in smaller portfolio deals. In 2016, fewer transactions (20) above €100 million were completed compared to 2015 (30).

Sub-€100 million portfolio sales account for lion's share of volume

The "€500 million-plus" size category contributed €2.8 billion towards the investment volume and accounted for a lower share of 20.4 % compared to the previous year (2015: €13.2 billion and 55.2 %). "Sub-€100 million" transactions, meanwhile, were responsible for a much larger share (57.0 %). The transactions volume in this segment increased by 31.4 % to €7.9 billion (2015: €6.0 billion).

"Open-ended funds/special funds" retained their status as the largest group of buyers at the end of the year. "Strong cash flow and high liquidity encouraged these investors to increase their purchase volume by 75.1 % from €2.0 billion in the previous year to about €3.5 billion, equating to a market share of 25.2 %," said Stefan Mergen, Managing Partner at NAI apollo valuation & research GmbH. "Listed property companies/REITs" were ranked in second place. This group accounted for a combined €3.1 billion (a 22.4 % market share), which was 79.8 % below the corresponding level of the previous year (2015: €15.4 billion / 64.4 %) due to the absence of large deals.

"From a sales perspective, project developers had already emerged as strong players during the course of the year. Because property development deals had a much greater impact on the market, sales amounted to €3.7 billion by the end of the year and accounted for a 26.9 % share of total transactions," explained Dr. Konrad Kanzler. This compares to a €2.1 billion sales volume or an 8.6 % share in the previous year. Listed property companies/REITs were ranked in first place in 2015 but dropped back to second position behind project developers and contractors, with sales totalling about €3.1 billion (22.6 %).

Foreign investors grow in importance

"German investors remained the most active buyers this year with a 70.0 % share and €9.7 billion of turnover. However, they lost market share compared to the previous year. In contrast, foreign investors significantly increased their purchase volume from €3.0 billion to €4.2 billion during the same period, and also grew their share of turnover from 12.6 % to 30.0 %," said Stefan Mergen.

In terms of location, Berlin remained the top investment destination among the large German cities (2015: 26.2 %) and accounted for 15.7 % of all transactions, although the number of transactions declined slightly. However, the growing shortage of products in major cities prompted a further increase in investments in secondary and tertiary locations.

Surprisingly high number of large transactions in the fourth quarter

"Although large deals and company takeovers were underrepresented compared to the previous year, this market segment picked up significantly in the fourth quarter. In 2016, half of the 20 major transactions above €100 million took place within the final three months," said Dr. Konrad Kanzler.

These transactions included the acquisition of Conwert by Vonovia that represented the largest deal of the year and comprised 20,000 residential units, as well as the purchase by Morgan Stanley on behalf of Chinese state fund China Investment Corporation (CIC) of the BGP portfolio from BGP Holding with 17,000 residential and commercial units for around €1.2 billion. Patrizia also acquired a residential portfolio from several Bouwfonds funds that consisted of 3,500 residential units located mainly in North Rhine-Westphalia, Lower Saxony and Bavaria."

Strong rise in purchases of property developments adds to price inflation

The average price of a residential unit stood at around €97,000 in 2016 based on all transactions. Thus the sales price has risen sharply by 42.3 % compared to the previous year (2015: €68,200 per unit), which is due to three decisive factors. At the top of the list is the increase in the sale of new project developments, which command a higher price per square metre. The sales volume in this market segment reached around €3.1 billion, accounting for a share of 22.5 % and representing an increase of 41.2 % compared to the previous year (2015: €2.2 billion / 9.2 %). Stefan Mergen: "As well as the increased investments in new developments, prices of existing properties have also risen, especially in the major conurbations. The third factor affecting prices was the decline in large deals, which generally deliver a lower average price." Instead, small portfolios tended to dominate the market during the course of the year.

The number of large portfolio sales and company acquisitions is expected to be even lower in 2017, primarily because of the absence of suitable products following deals such as the acquisition of Conwert by Vonovia that was completed before the end of 2016. This will be counterbalanced by a rising number of project development and portfolio sales in the sub-€100 million category. According to NAI apollo, a transaction volume of more than €10 billion is therefore a realistic prospect for 2017. Certain events, such as if German residential property giants Vonovia and Deutsche Wohnen manage to complete their merger after all, would raise this forecast. Although that deal recently collapsed, Vonovia has not ruled out a fresh bid.