German commercial real estate – sought after, but expensive

With bond yields close to zero, investors are hardly likely to avoid the real estate market. Consequently, demand for commercial real estate is consistently high while supply is tight. As a result, rental yields have fallen sharply. It is now virtually impossible for investors to get more than 3% for prime office and retail space in Munich and Berlin. However, hotels, logistics properties and multi-family dwellings have also become much more expensive.

Falling yields are by no means weakening the high inflow of funds, though. Last year saw the highest level of investment in commercial real estate to date, at EUR 62bn. EUR 15bn was also invested in residential real estate portfolios. However, there are noticeable shifts between asset classes: in the wake of booming online shopping, there has been a decline in demand for retail space in high street locations and in interest for retail real estate. However, this does not apply to the convenience shopping segment, which is regarded as being largely resilient against online shopping. In contrast, the logistics property market is seeing unprecedented demand on the back of the success of e-commerce. There is also a lot of interest in hotels – not least because of a flourishing travel industry. The office market, which has long been the leading asset class is benefiting from a sharp increase in office employment. Meanwhile, investment in rental property is being bolstered by a tight housing supply in many cities and hence rising rents and a low vacancy-rate risk.

However, risks have also increased. High prices for commercial real estate and multi-family dwellings make the risk of market corrections more likely. Potential triggers would be a noticeable economic cooling or rising interest rates. In addition, high demand could lead to a further decline in already low initial rental yields, increasing the risk of overvaluation. Moreover, the potential for increases in rent is smaller and economic prospects have deteriorated. There is also the threat of tighter regulation in the rental sector and a greater risk of making mistakes when investing in commercial real estate. Nevertheless, commercial real estate and multi-family dwellings can be a solid investment, although they are no longer a sure-fire investment.

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