Rising office rents and a healthy yield gap are generating optimism and driving investors’ interest in the German market, Thomas Veith, Partner Real Estate, PricewaterhouseCoopers, told Real Asset Media’s Germany Investment Briefing, which was held in London on Tuesday.
‘At the end of last year there was a lot of gloom on prospects for 2019 and a fear of interest rate rises,’ he said. ‘But this year the gloom has lifted and sentiment is a lot more positive. There is no risk of increasing cap rates, so it still makes sense to invest’.
After ‘three or four years of talking about a downturn’, the mood in Germany is more optimistic. It helps that the yield gap between prime office yields and ten-year government bonds is a very healthy 3.6%, compared to 1.7% in midtown Manhattan.
No wonder American capital poured into German offices. The US was first in line with €3.6 bn invested last year, followed by the UK with €1.6 bn. Despite the growth in interest for alternative sectors, offices are still the asset class that attracts the most capital. Last year €12.9 bn were invested in offices, almost as much as in the logistics, residential and retail sectors combined.
Foreign investors were particularly active, as 50% of all cross-border investments were in offices. The reason for their interest is clear, Veith said: ‘Office rents have been increasing significantly, there is a lot of demand and in places like Hamburg or Munich there is no space left to build, all you can do is redevelop old buildings’.
The US was also the top investor in Logistics, with a €1.4 bn share of the total €4.2 bn attracted by the sector, and in Residential, accounting for €1.2 bn of the total €4.4 bn. Austrian investors focused on the Retail sector, accounting for almost half (€2 bn) of the €4.4 bn total.
‘The US is one of the main capital sources for investments in German commercial real estate, but Switzerland has also been a growing presence, mainly because it is getting harder for them to get the returns they want at home’, he said. ‘Asian interest is also growing, especially from Singapore and South Korea, but it is under-represented in the figures because often they are not direct investments’.
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