Steep valuations

High prices turning investors off German real estate, survey says

Baustelle für Wohnprojekt in München, 2015
Stomach-turning highs. Source: DPA

German real estate prices in top cities have risen so high that investors are shunning them, according to a survey by consultancy PwC. “Berlin, Frankfurt, Hamburg and Munich are seen as overpriced by many investors,” PwC said.

The volume of residential and commercial property deals fell to €65 billion ($74 billion) in the period from the fourth quarter of 2017 to the third quarter of 2018, down from €68 billion in the previous period. The study, based on a poll of 885 property experts, said Lisbon, Helsinki and Vienna are viewed as the most promising investment locations in Europe currently.

Rising prices also prompted investors across the continent to shift their focus to smaller towns. Additionally, they’re opting for new categories of property, with student hostels, hotels and residential care homes in focus, the study found.

Too plump of a premium

Research firm Empirica warned that prices in big German cities are exaggerated by up to 25 percent. Rental yields in the office real estate market at the time of purchase point to inflated prices, with big brokers like CBRE, JLL and BNP Paribas Real Estate reporting yields of less than 3 percent for top real estate in Berlin and Munich at the end of the third quarter.

That means a buyer is paying more than 33 times annual rent for such buildings right now. For a long time, initial yields of 4 to 4.5 percent were regarded as the norm. Nevertheless, investor interest in German real estate remains strong and a new record volume of deals is expected in the commercial sector this year.

“€60 billion can’t be ruled out,” said Piotr Bienkowski, head of German business at BNP Paribas Real Estate. Real estate services firm JLL estimates that almost €15 billion worth of residential property changed hands in the first nine months of 2018. The share bought by foreign investors remained stable at a quarter and will likely rise, JLL analyst Konstantin Kortmann said.

Meanwhile, the British real estate market continues to outshine Germany despite forecasts that the UK economy will take a hit from Brexit.

Reiner Reichel has been working for Handelsblatt since 1995 and specializes in real estate, closed-end fund and system models. To contact the authors: reichel@handelsblatt.com 

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