Why Germany’s cities are catching the eye of foreign investors
Four of Germany’s big cities are proving to be increasingly popular for international real estate investment.
Germany’s major cities are attracting increasing volumes of international investment, with more high-profile developments changing hands in 2018.
Ten years ago, Munich was Germany’s standout real estate investment destination and it continues to attract a steady flow of capital averaging around €4.4 billion (US$5 billion) since 2016. Now it’s been joined by Berlin, Frankfurt and Hamburg, marking the first time that four German cities have come in the top 30 destinations for direct commercial real estate investment by volume.
Their growing stature helped to take overall investment in German commercial real estate to €79 billion (US$89.7 billion), according to JLL data.
The pull of large regeneration schemes, increased demand from occupiers – especially for office space –and the country’s reputation as a safe haven in a time of uncertainty in Europe are an appealing mix for investors, says JLL Germany chief executive, Timo Tschammler.
Interest from institutional investors is high, with Asian investors such as Singapore’s Capitaland and Taiwan’s Fubon Life both investing in Frankfurt offices last year, the latter making its debut in Germany.
Major projects are helping raise German cities’ profile globally, says Tschammler, who points to Berlin’s Europacity site and Hamburg’s ongoing 20-year development, HafenCity.
“Historically, it’s been the missing link for investors and occupiers seeking quality space in central locations.”
Set between Hamburg’s central business district and the Speicherstadt docks, HafenCity is a mixture of office and residential space that’s continuing to attract both domestic and international companies and organizations. French real estate company Unibail-Rodamco-Westfield now has plans to create a shopping center on the site.
The site’s mix of uses, says Helge Scheunemann, head of research for JLL Germany, goes hand-in-hand with the diverse occupier base of Hamburg and is a favourite model with investors. Last year saw a major mixed-use scheme, the Hanseviertel, change hands for €400 million ($454.4 million), amid rising interest from international investors. Total investment in the city’s commercial and residential property topped EUR €7.2 billion ($8.1 billion) last year, its highest since 2016 and double the previous year.
“Hamburg offers a strong, diverse occupier base of sectors, ranging from export-based companies to consulting, to private banking,” he says. “Investors will allocate capital to cities where there’s a range of product. Not being dependent on one sector is an advantage.”
The variety of occupiers in Hamburg is in contrast to other German cities where different sectors tend to congregate, says Tschammler.
“Across the country, it’s a broad choice – ranging from Frankfurt’s financial sector to Berlin’s political and media sectors and its growing tech start-up scene.”
Raising the Capital
Having spent years as a non-capital, Berlin has long-suffered from the joke that its real estate market was solely centered around the gargantuan Potsdamer Platz and neighbouring Sony Center, which in recent years have been owned by South Korean, Canadian and US capital.
But more recently, the city’s growth has prompted talk domestically that the German capital is in new, unchartered territory and its rapid growth is unsustainable.
“For investors who typically have London and Paris on their books, Berlin still represents relative value as a major European capital,” says Tschammler.
Investment in Berlin totalled EUR € 10.8 billion (US$12.2 billion) last year, with a mix of institutional capital moving in on the capital. Singapore’s sovereign wealth fund GIC last year partnered with local management firm Caleus Capital Investors to invest in offices across the city, following the launch of a €250 million ($284 million) Berlin tech office joint venture between Dutch pensions group PGGM and Rockspring Property Investment Managers.
With the city’s vacancy low and rents rising to new highs of around 34 euros per square meter, Scheunemann says Berlin’s office market has grown from an historic low.
“It was once the city with high oversupply, but it’s completely changed into a lively leasing market – that’s thanks to Berlin’s strong net population increase and office sector employment growth,” he says. "Other German cities are also enjoying similar dynamics, creating a strong economic base that international investors find appealing.”
In Frankfurt, for example, over half of the EUR €11.6 billion (US$ 13 billion) invested in the city’s real estate in 2018 came from overseas buyers, with volumes boosted by deals such as the €670 million purchase of the Trianon skyscraper by a South Korean consortium of IGIS Asset Management and Hana Financial Investment.
The popularity of German real estate is, Tschammler points out, still largely thanks to the country’s macro-economic fundamentals.
“It’s a country as much as a city story,” he says. “But new projects are undoubtedly improving the global appeal of our top cities and keeping them on the radar of international investors.”