New opportunities in German real estate market
For institutional investors, Germany is the most important real estate market outside Switzerland. Promising opportunities abound thanks to a strong, regionally diversified economy – particularly amid the current market environment.
Investment in the real estate market is picking up again
After two years in decline, investment activity in Europe's real estate sector showed a return to robust growth in the second quarter of 2021. In fact, transaction volumes at the end of the quarter were up 20% on a year-on-year basis.
Although the COVID-19 pandemic caused the market to slow in 2020, the highest ever volume of transactions for a single month was recorded in December of the same year. This is illustrated by the latest report from Real Capital Analytics – the global provider of real estate data and analysis. Real estate transactions totaling CHF 33.3 billion were executed in Germany during the first six months of 2021 – equivalent to approximately 15 times the transaction volume for Switzerland.
Positive projections expected for Germany
The third wave of the pandemic sparked a 1.7% decline in German gross domestic product (GDP) in Q1 2021. GDP growth nevertheless recovered in the second quarter as a result of the significant easing of COVID-19 restrictions. Credit Suisse economists now expect year-on-year economic growth of 3.4% for 2021 as a whole, with the German economy likely to continue its recovery in 2022. Indeed the experts at Credit Suisse expect GDP to expand by 4.5%.
This growth is likely to be helped by the new monetary policy strategy adopted by the European Central Bank (ECB). In the years ahead, the ECB will now aim for annual consumer price inflation of 2% on a medium-term basis. This will mean allowing monetary policy to overshoot the inflation target for a certain period of time. Credit Suisse economists think the change of strategy will enable the ECB to continue pursuing its accommodative policy. Interest rates in the euro zone – and therefore Germany, too – are therefore likely to remain low for some time to come.
German real estate market offers favorable overall conditions
Investors looking for promising investment opportunities amid the positive economic situation in Germany need look no further than the real estate market. A high level of transparency and liquidity, coupled with scarce supply and low levels of construction activity, makes the country an attractive target market for real estate investments right now. The market shows few symptoms of a slowdown, even after the pandemic, with the logistics and housing segments exhibiting the strongest trends of all.
In industrial investments too, the German real estate market is a popular destination for institutional investors. EUR 3.7 billion was invested in Germany in the first half of 2021 alone.
In addition, Germany's comprehensive real estate legislation offers many advantages for institutional investors and gives them the highest possible degree of legal certainty. Although foreign investors have a complicated tax framework to contend with, it nevertheless gives them an opportunity to optimize their tax structure. In-depth research into Germany's legal and tax legislation is therefore advisable.
Diversifying portfolios by investing in Germany
Another advantage of real estate investments in Germany lies in the geographical diversification potential. The German real estate market is much bigger than that of Switzerland, with markets concentrated in a comparatively large number of cities. Moreover, the market is much more decentralized compared with other major European countries. Due to the country's federal structure, the key real estate markets are distributed across several metropolitan regions – the most important being Berlin, Hamburg, Munich, Frankfurt am Main, Cologne, Dusseldorf, and Stuttgart.
The opportunity to diversify real estate investments is also evidenced by the different stages of development of the individual real estate markets. In Germany, there are more than 30 real estate markets with a population greater than that of Geneva. In addition to the much higher number of major real estate markets, the individual cities also have a very different sector mix – in Hamburg, for example, logistics and the port are very important, while in Stuttgart the automotive industry accounts for a high proportion of employment.
Growth opportunities in logistics and office real estate
Two key trends are fueling higher demand for logistics real estate: The growing importance of e-commerce and the way in which the division of labor continues to develop. In online and multi-channel retailing, for example, a portion of the demand for retail space is switching to logistics real estate. Amid global lockdowns, this already rapidly growing segment has significantly increased in importance in recent months.
In addition to retailing, manufacturing is another important driver of demand for storage and logistics space. The growing division of labor within the production process is resulting in the need to ship an ever-increasing number of semi-finished goods and raw materials. Finally, we are now seeing a return to growth in warehousing within the industrial sector; this follows the experience of recent months and is aimed at averting supply bottlenecks. Going forward, Credit Suisse experts think logistics real estate will continue to grow at a faster rate than other segments of the real estate market. Moreover, persistently high demand from tenants is expected to exceed the available supply.
On the office side, the major German real estate markets are benefiting from extremely low vacancy rates. These are due to the very limited expansion of available floor space since 2010. The vacancy rate in Berlin and Munich, for example, was 3.6% at the end of Q2 2021; in Hamburg the figure was 3.8%, while in Stuttgart it was just 2.7%. Vacancies have risen slightly compared with 2019, but remain at extremely low levels by international standards. Rents have remained at similar levels throughout the COVID-19-pandemic.
*The main risks of real estate investments include limited liquidity in the real estate market, changes in mortgage interest rates, the subjective valuation of real estate, inherent risks associated with the construction of buildings, and environmental risks (e.g., soil contamination).
The issuer and manager of the CSA products is Credit Suisse Investment Foundation, Zurich. The custodian bank is Credit Suisse (Switzerland) AG, Zurich. The articles of association, regulations and investment guidelines, as well as the latest annual report and factsheets, can be obtained free of charge from Credit Suisse Investment Foundation. Only tax-exempt pension funds domiciled in Switzerland are admitted as direct investors.