German office deals beat UK as buyers look past economic gloom

London

GERMANY is set to knock the United Kingdom off its perch as Europe's most active property market, as yield-hungry investors bet the region's traditional growth engine will bounce back from its current economic malaise.

Investors poured 49.4 billion euros (S$74.2 billion) into German commercial real estate in the 10 months through October, surpassing the 35.1 billion euros of deals in the UK, according to broker Savills.

That puts Germany on course to best Britain this year for the first time in a decade. The German property market is booming despite its economy narrowly averting a recession in the third quarter.

Buyers desperate for returns in a world of negative interest rates and feeble bond yields are increasingly willing to look past harrowing economic forecasts and snap up buildings with the potential for rising rental income.

"At the moment the demand is strong, but all the surveys predict that German economic growth is slowing," said Gert Waltenbauer, chief executive officer of KGAL GmbH & Co, an asset manager that invests in real estate, infrastructure and aviation.

"We don't have the feeling we should be really worried; we have to take a long-term view."

The UK, led by London, has long been the commercial real estate capital of Europe, attracting the lion's share of international investment. But deals have fallen off amid the political turmoil and uncertainty surrounding Britain's exit from the European Union.

That has helped make Germany, with its relative political stability, economic heft and liquid market, a more attractive bet.

Brexit alone cannot be blamed for Britain falling behind. Marcus Lemli, the chief executive officer of Savills's German operation, said: "In Germany, construction is unable to keep up with demand in almost all major cities, particularly in the offices sector. The amount of capital trying to find a home in property is much larger than the available stock."

A case in point is the recent acquisition of a 49-property portfolio in Germany by Commerz Real for about 2.5 billion euros.

The real estate arm of Commerzbank AG beat out more than half a dozen rivals to complete the deal, which had a yield of about 3 per cent, based on current annual rental income from the properties and the sale price.

That's an extremely low yield for a large German portfolio. Still, the deal made sense because the price per square metre worked out at about 8,000 euros, more than a third less than one would have to fork out for top buildings in Berlin, Frankfurt and Munich, according to Commerz Real CEO Andreas Muschter. BLOOMBERG