German Office Deals Beat U.K. as Buyers Look Past Economic Gloom

(Bloomberg) --

Germany is set to knock the U.K. 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 ($54.4 billion) into German commercial real estate in the 10 months through October, surpassing the 35.1 billion euros of deals in the U.K., according to broker Savills Plc. 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.”

Read more: Germany Dodges Recession With Surprise Third-Quarter Growth

The U.K., 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.

Marcus Lemli, CEO of Savills’s German operation, said Brexit alone can’t be blamed for Britain falling behind. Germany’s economic fundamentals are what lure investors from around the world. And a limited supply of available buildings is making competition for assets increasingly fierce.

“In Germany, construction is unable to keep up with demand in almost all major cities, particularly in the offices sector,” Lemli said. “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%, based on current annual rental income from the properties and the sale price, according to people with knowledge of the matter who asked not to be identified because the sales process is private.

‘Long-term Play’

That’s an extremely low yield for a large German portfolio. Still, the deal made sense because the price per square meter worked out at about 8,000 euros, more than a third less than you’d pay for top buildings in Berlin, Frankfurt and Munich, according to Commerz Real CEO Andreas Muschter.

That suggests Commerz Real has room to raise rents and boost returns for its investors, he said -- as long as demand for office space remains strong. Given Germany’s economic malaise, that’s a bold bet.

“Pricing was aggressive, but it’s a long-term play and we’ll have the next 10 years to manage it to a higher level,” Muschter said in an interview. “That’s why you had so many parties going for it.”

The intense competition for the portfolio -- unsuccessful offers totaled about 20 billion euros -- highlights the strength of demand for a limited supply of deals in Germany, the people said.

Pending Deals

That capital that still needs to be invested, and deals are in the works. In Munich, Norway’s sovereign wealth fund is pushing forward the sale of a 400 million-euro office building, and an office campus owned by UniCredit SpA’s German subsidiary HVB is in the process of being sold for about 1 billion euros, according to people with knowledge of those deals.

“We do not comment on rumors and speculation,” a spokeswoman for HVB said by email. A representative of the Norwegian sovereign wealth fund declined to comment.

“We can discuss pricing forever, but our clients are giving us money and our job is to get the performance with the money they give us,” said Paul Joubert, managing director for European transactions at Invesco Real Estate. “Yields are going to go down for sure. All the institutions have the same problem.”

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