German market in gridlock, says Deka

High interest rates are crushing demand for core real estate assets in Germany, where the investment market has effectively come to a standstill.

The rise in interest rates has hit Germany’s core property market extremely hard, according to Deka Immobilien’s global head of acquisition Victor Stoltenburg. ‘There has virtually been no major core asset sold for the past six months,’ he said on the eve of Expo Real, adding that the investment climate remains very calm. ‘We have yet to see a major core investment asset coming to the market,’ he noted.

Given the lack of investment deals, there are no indications as to where prices are at the moment, said Stoltenburg. ‘The German core market was very expensive, with cap rates around 3%, and the change of interest rates has hit the sector extremely hard. Deals like the campus transaction we did in Amsterdam are just not possible in Germany at the moment and it will be interesting to see what will happen over the next few months.’

Deka, which reached the €50 bn mark in terms of assets under management this year, is a major player in the core investment spectrum. The group specialises in commercial real estate, in particular offices, which represent nearly 70% of its portfolio.

Logistics JV
Logistics is also a growing segment in the firm’s portfolio, with Deka sealing a 50/50 partnership with VGP in early September to hold a €1.1 bn portfolio of five parks with 20 buildings of German semi-industrial and logistics assets developed by VGP. ‘We love logistics and we would like to do more in this sector,’ Stoltenburg commented. ‘Besides, we believe our mindset is very similar to VGP’s. They are very risk adverse and well organized, and the assets they developed are of the highest standards.’

Contrary to most of its competitors, Deka has continued to focus on the commercial property sector over the past few years instead of switching tack to target residential real estate. The reasons for this are two-fold, Stoltenburg explained. On the one hand, investing in residential would require a different mindset and organization, as residential portfolios are very granular and require a more hands-on approach at the property management level.

‘A strategy change of this magnitude would require us to organize the company completely differently, and to adopt a new approach to get into many new markets,’ he said. Secondly, Deka’s focus on prime, core assets with a very low risk profile meant the company was largely protected by the market woes which have ravaged the value of many secondary office properties.

Commented Stoltenburg: ‘We never felt the need to refocus on residential real estate because we have always been happy with how our core business was performing.’

Office revolution
Even so, he admits the office market is undergoing a major revolution which is keeping landlords on their toes. Occupiers are asking for better and greener offices, meaning owners are spending more time and money to bring their properties up to the highest standards. ‘There is a behavioral change among occupiers in the office sector. There is a general flight to quality movement where tenants only want new and shiny offices or they prefer to work at home. Luckily our portfolio consists of core assets in top locations which are still in line with tenants’ requests but we are required to spend an increasing amount of resources to improve the offering of our buildings and make them more appealing to our tenants, notwithstanding the ESG credentials.’

Meanwhile, there is a general wait-and-see attitude on the investment front. Asked whether the group plans to launch new investment funds this year, Stoltenburg suggested the time ‘is not right to start a new fund’, as the market for core investment remains highly dependent on interest rates which are believed to be near peak levels.

‘Our business is made up of retail and institutional funds,’ he noted. ‘On the retail front, everyone is watching the market to see what direction it will take, on the institutional side there are currently more investors going out and less coming in,’ he admitted. ‘However, it looks like there won’t be many more interest rate increases and hopefully we may see investment come back to a more healthy level by mid next year.’


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