Yield for Experts at Most

Yield for Experts at Most

Office Retail Residential
02.03.2021 Author/s: Sven Carstensen and Anna Wolfgarten
Return on investment or not? If every step is right, quite achievable.
Return on investment or not? If every step is right, quite achievable.

In most asset classes, it has become even more challenging to achieve secure returns, according to the current "5% Study". Even in traditionally frequently traded, stable asset classes such as office properties in A-cities, the risk and return spreads have widened enormously. We presented the most important results for the residential, office and retail segments in a webinar before the study was published in April.

For the sixth time, with the kind support of BEITEN BURKHARDT Rechtsanwaltsgesellschaft, we have analysed the yield potential of the German real estate markets for the "5% Study - Where Investing Still Pays". We have already anticipated the most important result in the headline: Achieving returns in some asset classes is very demanding and something for well-informed, professional investors.

Offices in prime locations still generate returns only with expertise

The risk and return spreads for office properties in A-cities have widened considerably: In 2019, a return (IRR)* of between 0.9 and 3.3 per cent could still be achieved in the core area - i.e. for stably let properties in sustainably good locations. In 2020, the range has fallen to 0.0 to 2.8 per cent.

The most significant decline is in A-cities, while B-cities have remained fairly constant. Although risks are increasing, purchase prices in the core area are still high. Finding and managing suitable properties requires a great deal of local knowledge and expertise.

Home office will not lead to a swan song for classic offices. But many investors are uncertain about how home office will affect the future demand for office space. It is foreseeable that companies will allow their employees to work from home more in the future than before the Corona crisis. However, a possible reduction in space will be offset by the need for more distance in the office. The slump in office employment that many feared has also failed to materialise so far. Although the growth of office employees is losing momentum, bulwiengesa expects a plus of 1.0 percent p.a. as early as 2021.

From a legal point of view, home office or rather mobile working is not yet mature enough to seriously replace office work. Legislative measures have caused question marks in the real estate industry not only since the beginning of the pandemic. The so-called right to a home office does not even cover the real issues of the workplace or data security.

Shopping centres: Risks widen yield spread

The investment market for shopping centres is idle. Only a few are currently being traded, the demand situation is difficult. Buyers often have to factor in high investments for the conversion of (partial) spaces. Investors are uncertain to what extent future rent adjustments will fail or shops will close. Because these risks are priced in, the yield spread has widened considerably, from 3.2 to 3.9 per cent in 2019 to 2.5 to 4.3 per cent in 2020 for core properties. Food-oriented retail space, which is less dependent on the economy and e-commerce, continues to be a sought-after investment. Retail parks with a high proportion of periodic needs will benefit from this. These remain in demand. The yield range is 2.4 to 3.3 percent per annum. The comparatively low margin proves the security of these investments.

Note: The matrix shows the correlation between the probable internal rate of return of a real estate investment and the liquidity of the respective market.

Securing value in residential real estate is becoming increasingly demanding

Flats are a safe bank. This is where there has been the least change compared to the previous year. According to the bulwiengesa forecast, purchase prices will show lower growth up to 2024 than in previous years, as projects in expensive city locations are becoming fewer and fewer and absolute prices have already reached a high level. Despite an uncertain economic environment with more short-time work and higher unemployment, housing demand is good. Supply remains low in many cities, and new properties are scarce and expensive. The achievable yields remain at a low level, between 1.5 and 2.5 percent for residential properties in A-cities. The potential for increases is primarily limited by legal regulation. With a base value of 1.94 percent, value protection for residential properties is still given, but is becoming increasingly demanding. At the same time, the market risks remain very manageable - housing continues to be a very safe asset class.  

* IRR = Internal Rate of Return. This ratio is used to estimate the profitability of potential investments. A holding period of ten years is assumed.


Note: The full study will be published in April. If you would like to stay up to date, simply sign up for our newsletter.

Contact persons: Sven Carstensen, member of the board at bulwiengesa, carstensen [at] bulwiengesa.de and Anna Wolfgarten, junior consultant at bulwiengesa, wolfgarten [at] bulwiengesa.de