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Michael Neal

Is it time to move up from ‘core’ to ‘core plus’ in German commercial property?

​The German commercial real estate market is the third largest in the world behind the US and Japan. 2012 witnessed strong levels of liquidity in the investment markets with an estimated €25bn of transactions completed, the highest level of turnover since 2007.

​The German commercial real estate market is the third largest in the world behind the US and Japan. 2012 witnessed strong levels of liquidity in the investment markets with an estimated €25bn of transactions completed, the highest level of turnover since 2007. This year has started even stronger with good quality assets being well bid from various investor types including insurers, pension funds, closed-end funds, private investors and, increasingly, international investors. The issue, however, has been that the clear preference by almost all investors is for the same type of product – 'core assets', a definition generally tightly defined to long let properties in the central business districts of the five largest German investment centres of Berlin, Dusseldorf, Frankfurt, Hamburg and Munich. This typically accounts for over 50% of transaction activity, yet only accounts for between 10-15% of the total market. The result is a widening yield spread (differential) between 'core' assets, and almost all other areas of the market.

Disappointed investors failing to fulfil their allocations in the 'core' are increasingly looking at the next tier of assets regarded as 'core plus'. There are a further 80+ cities in Germany with populations over 100,000 so the scope for successfully placing capital is far greater, and with careful stock selection the returns look more compelling. This has not been lost on the locals – a recent Ernst & Young survey found that 77% of all German insurers interviewed intended to invest into 'core plus' property in 2013 as well as increasing their allocations to real estate generally.

Michael Neal

Michael Neal

Head of UK Investment

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