The 5 % Study – Where it Still Pays off to Invest
- Performance expectations are highest in the core segment of the office markets in Class C and D cities and in the light-industrial segment of Unternehmensimmobilien (UI). Exceeding 5 %, these mark the upper end of the spectrum.
- Established core markets range between 2 % and 4 %.
- Non-core potential in the major office markets goes as high 9 % in major office markets, and as high as 12 % in Class C and D cities.
The independent German consulting firm bulwiengesa AG analysed the German real estate market on behalf of Aurelis Real Estate GmbH & Co. KG, Beiten Burkhardt Rechtsanwaltsgesellschaft mbH, Commerz Real AG and Waterway Investments GmbH to identify its intrinsic potential for investment returns. The purpose of the survey is to benchmark the current market situation, using the classic 5 % return target that investors pursued in previous market cycles.
The Findings for Core Real Estate at a Glance
As far as the placement of large volumes of capital goes, the office markets of Class A cities offer particularly auspicious investment opportunities. That said, the internal rate of return (IRR) is merely 2.3 % to 4.6 % here. The residential sector shows an internal rate of return between 2.8 % and 3.3 %, which means that the level of returns on residential investments in Class A cities is the lowest of all asset classes analysed. Shopping centres also present opportunities for large volume investments. In this segment, the IRR extends from 3.1 % to 3.8 %.
Smaller markets generally show an increased market liquidity at the moment. If investment demand was to slow down again, these markets would be affected more than others. Also, the dimensions of properties that may be placed here tend to be markedly smaller. These drawbacks are offset by increased upside potential: The prime segments of office markets in Class C and D cities report returns of up to 6.0 % and 7.3 %, respectively. The segment of Unternehmensimmobilien (UI) delivers stable returns upward of 5 % within a window of 5.1 % to 7.5 %.
The Findings for Non-Core Real Estate at a Glance
The performance expectation for non-core real estate in the office markets of Class A cities ranges from 4.6 % to 9.8 %. However, there is a risk of the internal rate of return slipping into the negative range. In the hotel segment, rates of up to 7.6 % have been registered for properties nearing the end of their lease terms. Modern logistics properties in the non-core sector will return 5.5 % to 7.7 %. These rates are realised outside the established logistics regions.
For yield-driven investors, the new light-industrial asset class of Unternehmensimmobilien (UI) presents sound opportunities. For one thing, return expectations are 6.9 % to 11 % for business parks with their mix of office and warehouse/service areas, and 7.5 % to 11.2 % for light manufacturing properties. The most rewarding opportunities for non-core investors, however, are associable with office assets in Class C and D cities at 6.1 % to 12 %.
About the Methodology
For the purpose of the study, we chose an analytic approach that is new in German market research: The findings are based on a simulation of the internal rate of return (IRR) for a broad spectrum of asset classes and geographic locations. In addition, core and non-core sectors were staked out on the performance level. In doing so, it was assumed that the core market straddles the central margin of fluctuation of the simulation while the non-core markets occupy the extreme ends.
The analysis focused exclusively on the property level. Financing influences such as positive effects that are generated by exploiting the gap between property yields and borrowing costs (leverage effects) did not enter into the simulation. Neither did the survey consider property developments or re-developments.
Breaking the market down into core and non-core real estate permits a more investor-specific classification. Properties with a stable tenancy situation and sustainable location parameters were qualified as “core”. Properties outside the core spectrum were classified as “non-core” for the purpose of this survey. In addition, the survey examined the asset classes separately from the investment cycle in order to take future exit options into account (market liquidity).