Fundamentals - Cornhill AG

German real estate in secondary cities shows resilient growth compared to the Top-7 Cities

Secondary office real estate in Germany benefits from the same positive trends as office real estate in general, but is more attractive for investors, offering higher yields and lower volatility.

Secondary office real estate is a highly attractive market vs. Top-7 cities⁽²⁾

Secondary Cities

Lower purchasing prices for non-trophy assets
Sustainable higher yields
Resilient tenant retention (Mittelstand, gov. agencies, blue-chip companies)
Low competition (only handful of larger players in market)
Proprietary deal sourcing through personal networking

Top-7 Cities

High prices for "flagship locations"
Systematically decreasing yields over recent years
High tenant turnover
High competition due to interest from international investors and large players
Broad auction processes with no differentiation outside of price

Current market sentiment

The amount of office workers has increased significantly over the last decade, both in secondary and Top-7(1) cities, as secondary cities remain the focus locations for large blue-chip and mid tier companies as well as local government agencies
Yields in secondary cities are essentially higher than in Top-7(1) cities, driven by lower acquisition costs and attractive tenancy profile opportunities
Additionally, due to growing investment volumes, liquidity in secondary cities is increasing
The SOX index(2), which replicates the attractiveness of secondary office real estate investments, has continuously outperformed the analog index for Top-7(1) cities over the last 15 years

Source: Company information, CBRE, Bulwiengesa

SOX index (created by Bulwiengesa) includes economic activity indicators, interest rates (i.e. basic rate of interest & 10 year government bond yield), employment data, office market data as well as office investment market data
Top-7 cities defined as Berlin, Cologne, Duesseldorf, Frankfurt, Hamburg, Munich and Stuttgart

Excursus – Impact of Covid-19 on German office real estate market

Cornhill Real Estate’s business model is highly resilient, as demonstrated by the limited impact of the COVID-19 pandemic.

COVID-19 Recovery Scenarios

Source: Company information, McKinsey, Colliers, DB Research

Top-7 cities defined as Berlin, Cologne, Duesseldorf, Frankfurt, Hamburg, Munich and Stuttgart

Impact of COVID-19 on real estate in relation to other industries

Voices on the impact of COVID-19

Generally speaking, however, many office properties may become more expensive (..), similar to residential properties. This applies above all to office buildings in metropolitan areas, which have been increasingly regarded as a “safe haven” asset in the last few years.

DEUTSCHE BANK RESEARCH, 03-Apr-2020

Germany is the most stable economy in Europe with Real estate being its safest area to invest. Also, due to its comparatively low prices and long-term rental contracts, the office sector in secondary locations is the most defensive, even in Corona times.

German real estate market – Economic environment

Sustained by a strong and resilient macroeconomic environment, which is expected to retain its leading position in Europe after the COVID-19 pandemic.

Overview

The German economy is the largest in Europe and often considered a “safe-haven” for international investors.

Over the last ten years, Germany has substantially reduced unemployment, achieving a 3.2% unemployment rate in 2019A
Simultaneously, GDP has consistently grown since 2010A

Germany benefits from a top-of-class infrastructure, education and healthcare system.

The German economy is expected to rebound quickly from COVID-19 and return to its fundamentally healthy status, as demonstrated by the forecasted unemployment figures for 2021E which are in line with recent levels.

Euro area 8.9%

German governmental response to the COVID-19 pandemic

The German economy has been growing for many years. At the same time, the sound fiscal policies of recent years have steadily increased the resilience of German public finances. The federal government is therefore able to support people and the economy both during the short-term response to the crisis and after the acute phase of the crisis is over.

GERMAN STABILITY PROGRAM, FEDERAL MINISTRY OF FINANCE, 28-Apr-2020

The main aim of economic policy in this situation must now be to alleviate uncertainty. No healthy company should go bankrupt due to corona, no job should be lost. We are therefore putting a comprehensive protective shield in place for employees and companies.

PETER ALTMAIER, FEDERAL MINISTER FOR ECONOMIC AFFAIRS AND ENERGY, 13-Mar-2020

Source: IMF, Federal Ministry of Finance, Federal Ministry for Economic Affairs and Energy.

German real estate market – Office real estate

Continuous and substantial growth in 2019A, with record investment volumes, as rents are continuously growing, and vacancy rates are decreasing.

Current market sentiment

German office real estate market accounted for €40bn in investments 2019A, a 25% increase y-o-y. This represents 48% of total real estate investment in Germany
Increasing investment volumes over the last years and an increasing demand in the Top-7 German cities(1) accelerated the ongoing yield compression
Growing investment volumes drive the liquidity of the market, across location categories
Over the last five years, rents have consistently increased in the Top-7 cities, which is also driving price growth in secondary cities
Driven by Germany’s strong underlying macroeconomic environment in the last five years, vacancy rates have also consistently fallen

Source: Colliers International, CBRE

Top-7 cities defined as Berlin, Cologne, Duesseldorf, Frankfurt, Hamburg, Munich and Stuttgart