Sirius continues to operate solely in Germany with a focus on value-add and opportunistic assets with asset management potential. The primary focus is to build a ‘critical mass’ around Germany’s ‘big seven’ cities: Berlin, Hamburg, Düsseldorf, Cologne, Frankfurt, Stuttgart and Munich. The Company has a secondary focus on a selection of key border towns where we can reap the benefits of markets on both sides of the border. As of 31 March 2020, 88% of the value and 85% of the income generated by the Group relates to these markets. In total, the Group owns 57 assets and of which 30 are traditional industrial business parks, 14 are modern warehouse business parks and 13 are pure office buildings. It also manages two assets and holds an interest in six others through Titanium.
The majority of Sirius assets are industrial property units, the Company also invests in the secondary office and modern warehouse market. The major usage of the assets is light manufacturing and production, storage space and offices. To maximise the utilisation of space, Sirius has developed serviced offices, self-storage and workbox products which have their own Smartspace brand and are particularly popular with tenants seeking flexible solutions to their accommodation needs. The products are usually created from space that other owners may regard as structural void by investing into these spaces and using the capability of the inhouse sales and marketing teams to let these at premium rental rates.
The Company’s tenant base is diverse – its largest tenants are typically industrial, storage or conventional office tenants on long-term leases and typically have been on site for many years. Although the Sirius portfolio has in place lease agreements with around 5,000 tenants, the top 50 tenants make up 43% of the rent roll and include some of the world's best known multi-national companies, it is also worth noting that 7% of the Group’s tenants are government agencies.
The German Economy
Leaving Covid-19 aside, Germany’s economy recorded its tenth consecutive year of growth in 2019, the longest period of growth since the country was reunited. There had been much speculation that the German economy was heading into a recession but that did not materialise. The reason for lower growth was a small downturn in Germany’s manufacturing sector, where slowing global growth and wider uncertainty, particularly in the automotive sector, made the environment more challenging. It is worth noting that contrary to popular belief, the German industrial sector accounts for around 23% of total GDP – meaning that 77% of the German economy is in fact non-industrial. So, while the manufacturing sector growth slowed there was still plenty of growth in the services sector.
Germany remains the most resilient economy in Europe, owing to its positive balance of trade and strong balance sheet. Indeed, the German Bundesbank has more scope to look at a financial stimulus to kick start the economy than anywhere else in Europe as we all manage through the Covid-19 situation. In recent years the German economy has benefited from strengthened domestic demand and export performance, and it has long been considered a relative ‘safe haven’ which has resulted in significant capital inflows. This has been supported by low interest rates and rising business investment which, before the Covid 19 outbreak, drove unemployment to historic lows. The fundamentals of the German economy remain, its balance sheet is stronger than any other European country and it has a wider range of options in terms of financial stimulus. It does also appear, at the time of writing, to be managing Covid-19 more effectively than many other European states.
The German Commercial Real Estate Market
2019 was another record year for the commercial real estate investment market in Germany, with €67.5 billion channelled into the commercial real estate sector. The previous record year of 2015 was exceeded by around 8%. National and international investors continue to focus on the German market, underlining its status as one of the most desired locations in the world for commercial real estate. This is driven by the strong labour market and stable income development. Investors have continued to focus on Germany’s top 7 locations, 62% of commercial investment volume was allocated to Berlin, Dusseldorf, Frankfurt am Main, Hamburg, Munich, Cologne and Stuttgart. The large influx of investors has meant that competition for assets has remained high and this has had further impacts on pricing over the last year. In particular, industrial, logistics and office assets have seen the largest increases in demand over recent years and this has been reflected in the yield movements within these asset classes. Despite the ongoing yield compression of recent years, cash on cash returns remain highly attractive within the asset classes Sirius invests in because of the good long-term banking deals that Sirius has been able to take advantage of.
It is too early to speculate on what the long term impact of Covid 19 might be on the market but clearly Germany has taken unprecedented steps to deal with the crisis and its “Kurzarbeit,” or “short-time work” programme (under Germany’s system workers are sent home or see their hours cut but are paid around two-thirds of their salary by the state), has set an example to the world as to how deal with this crisis from an economic perspective. A similar approach was taken during the 2008/2009 global financial crisis and enabled Germany to keep unemployment low and return to growth more quickly than most other markets. The package of support for business coupled with the state’s effective programme for managing new cases of the virus may well partly insulate the commercial real estate market from as deep a downturn as may be experienced in other countries.
German industrial real estate market
The 2019 calendar year saw record investment activity into the German “Unternehmensimmobilien” market (a distinct asset class of German mixed-use and multi-let commercial properties, that is the heart of the Germany economy), with transaction volume of approximately €3.1 billion being recorded. The market for this asset class is increasingly characterised by a diverse investor landscape. We again saw high levels of inward capital from private equity, sovereign wealth, insurance companies, private investors, asset managers, public companies and funds managed by banks active in the industrial and logistics asset class. The continued broadening of the investor base of these assets demonstrates that the appeal of the sector continues to increase and that with the right operating platform sustainable and attractive risk-adjusted returns are deliverable. Among the most sought-after assets in this class are business parks which attract the largest investment volumes. The average sum annually invested in business parks in recent years totals approximately €1.05 billion. The growing investor interest in the broader asset class has had implications for purchase price and has squeezed yields, the yield compression for ‘Unternehmensimmobilien’ assets has been subject to a modest time lag compared to other real estate asset classes and places further emphasis on the need for Sirius to buy well and to deploy its specialist platform for intensive asset management. It should be noted that although there is increasing reliable data on this asset class, asset management in this sector requires specialist know-how compared to other real estate classes. Not every investor is as well placed as Sirius and is unlikely to have the specialised local knowledge needed to maximise returns.
In 2019 transactions and activity were dispersed throughout Germany but two clear markets stand out: Munich and Berlin. For many years Munich has been a hotspot for investment, but in the last calendar year more than half a billion euros was invested in its ‘Unternehmensimmobilien’ sector. In recent years, investment in this asset class in the Berlin area has significantly increased and in 2019, accounted for over €444 million of transactions, the second-largest share of transactions across Germany’s key cities and related mainly to business parks and conversion properties. Transaction volumes in 2019 were down on the previous year, which was more due to a lack of supply than a lack of demand.
C&W Market Summary