Sirius continues to operate solely in Germany where it owns and manages a well-diversified portfolio of mature and opportunistic business park assets. Sirius’s portfolio continues to increase in size through a combination of organic and acquisitive growth underpinned by the Company’s internal operating platform. 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.
Sirius’ properties include traditional business parks, modern business parks and office buildings on the periphery of the ‘big seven’ cities. The Company manages in the region of 1.5 million sqm of manufacturing, storage and office space. To maximise the utilisation of space, Sirius has developed a range of high yielding products including serviced offices, self-storage and workboxes which have their own Smartspace brand and are particularly popular with tenants seeking flexible solutions to their accommodation needs. The products are usually created through investment into space that other owners may regard as a structural void and using the capability of the in-house sales and marketing teams to let these at premium rental rates. The Company’s tenant base is diverse ranging from multinational corporations and government agencies to SMEs within the German Mittelstand and retail tenants.
Key Market Drivers
The German Economy
Relative to other European economies Germany performed well through 2020 and the COVID-19 crisis. With official figures citing a contraction of around 5% representing a comparatively good performance relative to its peers in Europe. The impact of COVID-19 in Germany is expected to be one of the least severe in Europe due, in part, to the government’s decisive fiscal response.
A number of factors have contributed to Germany’s relative economic strength. Many analysts take the view that the composition of Germany’s economy has been a major factor in helping it record a stronger performance than many close neighbours, its bigger manufacturing and exporting base – which accounts for more than a quarter of the German economy – is able to continue operating with fewer disruptions through the pandemic than service sector dependent economies.
The Ifo Business Climate Index –which tracks economic sentiment in Germany – has continued to steadily improve over the course of 2020, with confidence most pronounced in the manufacturing sector implying a return to growth is possible in 2021.
The German Commercial Real Estate Market
Commercial real estate transaction volumes in Germany in 2020 were €59 billion, only 6% below the five-year average, which demonstrates remarkable underlying strength given the scale of the pandemic. According to Savills, investment volumes in the second and third quarters of around €10bn and €12bn were the lowest since 2016, however the final quarter showed a higher volume once again of around €16.6bn. The seven major cities once again attracted the majority of capital with around 55% of the transaction volumes. A large proportion of demand is, unsurprisingly, concentrated in property that offers stable cash flow. This is particularly the case in the logistics sector and offices let on leases to public sector clients, whilst there has been a marked decline in demand for shopping centres and retail parks.
According to Savills, the proportion of German investors rose as a percentage last year, which may be as a result of travel restrictions. Domestic purchasers accounted for around 57% of investment volume, which is the highest proportion since 2013 however capital from outside of Germany continued to play an important role in investment activity. Approximately 71% of foreign capital originated from Europe, followed by around 21% from North America with the remainder coming from the Middle East and Asia.
Looking forward, it is reasonable to assume the market will see the deployment of reserves that have been built up over the last twelve months. With investors increasingly challenged to find assets that meet their criteria. As such, we can expect transaction volumes to remain high this year with the majority of activity likely to take place in the second half of 2021 when the market conditions and operating environment have returned to some form of normality.
The German Industrial Real Estate Market
Despite the challenging environment in the commercial real estate market as a whole, there has remained a strong investment market for German mixed-use and multi-let commercial properties. In the first half of 2020 alone a transaction volume of more than €1.2 billion was recorded, the second highest half-yearly volume recorded – only 2017 saw a higher volume in the first half of the year.
In the first half of 2020 business park assets accounted for almost 73% of the total investment volume with a transaction turnover of around €903 million, with the remainder of investment activity divided between warehouse and production properties.
Some clear regional trends emerged in the first half of 2020. 49% of transactions totalling €610 million occurred in the Southern region of Germany. The highest transaction volume ever recorded in the first half of a year. This was followed by the Rhine-Ruhr region which accounted for 13.4 % of transactions totalling €166.4 million, with Munich and its surrounding area closely behind with 13% of activity totalling €162 million. The few markets where investment volumes saw a year-on-year decrease were those impacted the most by lack of supply. Demand for space remains high however with supply side challenges impacting take up which has put upward pressure on pricing. With limited volumes of new space being made available the outlook going forward appears to be a continuation of the status quo.
It remains to be seen if the challenging macroeconomic environment leads to permanent changes in behaviour that might impact the asset class. However, when looking at past major economic events and recessions the flexibility and diversity inbuilt within multi-tenanted business parks suggests the asset class will cope particularly well compared to other sectors. The tendency for companies engaged in production and manufacturing to respond to economic contractions by reducing output rather than space combined with the depth of the Mittelstand market should be considered key factors in the ongoing growth and stability of the asset class.