The Cologne investment market – first half of 2019

In a figurative sense, one could say: "It's not how you play, it's how you win!" This very limited supply continues to weigh on the overall result, and acquiring new solid investment offers is not easy. Demand in the Rhine metropolis remains high and the number of properties available for sale is very limited. Even though most of the transaction volume is recorded in Cologne's city center, this somewhat masks the fact that the number of investments in central locations has continued to decline. Value-add products are currently almost unavailable in the inner city ring.

The Cologne investment market even slightly exceeded the extraordinary result from the first half of 2017 (€1.02 billion) in 2019. We evaluated 23 transactions on the Cologne investment market in the first half of the year. These represent a total volume of €1.05 billion in the cathedral city. Compared with the same period last year, this represents an increase of approximately 59.00% (first half of 2018: €665 million).

The cathedral city continues to promise investors stable returns and rising office rents. This makes Cologne one of the most attractive investment markets in Germany for domestic and foreign investors. In existing properties in particular, significant rent increases for office space can be achieved when contracts are renewed – without any significant investment.

With our market report, we would like to give you an insight into the Cologne investment market and an outlook for the second half of the year. We are looking forward to an exciting second half and are confident that we will continue to play in the top league in the future.

The Cologne investment market continues to ride the wave of success. The upturn from the last half of 2018 continued in the first half of 2019. Commercial properties with a total volume of approximately €1.05 billion changed hands in the first half of the year. Compared to the same period last year, this represents an increase of approximately 59.00% (first half of 2018: €665 million).

The sale of the "Wallarkaden" project development on Rudolfplatz played a significant role in this positive result. The office and commercial building was sold in a forward deal for €140 million by MOMENI to the professional pension fund company in Hanover. The new complex is scheduled for completion in 2021 and comprises a usable floor space of approximately 20,000 square meters.

Another major deal was secured in Ehrenfeld. With the partial sale of the Barthonia Forum, the last and largest piece of the "Kölnisch Quartier" puzzle was sold to the Swiss family office East Guardian after two partial sales in recent years. was sold to the Swiss family office East Guardian. The joint venture between Tristan Capital Partners and the FREO Group was thus able to finally place the entire site, which it acquired in 2015 for €110 million, with a total increase of +100.00%.

The investment market in Cologne remains under pressure. Demand remains high and exceeds supply many times over. In particular, the strong demand for value-add products cannot be met. In addition, the supply situation for investors in central locations in Cologne is currently extremely modest.

Open-ended real estate funds/special funds accounted for by far the most transactions on the buyer side and were the most active buyer group in the cathedral city (approx. 33.00%). They were followed by private investors/family offices with a share of €257 million (25.00%). The otherwise strongly represented buyer group of project developers/builders was hardly visible in the first six months of this year. This is apparently due to the fact that the majority of the projects in the city center are already under construction or have been sold. (25.00%). The otherwise strongly represented buyer group of project developers/builders was hardly visible in the first six months of this year. This is apparently due to the lack of available land and opportunistic investment products.

On the seller side, project developers/builders have the upper hand. With €346 million, their share is just under 32.90%. Private investors/family offices accounted for 25.30% of the transaction volume with €265 million. Insurance companies/pension funds/banks followed with €184 million.

A total of €153 million was accounted for by portfolio deals. This corresponds to a share of 14.60%.

Office properties were once again by far the most popular asset class in the first six months of 2019. In terms of transaction volume, almost half (approx. 47.00%) was invested in office buildings. Mixed-use properties were also popular, accounting for approximately 21.00%. These were followed by retail properties with approximately 16.00% and hotel properties with approximately 12.00%.

Development sites and logistics/light industrial properties played an insignificant role in the first half of the year. Demand for these two asset classes is also very high, but supply was scarce.

Compared to 2018, there were no significant changes in gross initial yields across all asset classes. Yields for all property types are therefore at a historically low level. There was no correction in the gross initial yield for office properties in prime locations in the first half of the year. The prime yield therefore remains at 3.40% (+/- 0 basis points). The initial yield for commercial properties also fell by five basis points and currently stands at 3.30%. In the logistics segment, however, there was a decline of 15 basis points to 4.25% (-15 basis points) for absolute top-quality properties.

In the price segments of approximately €5 million to €10 million per individual investment, gross initial yields are still slightly above 4.00%, as this segment represents a kind of intermediate segment. Experience has shown that this purchase price corridor is too large for many private investors and too small for institutional investors, meaning that the factors in this investment area still achieve slightly better returns. This segment will continue to be served in Cologne due to its urban and small-scale property structure compared to the TOP 7 locations.

Led by the sale of Wallarkarden on Rudolfplatz, the city center accounted for more than half (approx. 53.00%) of the total purchase price volume transferred, at €545 million. The southern part of the old town stood out in particular. The districts adjacent to the city center also remain popular. In the first six months, Ehrenfeld pulled ahead of the other districts by a wide margin and climbed to second place with approximately 35.00%. The long-standing trend and popularity of this district remains unbroken and continues to grow. This is also underscored by rising office rents.

A total of 23 commercial transactions worth over €1 million were recorded in the first half of the year. With a share of around 25.00%, deals in the triple-digit million range are leading the way. Four transactions fell into the €50-100 million size category. Just under 25.00% of the volume was accounted for by the €25-50 million segment. In the category up to €25 million, a total of 10 deals were recorded, accounting for a total share of approximately 9.00%.

Following a strong finish in 2018, the Cologne investment market maintained its level in the first half of 2019. Performance picked up seamlessly from last year, with investors already very active during what was otherwise a rather quiet start to the year.

Due to steadily rising rents and continuing declines in vacancy rates, yields reached a new high. Nevertheless, there are still many properties with upside potential. In some cases, significant rent increases can still be achieved when tenants change without having to completely revitalize an asset. This offers investors attractive prospects when entering the Cologne investment market at the current time. In addition, many existing properties still offer corresponding building reserves that can be activated.

Due to low yields in the CORE real estate segment, demand for value-add products continues to rise. In addition to the ever-popular city center locations, Cologne's suburbs are increasingly attracting the attention of investors.

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