a German perspective
"Even though we are regaining more normality with increasing immunisation across the globe, the Covid-19 pandemic has changed our lives and work permanently. Investing in flexible real estate remains a safe option for 2021."
Mehdi Patrick Riahy
Principal & Managing Director Head of Capital Markets
Avison Young Germany
Globalization has already slowed down in recent years. The Covid-19 pandemic has severely intensified this development and thus, for example, ruthlessly exposed the vulnerabilities of supply chains on a larger scale. Even before the pandemic, there were tendencies to bring production back "onto the doorstep" or rather to bridgeable distances - and this was not only for political reasons, such as the trade conflict between the USA and China. The background was and is, on the one hand, to reintegrate strategically relevant segments into the domestic market, e.g. to reduce drug bottlenecks. On the other hand, it is more than ever about the time it takes for a product from the production site to the customer.
Cost advantages due to lower unit labour costs become relative as labour wages rise in many previously low-wage countries. In addition, the increasingly automated processes through AI and/or robotics favour shorter delivery routes. Overall, companies are trying to reduce structural dependencies and improve their carbon footprint. This development is directly reflected in the logistics market, for example. New construction, leasing of and investments in German logistics real estate have risen steadily in recent years. The rise of online retailing, still relatively unbridled and without legal control elements, has of course significantly favored these developments. The pandemic has further stimulated online trade. The need for a vaccine chain also generates additional demand for logistics real estate.
On a smaller scale, this trend toward deglobalization is also reflected in the office leasing market. Internationally based companies have to adapt to new developments and look more than ever at where they want to be based politically and regulatory. Furthermore, industries are changing, and traditional companies find themselves competing with companies from Industry 4.0.
On the other side is the capital market, and for risk-averse companies, diversification is critical. Global capital flows are changing, but investments in different world regions at the same time will presumably continue to be the basis for risk diversification. As we have seen increasingly in recent years, conflicts are quickly initiated by new decision-makers on the political stage. Restrictive measures intended to protect the domestic economy can weigh on cross-border investments. A reaction of the markets would be reflected in rising interest rates, which would at least not facilitate investment decisions. Germany is still considered interesting for foreign investors and buyers. Despite the pandemic, despite Brexit, etc. Germany is considered comparatively stable and a safe haven. We see a more hesitant cross-border business at present rather due to the pandemic-related travel and contact restrictions, which e.g. make inspections and due diligences in general more difficult.
However, as a result of the pandemic, we see slight shifts in the origin of foreign capital. i.e. at mid-year, there was a slight subdued demand from foreign investors for especially value add and opportunistic office properties, which could increase the opportunities for German market participants. In general, however, there is clearly an excess demand in all asset classes (except retail), with a clear focus on residential and logistics core real estate. Within the office segment investors primarily concentrate on core.
Overall, the pandemic is causing decisions to be delayed unless necessary. This affects real estate investments and, to an even greater extent, leasing. Companies that must act are focusing especially on flexibility.
The prospect of a vaccination of the population alone seems to have revived the investment business at the end of the year. Nevertheless, it remains to be seen how international flows, whether of goods or capital, will develop as immunization and economic recovery increase. Countries that move fastest with immunization can return to normality more quickly, at least within their borders.
"International companies appreciate secure political and administrative structures and so German office markets remain an attractive platform for the operational business."
Bertrand M. Fröck
Consultant Office Leasing Hamburg
Avison Young Germany
