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Real estate in Cologne: strong investor demand despite high purchasing prices

Greif & Contzen analyses the current property transaction situation in Cologne

We have all been in this situation before: if a product we would like to buy is no longer available, we will start looking for alternatives. It is often the case then that many others are doing the same, and that the alternative product becomes more expensive as a result. It is a well-known fact that capital investors have been in this very situation for quite a while now. Owing to the continuously low interest rates, there are fewer alternative capital investment options, and demand for the existing options – such as real estate – has increased considerably. Institutional investors from Germany and abroad are particularly interested in properties. Cologne is not an exception in this respect. “Quite the contrary: demand for investment properties is higher than ever before in Cologne,” says Thorsten Neugebauer, Head of Investment at Greif & Contzen Immobilienmakler GmbH. The researchers from Greif & Contzen have just presented their latest Investment Market Report. They found Cologne’s investment market to have closed 2019 with a record transaction volume of EUR 6.4 billion across all types of real estate. “Low interest rates, a lack of alternative investments, and pressure to invest were the driving forces behind the record set in 2019, and these factors will remain unchanged in 2020. Real estate in Cologne will therefore continue to be popular in the months ahead,” Neugebauer points out. “Compared to other asset classes, property investments still provide for stable profits at a good level. We expect a high transaction volume.” Greif & Contzen expects that turnover will be boosted by investors, who take advantage of this time of high prices by realising attractive sales proceeds with their properties. In addition to this, it is likely that a number of property developments from the office and logistics segments will become available for sale.

Hotspot Cologne-Deutz
The district of Deutz has meanwhile emerged as an investment hotspot within Cologne. “This area has developed into a location that many property investors find attractive, and they are often willing to pay very high prices,” Thorsten Neugebauer reports. For their latest Investment Market Report, the Greif & Contzen researchers took a closer look at Cologne-Deutz. This is what they found: the neighbourhood is characterised by its central location within the city and the traffic network, its large-scale office space users, and high-quality buildings and development sites. Cologne-Deutz is now one of the city’s most dynamic districts with regard to urban development as well as its investment market. Forecast: busy construction activities and further real estate transactions. Construction work for MesseCity is underway, LVR is planning to build new offices in Deutz and 3,000 apartments and 6,000 office workplaces are to be created on the 37.7 hectare Deutz Harbour site, part of which is currently still used for industrial purposes. There are no signs of a standstill, at least in Deutz.

Office buildings are the strongest asset class
Within the total transaction volume of EUR 6.4 billion across all asset classes, commercial properties accounted for a combined investment turnover of around EUR 3.1 billion. The previous record of EUR 2.3 billion that was set in 2017 was therefore surpassed significantly. Cologne’s commercial property investment market was dominated by office buildings. This was mostly due to a number of larger transactions. “KölnTurm” in MediaPark changed hands, along with the office building ‘Cäcilium’, as the US fund Blackstone’ concluded its take-over of the Canadian trust Dream Global in December. The purpose of the acquisition was to obtain the real estate held by Dream Global. KölnTurm and Cäcilium accounted for a value of around EUR 260 million in this context. The Town Hall in Deutz was sold for around EUR 490 million, and seven buildings in TechnologiePark in Braunsfeld/Ehrenfeld changed hands as well. Office and retail buildings for around EUR 2.0 billion were sold in 2019, which corresponds a year-on-year increase of 55 percent over 2018.

Hotels and construction land
New owners were also found for a number of hotels: “Southern Cross” in Deutz, Steigenberger Hotel in Neustadt Süd, and the NH Hotel in Neustadt Nord. While construction land accounted for a relatively small share of the investment volume, a significant increase could be observed compared to previous years. “Various owner-occupiers and property developers picked up development sites,” explains real estate expert Neugebauer. This is a clear sign that investors have faith in the future of property developments in Cologne.

Rising sales figures could also be observed for condominiums in the past year. This trend is likely to continue, as the announced new construction projects suggest that availability of products will increase compared to previous years.

Moderate decrease of yields
There are indications of an upcoming moderate decrease of yields. However, the 3.0 percent prime yield on office properties is still higher than what can be realised in Frankfurt, Munich or Berlin. It is a likely scenario that when overall profitability is considered, rising rental income in Cologne’s housing, office space and logistics markets is going to compensate for the fact that purchasing prices will also continue to rise in Cologne, and that the city’s real estate market will therefore remain attractive for investors. While there might be further slight decreases of prime yields, Greif & Contzen’s researchers do not expect that there will be any further significant declines. “We believe that buyers tend to have long-term objectives. Some investors also pursue strategies for increasing their properties’ value in the medium to long term, through structural development or asset management, such as by optimising the letting situation,” says Neugebauer. “We do not expect that there will be quick resale activities on similar level as in 2019.” What remains unchanged is that just as in previous years, Cologne’s investment market continues to be characterised by buyers and sellers with a wide range of different backgrounds. Market participants include internationally active insurance companies, family offices from around the world, fund companies, as well as German and international property developers. Thanks to all of these stakeholders and the lack of alternatives, demand will remain stable also in the current year, despite shrinking yields and scarce availability in relation to the strong demand.