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News Release

Frankfurt

The picture looks bright overall on the German real estate market


 
Frankfurt, 5th January 2012 – While political leaders in the eurozone lurch from one crisis summit to another, and financial market players await what may come in a state of high nervous tension, Germany’s real economy appears increasingly immune from the effects of the hysteria surrounding the euro and sovereign debt. For example, in December the ifo-index for Germany increased for the second time in succession and, surprisingly, the companies surveyed are even more confident about their business expectations. Consumers have also refused to allow the situation to spoil their mood. It seems, therefore, that the average consumer is greeting financial upheaval that they have long found difficult to understand with a certain amount of equanimity. Such apparent defiance has caused incredulous disbelief among Germany’s neighbours.
 
Nevertheless, the general conditions have in fact worsened globally. “In particular, the impact on the financial sector, which provides the loans that are vital for the real estate industry, is casting a shadow over the property sector’s outlook for 2012,” notes Marcus Lemli, Head of Leasing & Capital Markets Jones Lang LaSalle Germany. Is the property asset class able to buck the general - at any rate “sensed” - negative trend? If so, for how much longer? Or, on the contrary, will property not benefit as an investment product from the complex situation of sovereign debt and low alternative yields?
 
“The new year will bring answers to these questions. Currently, there are signs that the supply of property is increasing, but this only meets the demand in the top quality segment. However, looking back it should first of all be noted that all key indicators of the German property market demonstrated a positive development in 2011. Investment volumes increased as much as capital values, as did lettings income and also the rents themselves,” says Helge Scheunemann, Head of Research Jones Lang LaSalle Germany.

 
Continued revival on the German investment market – gap widens further between “prime” or “core” and “secondary”
 
As demonstrated by the statistics for 2011, the revival on the German investment market has continued. The predictions made at the end of last year have even been exceeded by the actual figures. The transaction volume was around 22% higher year-on-year at €23.5 billion. “This transaction volume could also be maintained in 2012. At present, we are in no way expecting an investment ‘ice age’,” says Scheunemann. Financial bottlenecks are proving to be a handicap, and the checks on purchases are taking longer. On the other hand, there are a few larger deals on the market (including the Kaufhof properties or the area on Potsdamer Platz) and closed open-ended funds are becoming more active as sellers. In addition, the supply of products from refinancing deals will increase, and banks will become more restrictive with follow-on financing and as a result will play a more active role in property disposal.
 
“Location and building quality were also in demand in 2011. An increased willingness to take risks was evident at times, but generally speaking this was already over by the summer,” says Lemli. Outside the Core segment there was a significant decrease in demand, although there are two exceptions: on one hand with developments, particularly if a user is already available or where there are forward commitments to secure a certain level of location and building quality that is not sufficiently available in existing building stock. The other exception relates to products of a certain minimum quality where the price generates demand. In other words, they attract interest when attractive yields beckon.
 
In contrast to 2010, office property was only able to slightly close the gap to retail property in relative terms during 2011. The retail asset class continues to dominate transactions, with shopping centres in the lead. The overall retail share is around 45% (€10.6 billion), and seven of the 10 largest deals in 2011 were still retail transactions. These seven deals amounted to a total of around €3 billion and included CentrO with €650 million, the sale of the PEP shopping centre in Munich for more than €410 million – the largest single transaction in any of the seven strongholds that also helped increase Munich’s transaction volume by 130% - and the Skyline Plaza in Frankfurt with €288 million. The Frankfurt property stronghold achieved a 69% increase over the year; with a volume of around €3.05 billion it is also ahead of Munich (€2.9 billion) and Berlin (€2.1 billion).
 
A glance at the investor landscape reveals little change from 2010. Equity-strong investors further increased their holdings. Dominant investors in 2011 were insurers and pension funds (national and international), which invested either directly or indirectly via special funds and closed funds (pushed by the two largest transactions: Deutsche Bank headquarters for €584 million and Hamburger Meile for €254 million). On balance, these types of investors bought much more than they sold. In addition, private investors were particularly active buyers in the area of small deals (up to €10 million). “This picture will also see little change in 2012. Banks could be an exception since they will increasingly sell properties on their balance sheets as well as debt portfolios due to tightened regulatory capital requirements,” says Lemli.
 
Yields also fell slightly in the Prime and Core segment. Across all seven cities (average value), the prime yield for office property declined to 4.95%. In some cities, however, the yields declined as a result of an increase in the land transfer tax, which increases the cost of commercial property acquisitions in the price calculation. The yields in the retail sector remained stable compared to the previous quarter, even though isolated transactions particularly in the shopping centre segment produced lower yields. “The focus of investors is clearly on quality, and they do not deviate from this requirement for building quality just because they are looking at a property in sub-markets outside of the city centre,” says Lemli. Yields for products or locations that do not meet Prime or Core requirements tend to be higher, and the gap to secondary yields has further widened to up to 200 basis points depending on location, quality, lease term and the creditworthiness of tenants.
 
Germany, which is plainly one of the core countries with comparably low sovereign debt, stable growth, large and solvent property markets, good refinancing opportunities, long leases, political stability and legal certainty, maintained its standing as a safe harbour in 2011 and performed better than some other important international markets. The same applies for 2012: the combination of “Germany and property” remains virtually unbeatable in spite of the euro and debt crises. However, the macroeconomic situation will also have an impact on the real estate sector in Germany. The reduced lending by banks and the higher cost of credit could also prove to be limiting factors on the German investment market. The demand surplus for Prime and Core products in all sectors will continue further. This will mean that it will only be possible to realise increases in value in the prime segment. There will unquestionably be a surplus supply in segments other than the Prime and Core segment due to the more difficult refinancing conditions.

 
Take-up volume increases strongly again on office property markets
 
The office lettings markets in the seven property strongholds experienced a strong recovery in 2011 compared to the previous year. “The market continues to defy the increasingly negative general economic data and the increased demand for office space follows the continued favourable development on the jobs market,” says Helge Scheunemann. Furthermore, “there are initial indications that users are beginning to adjust themselves to the changing economic signs and some isolated space searches were postponed, but this is certainly not to be described as a negative trend. On the contrary, a strong momentum in the signing of deals was evident last year in Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart.”
 
The total aggregate space take-up in 2011 was around 3.4 million sqm, which was significantly higher than in the previous year (+18%). In view of the significantly lower growth of the Gross Domestic Product and the delayed reaction normally seen among property players to economic effects, take-up is expected to decline in 2012. This decline is expected to be increasingly evident in the second half of the year. On the whole, the space take-up volume could again fall below 3 million sqm and would then be in line with the five-year average (2007-2011).

 
Positive net absorption and declining new-building volumes cause a reduction in vacancies
 
In the Big 7 last year, there was a strong increase in net absorption to more than 1 million sqm, which corresponds to a six-fold increase compared to 2010. In the coming years the values are more likely to level off in line with the five-year average (2006-2010: 620,000 sqm). 
 
Vacancies fell in a 12-month comparison in all strongholds as a direct result of this strong demand from office tenants. The heaviest declines were recorded in Stuttgart and Düsseldorf at 14% and 13% respectively, followed by Hamburg with 10%. The vacancy rate averaged over the seven property strongholds fell below 10% in 2011 (9.5% after 10.4% in 2010), led by Düsseldorf (-180 basis points), Hamburg (-110 basis points) and Stuttgart (-100 basis points). Based on total office property stock, the rate in Düsseldorf remained at a disproportionately high level of 11.2%, as was also the case in Frankfurt with 13.9%.
 
Although new-building activity in the Big 7 increased again in the final quarter of 2011, there was a considerable reduction in the 2011 completions volume to around 880,000 sqm (-25%) compared to the previous year. “In purely arithmetical terms, this space volume was therefore completely absorbed by the demand,” according to Scheunemann. Frankfurt, Hamburg and Munich all had almost identical completion volumes totalling 570,000 sqm, accounting for almost two thirds of the overall volume.

In the current year the new-building volume in the Big 7 will be at a similar level. Since just 36% of the expected 882,000 sqm is still available on the market, vacancies could sink again slightly.

 
The focus of users on quality drives up prime rents
 
In 2011, prime rents increased in five of the seven cities. By the end of December, all cities combined registered an increase of almost 3% (2010: below 1%). Above-average increases in nominal prime rents were recorded by Berlin with 4.9%, Hamburg with 4.4% and Düsseldorf with 4.3%. There was no rental price growth in Frankfurt and Cologne. “However, the analysis of the maximum rents that were achieved indicates a much higher number of deals in some areas and therefore confirms the willingness of tenants to pay a premium for high-quality and prestigious spaces,” says Scheunemann. He adds: “As is also the case on the investment market, users on the office property market have a clear focus on quality, the result of which is a widening of the rental price gap.” In 2012, rental price growth will be seen in central locations due to the expected continued positive demand for spaces of a premium standard. However, the rate of increase will be lower than in 2011 and is expected to reach around 2%.