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News Release

Frankfurt

German property market at the mid-year point: Consolidation at a positive level


Press release including overview tables [PDF]

Charts [PDF]

 

Frankfurt, 10th July 2012 – As we reach the halfway point in a year dominated by turbulence in the eurozone, it’s encouraging to see that the overall property markets are in a solid and mostly stable position in contrast to the volatile underlying economic conditions.
 
However, particularly in recent weeks a growing number of more serious risks have also upset the balance in Germany. At present, the economy’s main supports are the still-functioning world trade, and the domestic economy above all. The German economy has so far been able to rely on its strong exports and on business sentiment in particular. However, exports are gradually losing momentum and business sentiment has gone into reverse, according to the recent ifo surveys. 
 
Confidence in Germany remains high nonetheless, as evidenced by the ratings and yields of German government bonds, which have been in a permanent slump for some time. The direct link with the property market suggests itself here since the gap to property yields is still used as a benchmark, with a clear plus for German property and its attractive risk premium. Admittedly the increase in the premium is largely ascribed to the decline in government bond yields. This, together with the more perceived fear of inflation, the flight into real assets and the lack of investment alternatives, speaks in favour of property as an asset class at least from a rational perspective. 
 
“’Safe haven’ is on everyone’s lips. And if investors ask themselves in which regions and with which investment vehicles it is still possible to invest, they will not be able to avoid property,” says Dr. Frank Pörschke, CEO of Jones Lang LaSalle Germany. 

 
The shortage of Core products that are in high demand causes a reduced transaction volume 
 
After an extremely active first quarter, business has slowed down somewhat on the German investment market. At €4.2 billion, the capital invested in commercially used property between April and June was around €1 billion below the first-quarter volume. In the first half of the year, the transaction volume therefore amounted to around €9.4 billion. This was around 16% below the volume in the first half of the previous year. “Despite this decline, there is no cause for anxiety in our view. Investor demand remains stable, and we expect to see brisk investment activity in the second half,” says Frank Pörschke. “We maintain our forecast issued at the end of 2011 for a 2012 transaction volume of around €23 billion.”
 
The Big 7 accounted for €5.13 billion or more than half of the volume. The decline in these markets compared to the first half of 2011 was 4%, which at first glance seems more moderate than in the overall market. However, while Munich and Stuttgart were able to significantly increase their volumes – Munich has already almost reached its 10-year average – all other strongholds registered a year-on-year decline: -46% in Frankfurt, -30% in Cologne and Düsseldorf,  -26% in Hamburg and -7% in Berlin. The Munich transactions volume includes some larger transactions such as Maximilianhöfe and Pasing Arcaden, which changed hands as part of the Unibail deal. 
 
Individual deals accounted for 80% of the half-year volume of €9.4 billion, a higher percentage than in the previous year, while portfolio deals accounted for a fifth of the volume. Portfolio transactions also included the largest package deal, which was the investment by Unibail in mfi with a total of 15 shopping centres for around €500 million. 
 
The share of office property transactions also remained at a high level in the second quarter at 44%. The total office property transaction volume in the first half of the year reached €4.2 billion, which was 45% higher than in the first half of 2011. 
 
“After a weak start to the year, retail property increased slightly in contrast to the overall trend early in the year,” says Jörg Ritter, director of retail investment and lettings at Jones Lang LaSalle Germany. Retail now accounts for a share of 30% (€2.9 billion), of which more than half related to the sale of shopping centres. In second place were retail warehouse centres, which were able to double their share to 16%. 
 
Foreign investors have significantly increased their activities in Germany again in the last two years. Institutional investors such as pension funds and insurers in particular are on the search for investment opportunities, and Germany as a target country is again at the top of the list of potential countries in which to invest. In the first six months, foreign investors acquired Germany property for around €3.1 billion. “A higher volume was prevented by the limited supply of suitable products. However, we expect foreign investors to be more willing to close deals in the second half of the year, raising their share to around half of the transaction volume,” says Helge Scheunemann, Head of Research, Jones Lang LaSalle Germany. Jörg Ritter adds: “The focus of this group of buyers is in no small part on retail property in the Core segment; the safety aspect also plays an important role here.”
 
Quality of location and property are high on the list of requirements. It is therefore not surprising that Core properties continue to dominate the overall transaction volume and account for just below 60%. There is a lack of larger transactions in the Core+/value add segments, even though a small increase in the willingness to take risks can be identified. “In some cases the supply shortage forces investors to switch to other locations, but they still have the same demands for quality and the creditworthiness of tenants. Little will change here in the second half of the year,” says Helge Scheunemann.
A glance at the yields reveals stability in almost all segments; only in the office property segment have prime yields declined across all seven strongholds by around 10 basis points to 4.82%. 
 
“There is continued pressure due to the surplus demand, but we only expect to see moderate decreases as the year progresses and a sideways movement next year,” says Scheunemann. He adds: “The picture is different for products or locations that do not fulfil the requirements of a low-risk investor: here, yields are trending upwards and the gap is widening, with stable or slightly increasing yields to up to 240 basis points depending on location, quality, remaining term and creditworthiness of tenants.”
The same is true for growth. After achieving an increase in value of 5% on average in 2011, more than 6% is expected for this year. Rental prices are the primary driver of this positive performance: because yields will shift only slightly or not at all in 2012, the influence of the rental prices will increase.

 
Demand for office space on a solid basis
 
The German office lettings market again appeared to be stable in the second quarter of the year. Despite a slight decline in lettings activities it was still possible to register decreasing vacancies and - in isolated cases - rental price increases. 
 
The take-up volume reached around 1.42 million sqm in the first half of the year - a decline of almost 14% compared to the first half of 2011. However, larger differences are discernible between the markets: the decline was kept within limits in Hamburg and Berlin at -5% and -6% respectively, but considerable declines were registered in Cologne and Düsseldorf at -35% and -21% respectively. “By the end of the year we expect to see a take-up volume of around 3 million sqm, which would represent a decline of 12% compared to 2011. The 2012 volume would thus still be above the long-term average. In my view it is therefore not a slump but a normal moderate decline that was also to be expected,” says Helge Scheunemann. He adds: “The take-up result deserves even more attention because only six large-volume lettings greater than 10,000 sqm were registered. This indicates the broad foundation on which the demand is based.” 
 
Vacancies continue to decline slightly and in all cities. Compared to 12 months ago, vacancies have decreased by around 800,000 sqm. The vacancy rate is 9.2% - 100 basis points below the previous year’s level. This also reflects the robust demand based on the good employment situation at companies. Combined with a short supply of high-quality space, this led to a positive net absorption of around 510,000 sqm. 
 
The generally robust condition of the user markets has reactivated the project developers in the meantime. This is also evident from their investment volumes in sites or in the renovation of existing properties. In the first half of the year, around 411,000 sqm of new space came onto the market in all seven strongholds. Compared to the previous year this was an increase of 60%. As a result of this slight increase in new-building activity, the share of space that is still available on the market has increased to around a quarter of completed spaces. 
 
In the next two quarters, around 460,000 sqm of additional new space is expected to be completed. The total completion volume in 2012 would therefore still be at the same moderate level of previous years, however. Most new-building space is being created in Hamburg and Munich with a combined almost 400,000 sqm. The situation looks similar for 2013: around 870,000 sqm is also expected for next year. Next to Hamburg, the focus will move towards Frankfurt, however. The pressure from the supply side is therefore still restrained; since 1995 the completions volume of office space in the strongholds has been around 1 million sqm per year; the volume would then be considerably lower than this in 2013 for the third time in succession. 
 
The prime rents were also on an upward trend in the second quarter of 2012. In a 12-month comparison, the office prime rents across all seven strongholds increased by 3%. Above-average increases were registered in Düsseldorf with 6.4 %, Berlin with 4.8 % and Hamburg with 4.3%. Also in Cologne, rental prices increased by 50 cents, representing an increase of 2.3%. This means that Frankfurt is the only city in which a rental price increase has not yet taken place in the current cycle. Since users continue to focus on first-class space in central locations, prime rents remain on an upward trend. In addition, the shortage of space in the city centres/CBDs means owners are able to implement rents with far fewer deductions, and no longer have to be prepared to accept every form of incentive. On the other hand, we notice the first typical signs of weakening demand from tenants. Such signs include the intensive inspection of lease contracts, which slows down the decision-making process, and the increase in the importance of flexible lease contracts.