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News Release

Frankfurt

Investment market stays on course for the best year since 2007 – lettings market levels off


Press release including overview tables [PDF]

Charts [PDF]

  

Frankfurt, 1st October 2013 – The conflict in Syria, the interest rate decision by the US Federal Reserve and the German election have been the dominant themes in the past three months and are also relevant to economic policy.
 
In Syria, the threat of a US attack is now being played down and progress has been made with negotiations. At present, the perception is that no significant global upheaval will result from this conflict. There have always been and will be always be political risks, and investors are also attuned to this. 
 
More relevant from a purely economic viewpoint, and also more surprising, was the recent decision by the Federal Reserve to leave the federal funds rate unchanged at its exceptionally low level, even though the economic indicators in the United States were showings signs of a slight recovery. This led to the worrying suspicion that the Fed regards the situation in the US to be not so stable after all. This is also a particularly risky undertaking in that it could fuel another asset bubble. The stock markets celebrated the decision on the funds rate, nevertheless, albeit briefly. Property investors should see this as a signal that interest on borrowing will also remain low at least in the medium term. The interest rate decision is positive for the real estate sector as long as the consequence is not an excessive rise in property prices, but ultimately a close and critical eye must be kept on the situation. Dr. Frank Pörschke, CEO of Jones Lang LaSalle Germany, commented: “Despite this decision it is clear that interest rates will rise again sooner or later with the corresponding effect on property prices. However, equity-strong investors are prevalent in the Core segment, and will not be as strongly affected by an increase in interest rates.”
 
Last but not least, Germany has just gone to the polls. The win by the CDU came as little surprise, but the outcome for the FDP was ultimately unexpected and presents the election winners with the challenge of finding a new government partner. “Parliament elections always ultimately represent an important crossroads,” said Dr. Pörschke. “At the moment, it has not yet been determined who will form the government. However, since the CDU is clearly the strongest political party, it will certainly put its stamp on the government programme. It remains to be seen how much influence a coalition partner can and will have, and where this influence will be. The reintroduction of a wealth tax could probably be ruled out whichever coalition government will be formed. This is because discussions on the issue indicated that it would merely serve to increase the fiscal burden on companies, which would be an investor’s nightmare.”
 
Dr. Pörschke added: “It could look somewhat different for the housing market. Since the FDP is the only party to have been ousted from both parliament and the government that was strongly opposed to a regulation of new contract rents, there could be movement here.”
 
While there is still a lack of clarity at the political level, companies appear to be back on course. The Ifo Index increased again in September for the fifth time in succession. “Above all, company expectations have improved again. This can be interpreted as a sign that the economic recovery is broadening out. Robust employment figures and a good domestic economy also support this confident outlook,” said Frank Pörschke. According to consensus forecasts, the gross domestic product is expected to increase by 0.5% in 2013. A 1.7% increase is forecast for 2014, while initial forecasts even see the return of a two before the decimal point. 
 
 
User demand stabilises – Investment market on course for second-best result
 
Positive reports and a good outlook also form the basis of trust for property market players. In line with the economic development, user demand in 2013 remains at a relatively high level on the most important office property markets in Germany. Across the Big 7 markets*, space take-up is expected to be just 2% lower than the 2012 level. However, there are certain restrictions. For example, companies will not move to a new office at any price. As before, office space users place a strong emphasis on good-quality space, and in many cases they move in order to achieve an improvement in their location or the quality of their office. 
 
Nevertheless, the investment market is still on course for a strong year. Timo Tschammler, Member of the Management Board at Jones Lang LaSalle Germany, said: “The transaction volume amounted to around €19 billion in the first nine months of the year and highlights Germany’s attractiveness as a property investment destination. We observe further sustained interest from foreign investors in larger properties or portfolios. This will also continue throughout the coming weeks of the year, and we therefore forecast a total transaction volume of around €30 billion by the end of the year. This would be the best result since the boom year of 2007.”
German-wide transaction volume already up by 28% – 60 % applies to the Big 7…
Even though there was a lack of major deals in the last quarter (only one transaction above €200 million), the quarterly sum amounted to €6 billion. In the first nine months as a whole, the transaction volume reached €19.1 billion, which was 28% up on the previous year (Q1-Q3 2012). The investment market remains extremely active and large-volume transactions that are currently absent from the market should be realised in the next quarter because numerous very large transactions are underway or about to be closed. 
 
Individual transactions remain dominant and account for around €14.4 billion. The remaining €4.7 billion applies to portfolio transactions, although these increased by a much stronger rate of 74% compared to 2012. 

 
…with Munich in the lead
 
In the analysis of the cities, three of the Big 7* are already able to report a transaction volume of more than €2 billion each. Munich is in the lead with €2.5 billion, and also registered the largest single deal within the Big 7*: the €160 million Siemensforum transaction. Berlin and Frankfurt are close behind Munich with €2.3 billion apiece. Apart from Cologne and Stuttgart, transaction volumes increased in all cities year-on-year, with growth ranging from 5% in Munich to 164% in Düsseldorf. “Even though the completion volume for new office property in the Big 7 is increasing again, there is still a shortage of good investment products. This continues to prevent a more dynamic development on the German investment market. By the end of the year, we forecast a combined transaction volume in the Big 7 of around €16 billion. This would certainly be a remarkable result, and would be well above the volume recorded in 2006, which is one of the two boom years,” said Tschammler.
 
The relation between the investment volume in the Big 7 and investments outside these established markets has not changed from the previous quarter. “As before, around 60% of the invested capital flows into one of the Big 7 cities. When other cities are considered, retail property is the first port of call. Second-tier cities are also of interest to investors because of strong purchasing power and centrality indices in a populous and economically strong catchment area combined with strong demand from national and international chains. It is therefore fitting that the largest individual deal in the third quarter, the Kröpcke Center in Hanover, did not take place in a Big 7 city,” said Helge Scheunemann, Head of Research at Jones Lang LaSalle Germany

 

Office property remains the strongest asset class 
 
As before, office property accounts for the highest share of the transaction volume at 43%, followed by retail property with a 29% share. Distribution warehouses registered a relatively strong increase, raising their share from almost 8% at the end of the first six months to 10% now. Around €900 million was invested in the third quarter alone. “Such a good quarterly result was last registered exactly six years ago, and was primarily due to five portfolio transactions amounting to at least €630 million,” said Helge Scheunemann.
 
Foreign investors increased their transaction share somewhat to around 35% at present. This amounted to an investment of €6.7 billion in Germany, whereby investors from the UK and the US were again the most active buyers. Timo Tschammler: “There is unbroken and sustained interest from foreign markets. After the financial crisis we saw the investment horizon narrow for many investors, with many countries no longer regarded as possible targets. In Europe, Germany and perhaps another two or three core markets are left. In addition, investors are still extremely risk-averse, even though the strict criteria and high expectations with regard to location, quality and tenants are gradually softening.”
 
A glance at the yields reveals stable values and even one downward movement. In the office segment, the office prime yield fell only in Cologne by 5 basis points, providing an aggregated average value of 4.73% for the Big 7. While the yield for shopping centres remained unchanged at 4.75%, the yield for retail parks fell by five basis points to 5.75% and for standalone speciality stores by as much as 25 basis points to 6.25%. There was also a marked decline in the yield for logistics property due to the strong demand. The average is currently 6.56% and dropped 15 basis points in the last quarter and around 30 basis points compared to last year. “In general we expect to see little change in yields by the end of the year due to the continuing high demand for prime properties,” said Timo Tschammler.

 
Office lettings market: Recovery continues…

- 21%, -11%, -2% - these are the declines in take-up registered in the first, second and third quarters of the current year compared to a year previously. Thus the rate of decline lessened by (almost) 10 percentage points each quarter. “The downward trend in itself is not a surprise in view of the further improvement in the economic environment. What is surprising is the speed of the recovery. The seven strongholds achieved a combined take-up of 2.2 million sqm by the end of September, meaning that the 2-million sqm threshold had already been surpassed after just nine months,” said Helge Scheunemann.

 
….with a marked increase in take-up in the smaller Big 7* cities

The levelling off of demand is a positive signal, but as before there are marked differences between the regions. It was primarily the “smaller” cities in the Big 7 that achieved a significant increase in take-up, ranging from 13% in Cologne and more than 26% in Düsseldorf through to 36% in Stuttgart. The capital of Baden-Württemberg registered four deals larger than 10,000 sqm with a combined volume of 65,000 sqm in the last three months alone, which was certainly unusual based on previous form.
 
While demand in Hamburg was unchanged year-on-year at 325,000 sqm, Frankfurt and Berlin registered year-on-year declines of -9% (323,000 sqm) and -18% (329,000 sqm) respectively. After Berlin, Munich registered the strongest decline of 17% compared to the previous year, although again it recorded the highest level of take-up in absolute terms (449,000 sqm).  
 
“Market activity is dictated less by weak demand and more by a shortage of supply,” said Timo Tschammler. One indication of this is the fact that in Frankfurt, for example, four of the 10 largest lease contracts in the third quarter took place in project developments. Many large users have sounded out the market, and when there is no opportunity to lease office space in a project development for business reasons they often stay in their existing offices due to the lack of alternatives. “In addition – and this applies to all strongholds and the entire office market – the decision-making processes of users are still very long. International companies, which are also making decisions about possible moves to centres outside of Germany, scrutinise the situation very carefully and sometimes find it difficult to come to a decision,” added Helge Scheunemann. However, “there are still so many inquiries on the market that we have raised our full-year take-up forecast. It is entirely possibly that take-up will reach 3 million sqm, which would then be only 2% below the 2012 figure.”
 
Net absorption in the first nine months was 338,000 sqm and has therefore increased somewhat from the middle of the year. Considering the reduced expansion activity by users compared to 2012, annual absorption in 2013 could amount to around 695,000 sqm.

 
Completions are up, but the proportion of available new space declines 
 
There were no significant changes in the completion volume in the last three months compared to the developments and observations in the first six months. At almost 660,000 sqm, the volume of newly completed office space across all strongholds was still only around 2% below the year-ago level. There was again a more mixed picture at regional level, however. While the new-building figures increased threefold to almost 190,000 sqm in Frankfurt and more than doubled to 51,000 sqm in Cologne, Munich (-60%), Düsseldorf (-28%) and Hamburg (-25%) registered particularly strong declines year-on-year. 
 
However, there will be a turnaround in the situation in the coming three months: as a result of increased building activity, the small minus will transform into a significant increase. A further 339,000 sqm is expected in the last quarter, so that the total completion volume in 2013 will increase to 997,000 sqm. This would represent an increase of 21% compared to 2012. Nonetheless, two thirds of the 339,000 sqm is already occupied – either by owners or pre-let to tenants. This means that only 112,000 sqm will be available to the market and companies searching for space – just 16,000 sqm per city on a purely arithmetical basis. There will be a similar development in 2014: the new-building volume will increase to around 1.4 million sqm, but the majority of this has already been let in advance. Almost 44% or around 497,000 sqm of space will therefore be still available on the market. 

 
Vacancies decline further

The vacancy volume for all seven strongholds fell further in the third quarter, declining 2% to 7.49 million sqm at present. The vacancy rate averaged out for all cities is therefore 8.5%. This value should still apply by the end of the year, in spite of the increase in completions. 
 
At 13%, Frankfurt registered the strongest decline in vacancies compared to a year ago. The actual rate was down 180 basis points at 11.3%. Cologne and Munich also registered double-digit declines in vacancies compared to 12 months ago. 

 
Prime rent rises again in Frankfurt and Munich
 
The prime rental price index as an aggregate for all seven strongholds currently stands at 172.11 points (1987: 100). The index has therefore increased for the 12th time in succession and reached the highest level since the third quarter of 2002. Compared to a year ago, the rental price index increased by 2.5%.
 
In the most recent quarter, Frankfurt and Munich registered a change in the prime rent. The city on the Main recorded a 4.5% increase to 34.50 €/sam/month, while Munich registered a 3.3% increase. “By the end of the year, the prime rent could increase again slightly in Frankfurt. In addition, we expect to see an increase in Stuttgart to 19 €/sqm/month, while the prime rents in other markets will remain unchanged,” said Scheunemann.

 

* Big 7 markets: Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart