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News Release

Frankfurt

German investment market achieves best year since 2007 – lettings market stabilises considerably with a positive outlook for 2014


​Press release including overview tables [PDF]

Charts [PDF]

 

Frankfurt, 7th January 2014 – In retrospect, 2013 performed better in economic terms than many had expected. Germany has already compensated for its stagnant development in 2009, and its absolute economic output has now exceeded pre-crisis levels for three years.
 
The forecast for 2014 is GDP growth of 1.7% after 0.7% last year. This provides the basis for a sustainable recovery with correspondingly positive business prospects and an improved jobs market. 
 
In spite of the rather subdued economic recovery, Germany again registered a new employment record in 2013. On average around 41.8 million men and women were in paid employment last year – more than ever before. This means that the number of those in paid employment reached a new peak for the seventh year in succession. Service providers again provided most of the new jobs, creating 227,000 posts and accounting for around three quarters of all workers. 
 
The euro crisis is still very much present, but was put into more perspective over the year so that the worst of the recession in the eurozone appears to be over for the time being. The stabilisation of the economy as a whole was admittedly bought at a high price - with “cheap” capital available by virtue of the very low interest rates. The prospect of higher interest rates will hang like the sword of Damocles over all first-world economies in the short and medium-term. While the borrowing of funds at low interest rates seems attractive on one hand, on the other hand it is regarded as increasingly problematic with regard to return on investments. In particular, institutional investors such as insurance companies and pension funds are coming under increasing pressure to achieve their targeted rates of return. The era of “cheap money” will continue into 2014 and further increase investment pressure. The real estate industry will initially benefit from this. 
 
“Property gained further importance as an asset class in 2013 and will also remain at a high level in 2014. This is because the global investment requirements of institutional investors remains high and there is a lack of attractive alternatives due to the low interest rates,” said Dr. Frank Pörschke, CEO Germany at Jones Lang LaSalle. He added: “However, since there is no let-up in investor interest in Core products the lack of suitable products in the property sector limits the investment volume in this asset class. Although we have noticed a greater willingness to accept risks beyond the Core segment, the largest volumes will nonetheless still be invested within the Core segment.” Even if the completions volume for new office properties increases again in the Big 7, it will not come close to resolving this product bottleneck. Pörschke said: “The German investment market could gain further momentum, but this will only be poorly documented by the bare market statistics. The buyer’s market is much better than the figures from contract signings suggest.”

 
Strong demand for commercially used investment property drives the transaction volume
 
On the investment market in 2013, total capital amounting to EUR 30.7 billion was invested in German commercial property – an increase of about 21% compared to the previous year. This means that 2013 was the strongest year for property transactions since the boom year of 2007. As was already seen in the previous year, the final quarter of the year proved to be the strongest in terms of transactions. Property worth around EUR 11.5 billion changed hands in the months from October to December, and this volume was also EUR 1.5 billion higher than in the fourth quarter of the previous year. “Not all transactions that were initiated could be notarised in the last days of December, so that we expect to see a very lively start to 2014,” said Timo Tschammler, Member of the Management Board Germany at Jones Lang LaSalle. 
 
“The good economic outlook on the domestic market also provides a basis of trust for property market participants and attests to the attractiveness of Germany as a property investment destination. At the same time this interest is equally supported by foreign and domestic investors,” added Tschammler
 
The relation between the investment volume in the Big 7 and investments outside these established markets has not changed from 2012. As before, around 60% (EUR 19.5 billion) was invested in Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart. Retail property was of primary interest in other cities. “High purchasing power and centrality indicators in densely populated and economically strong catchment areas combined with strong demand from tenants such as national and international retail chains means that second-tier cities are also of interest to investors,” said Helge Scheunemann, Head of Research Germany at Jones Lang LaSalle. 
 
Asset/fund managers and special funds formed the strongest buyer group in 2013. These two groups invested a combined EUR 10.5 billion in commercial property and therefore accounted for a third of the total investment volume noted for 2013. One fundamental difference was that while most foreign fund management companies sold more properties last year and therefore on balance reduced their overall property holdings in Germany, special funds are clearly net buyers (with a balance of EUR 4.2 billion). Insurers, pension funds property companies and REITs also bought more than they sold, as did private investors including family offices. 
 
Open public funds were ranked in third place among the buyers. “That this type of investor is also currently a net seller comes as no surprise. The division of the sector into active and cash-rich funds on one side and funds in the liquidation phase and therefore obliged to sell on the other is becoming increasingly obvious,” said Timo Tschammler. When open funds do buy, they mainly buy office properties. Closed funds also acted with more caution over the year, but in contrast to the open funds they sold far fewer properties and therefore built up their property holdings on balance with a focus on retail property. The sales activities of banks also make for an interesting analysis. Due to some large portfolio sales (eg Max Bahr Immobilien by RBS), banks have increased their current share of the sales volume to 6%.
“Also in 2014 we do not expect to see a big sell-off of distressed property assets by banks. There will be isolated instances of such properties or portfolios coming onto the market, but for the most part these should be liquidated relatively quietly and in small steps. The pressure to sell has been reduced through amortisation, rental increases, the overall positive market development and the low interest rates,” said Timo Tschammler.
 
Domestic investors increased their share of the total transaction volume (all commercial property asset classes) to 67% from 58% in 2012, while the share of foreign capital fell slightly as a result. “However, this in no way signifies that interest from foreign capital is waning. Foreign investors make an appearance in almost all major transactions, but do not always close a deal,” noted Tschammler. “Worth noting is the interest of foreign investors in portfolios: the share of foreign capital in such transactions reaches around 45%. In addition, in absolute terms foreign investors acquired properties worth around EUR 10.1 billion in 2013, and this is only marginally less than in 2012 (EUR 10.5 billion).
 
The analysis of the different asset classes reveals no fundamental differences from 2012. Office properties again accounted for the highest share of the transaction volume at 46%. Retail properties accounted for a 26% share, followed by mix-used properties with 11% and warehouse and logistics properties with at least 7%. 
 
The office prime yields were still on a slight downward trend in individual cities. Each of the Big 7 cities now has a net initial yield of below 5%. Aggregated across all cities, the prime yield in the office segment fell to an average value of around 4.67%. Shopping centre yields are at a similar rate of 4.70%. 
 
Prime yields for logistics properties fell considerably compared to the previous year. Due to the high demand, yields fell to an average of 6.56%. 
 
“For 2014 we expect a stable development overall for yields. Based on the continuing strong demand for prime properties the prime yields could even fall slightly again. At the same time, it will also depend on how the capital market environment develops during the year. The interest rates will probably stay low and therefore offer an attractive environment for companies and debt-oriented investors,” said Helge Scheunemann. A reduction in the risk premium (on the basis of 10-year government bonds and the prime yield for office properties) from almost 300 basis points at present to around 260 by the end of 2014 will also not restrict investments in German commercial property.”
 
Financing options for Core investments also remain in force in 2014. Traditional lenders as well as increasingly insurance companies and pension funds are still providing loans. For both groups, the debt-financing business is an attractive area of activity in the light of Solvency II. “Rising competition among lenders will increase the pressure on margins in 2014, and this is in combination with a slight increase in loan maturities against the background of a moderate rise in risk appetite,” said Dr. Pörschke. He added: “A further adjustment of the book values among today’s property owners as well as risk-neutral banks, which are also providing more financing for property other than Core products, could create an even stronger impetus on the German investment market in 2014.”

 

 

 

 
Lettings market has clearly stabilised – positive outlook for 2014 based on good overall economic data

In line with the relatively positive economic development, user demand on the most important office property markets in Germany remained at a comparatively high level last year. In 2013, take-up on the office lettings markets in the seven German property strongholds (Berlin, Düsseldorf, Hamburg, Frankfurt, Cologne, Munich and Stuttgart) amounted to around 2.93 million sqm and was therefore almost in line with the previous year’s level (-3.5%). In a regional breakdown, however, there were marked differences between the cities in a 12-month comparison. For example, Stuttgart stood out with an increase of almost 35%, and Düsseldorf and Cologne also registered increases of 19% and 18% respectively. While Hamburg also recorded a slight increase in take-up to 440,000 sqm, the remaining three strongholds - Frankfurt, Berlin and Munich - saw their take-up volume decline by between 14% and 17% compared to 2012. 

Timo Tschammler added: “Office users generally want to achieve an improvement in location or quality through a move. On the other hand, however, there is an increased sensitivity to price, and it is often more cost effective to remain in the current location than to move. Owners seek to lock in potential tenants with concessions on rents or office installations. Overall, this leads to a lengthening of the decision-making process, not least because the search for suitable space already takes longer in itself.” This also applies especially to international companies that are involved in coordination processes with central offices outside of Germany. 
 
The pattern of demand also remained well balanced in 2013: the top five industries accounted for slightly more than 50% of take-up across the Big 7 cities. As is traditionally the case, business service providers were in the number one position with a share of almost 20% (2012: 17%), followed by industrial companies in second place. Banks and financial service providers, which were only ranked eighth last year, moved into third position after they resumed more active leasing activities and achieved a share of more than 8% with a take-up volume of almost 250,000 sqm. 
 
Office vacancies in the Big 7 amount to around 7.3 million sqm, which means vacancies declined by a further 6% from the end of 2012. Modern and high-quality fittings and fixtures that meet user requirements are available in only part of this stock. Hence the share of vacancies rated as high-quality space has fallen again for the third year in succession: a lower share than this was last registered in 2008.
 
“During 2013 the vacancy rate across all seven property strongholds fell from 8.8% to 8.3%. This is the lowest level since 2002. With continuing positive demand along with a moderate rise in the completions volume, it’s nonetheless unlikely that there will be a further decrease in the current year,” said Helge Scheunemann. In a regional analysis, the reduction in vacancies in a 12-month comparison was most pronounced in Munich (-14%) and Cologne (-10%). Only Düsseldorf registered a slight increase in vacancies. 
 
Compared to the previous year, net absorption in the Big 7 fell by more than 200,000 sqm but is still in line with the five-year average. In 2013 the volume of occupied office space increased by around 790,000 sqm. 
 
In terms of the completions volume, the last three months of the year saw a significant change compared to the developments and observations of the first three quarters. As expected, the situation turned round completely and converted a minus figure in a 12-month comparison to an increase of 8% by the end of the year. Total completions reached around 890,000 sqm in the Big 7 during 2013. In the last few years, developers had focused their attention on the Munich and Hamburg markets, but Frankfurt is now the office market with the highest new construction volume. More than 204,000 sqm of new or fully renovated space came onto the market, which represented an increase of more than 140% compared to the previous year. At almost 60% apiece, Stuttgart and Cologne also registered above-average increases in the completions volume. In contrast, the decline in completions was particularly pronounced in Hamburg (-25%) and Düsseldorf (-52%). 
 
In 2014, total completions are expected to reach 1.17 million sqm, which equates to a 32% increase compared to 2013. More than a quarter of the volume will apply to Frankfurt. Of the total volume in the Big 7, 63% is already occupied in that it has been pre-let or will be occupied by the owner. This means that around 439,000 sqm is available to the open market and companies seeking space.
 
“The prime rents increased in Düsseldorf, Frankfurt and Munich during the year. By the end of 2013, the aggregated prime rate was 1.9% higher, which was slightly below the growth rate of the previous year (2012: 3.0%). If the positive demand for high-quality spaces in central locations continues, rental prices will also increase in 2014, albeit only moderately by 1%,” said Timo Tschammler
 
Average rents were also on an upward trend in 2013, with average growth of almost 1.5% registered for all cities. Over the past three years there has been a very high correlation between the prime rental price index and the average rental price index (correlation coefficient of 0.95%). “This clearly shows that rental price growth is also reflected in the wider market and is not only limited to the narrow prime segment,” said Scheunemann.