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News Release

Frankfurt

German real estate market in excellent shape at the start of the year: Strong investment market and positive lettings market; political risks; subdued outlook


Press release including overview tables [PDF]
Charts [PDF]

 

Frankfurt, 2nd April 2014 – There’s little question that 2014 got off to a perfect start: seldom are forecasts for the coming 12 months so unanimously positive at the beginning of a year as they were in January 2014. The equity markets capitalised on the positive momentum from the last few weeks of 2013 and the moderate recovery in the global economy continued on a broad front, also carried by growth impulses from the industrialised countries. At the same time, the central banks maintained their low interest rate policies, which combined with low inflation rates are designed to have a stimulus effect on the economy. “Even though this consistently positive picture has changed since the beginning of March and the unrest in Ukraine has proved unsettling, as long as the conflict remains at a diplomatic level we do not see any worrying implications for the global and domestic economies, and certainly not for the real estate markets,” said Dr. Frank Pörschke, CEO Germany at JLL. Despite the further recovery in European economic data, business sentiment was also bleaker in Germany at the end of March. As well as the crisis in the Crimea, deflation concerns in the eurozone are contributing to the current uncertainty and are leaving their mark. The ifo business climate index for the industrial sector in Germany fell to 110.7 points in March, down from 111.3 points in the previous month. Prior to that it had risen four times in succession.

Companies are also critical of the further sanctions that are being threatened by political leaders against Russia. They fear this could spur the withdrawal of investment capital from Russia and increase the interdependence of Russia and Asian states at a political and economic level. This could then have corresponding negative consequences for the European and German economies.

The European Central Bank has signalled a slight easing of deflation fears, on the other hand. The rate of inflation is expected to increase again in April and approach the 2% target in the medium term. “On the whole, the fundamental data remains sound despite the political and geostrategic developments in recent weeks, and the German gross domestic product could increase by around 2% over the year as a whole,” added Pörschke.



Positive development on the lettings markets…

The office lettings markets in the Big 7 presented a largely positive picture in the first three months of the year. “At this time, we are unable to detect any reaction by users to the unrest in Ukraine. However, the effects of any potential reaction to these events would also not be felt until the middle of the year at the earliest, because relocations that are planned long in advance are not affected by current problems like these. As before, we expect demand to be based on the positive fundamental economic data and forecast a slight rise this year compared to the previous year,” stressed Timo Tschammler, Member of the Management Board Germany at JLL.


…and an impressively strong investment market

The German investment market appears to be maintaining its momentum. The impressive end-of-year rally in 2013 continued seamlessly into 2014 to produce an equally good start to the year.

“The framework data remains good and the improved economic outlook coupled with the continuing low interest rate are fuelling transactions on the German market for commercial property. While domestic players dominated the market in 2013, we expect to see a much stronger involvement by foreign investors in 2014,” said Tschammler. Furthermore, “the flow of international capital will continue so long as exogenous economic and political risks remain manageable, and the property asset class will benefit from this.”

Helge Scheunemann, Head of Research Germany at JLL, added: “The high price level that has now been attained in some areas can also not yet be identified as a limiting factor. On the contrary, an improved situation on the capital market once again allows higher loan-to-value ratios for borrowings and the banks are reducing their margins in view of growing competitive pressures, so that the market offers attractive conditions for borrowers.”

With around EUR 10 billion in commercially used properties across Germany as a whole, the transaction volume is around 40% higher compared to the first quarter of 2013 and is also equivalent to the volume recorded for the final quarter of 2012. The last quarter of a year is generally the strongest in terms of transaction activity. Even if it is not possible to realise mega-transactions such as the EUR 1 billion Leo I portfolio in any of the coming three quarters, indications are that the transaction volume in 2014 as a whole will be between EUR 35 billion and EUR 40 billion. This would therefore exceed the 2013 volume by up to 30%. The continuous growth since 2009 may arouse fears that the investment market is again moving to a rather unhealthy level, as was the case in 2006/2007. “We cannot confirm this at the present time, however. We observe neither overstatements by the lending banks, nor do the prices achieved appear to be fundamentally unjustified. A well-developed awareness of risk still persists, and transactions are still being intensively analysed,” noted Pörschke.

The increase in transactions this quarter was substantially due to the significant growth in portfolio transactions, which grew by almost 70% to EUR 4.5 billion. Individual transactions amounted to EUR 5.5 billion, an increase of 24% compared to the previous year. Only two out of the 10 largest transactions in the first quarter concerned sales of individual properties: the largest transaction here was the part sale of CentrO Oberhausen for almost EUR 540 million. The other eight deals related to portfolio sales.

The transaction volume in the seven property strongholds amounted to a total of almost EUR 4.1 billion by the end of March. This also includes properties from cross-site portfolio transactions. Somewhat surprisingly, however, the volume fell by 13% compared to the first quarter of 2013, and this was in spite of the fact that transactions were much higher across Germany. Accordingly, the share of the seven strongholds fell from 61% in the first quarter of 2013 to the current level of 41%. This outcome was largely dictated by the large cross-regional portfolio transactions that not only include properties in one of the Big 7 locations. The part sale of CentrO in Oberhausen alone accounted for 5% of the transaction volume for the whole of Germany. “However, we cannot assert from this that investor demand in the strongholds is abating, and we predict that the share of the Big 7 will increase again later in the year,” said Tschammler.

Munich remains the number one investment stronghold with a transaction volume of EUR 1 billion. It is the only city out of the Big 7 to have registered an increase in transactions (14%) compared to the previous year. Frankfurt is in second place with EUR 780 million (-11%), followed by Düsseldorf with EUR 700 million (-8%).

Investors also continued to focus on office properties in the first quarter of 2014. With a share of around 43% of the transaction volume (corresponding to EUR 4.3 billion), this property type is clearly ahead of the retail segment with a 29% share (EUR 2.9 billion). Distribution warehouses also made a strong showing in the first few months of the year. Properties with a volume of around EUR 1.3 billion changed hands, corresponding to a 13% share of the transaction volume. Four portfolio sales, each with a volume of more than EUR 100 million, contributed to this result.

Investors continued to show strong interest in top office properties in prime locations in the first few weeks of the year. As a result, office prime yields again fell slightly to an average of 4.61% for the Big 7. This decline was caused by the slight decreases in yields in Berlin, Hamburg, Cologne and Munich by 10 basis points apiece.

Yields also showed some movement outside the top locations but not to the same extent as the prime yields. The average yield for prime properties in secondary locations in the Big 7 strongholds fell slightly to 5.49%, therefore increasing the yield spread marginally to around 90 basis points.

Yields for logistics properties remained more-or-less stable at 6.56% on average for all strongholds. As before, initial yields of 5.65% were also paid for good specialist warehouse products. Shopping centre yields were on a slight downward trend: net initial yields in this segment fell by 10 basis points in a quarterly comparison to 4.60% at present.

“The prime yields could fall further as the year progresses, but strong price increases are not to be expected. Furthermore, in view of the continuing low interest rates for alternative investment products, there is still an attractive higher return for investors,” commented Scheunemann.


Office lettings markets register higher take-up in the first quarter

The German property strongholds made a good start to the year on the whole. The take-up volume between January and the end of March amounted to 697,000 sqm in total and was therefore almost 15% higher than a year previously. “The take-up results would not be a cause for major celebrations among the market players, especially since the picture is very mixed at a regional level,” said Tschammler. The relative changes in take-up compared to the previous year ranged from -18% in Cologne – where take-up reached around 62,000 sqm – and +133% in Stuttgart. However, the capital of Baden-Württemberg still recorded lower take-up than Cologne, at just below 61,000 sqm, and its high growth was from a very low base in the first quarter of the previous year. As well as Cologne, Düsseldorf (-9%) and Hamburg (-3%) also registered lower take-up. On the other hand, Munich increased its take-up volume to 169,000 sqm (+11%), while in Berlin take-up grew by as much as 43%.

The outlook for the rest of the year remains positive. “We forecast a total take-up result of around 3 million sqm, which remains in line with the average for the last 10 years,” said Tschammler. Scheunemann added: “The lettings market will not only be supported by large searches above 10,000 sqm but also by the solid economic data. Companies are also continuing to recruit new staff particularly in the services sector, which is so important for the office market.”

Net absorption will also remain positive at almost 700,000 sqm, which is just 15% below the total level in 2013.

“Tenants still have high expectations with regard to the efficiency and quality of office spaces. We observe that companies make no cutbacks here, and if they find they are unable to meet their high requirements through a physical move then remaining in the existing office space is a real alternative. Lease extensions are increasingly becoming a market-influencing factor that has to be addressed by owners and advisers. At the same time, tenants are taking longer to make decisions as they are undertaking more intensive reviews of their space options. This is particularly the case for large companies, which increasingly recognise the strategic importance of office workplaces not only for the overall calculation of costs but also for employee satisfaction,” commented Scheunemann.


Completions are rising again – vacancies fall further

The new-build volume increased by almost 40% in the first quarter to a total of 226,000 sqm. Munich registered the strongest increase to around 66,000 sqm, but this was from a very low level. In Düsseldorf, the new build volume also increased almost nine-fold in the past 12 months to reach almost 37,000 sqm. The picture is extremely mixed, however: in Berlin and Cologne, for example, no office space at all was completed.

Completions are expected to amount to around 923,000 sqm in the remaining three quarters of 2014, taking the annual completions volume to more than 1.1 million sqm. This would therefore be 30% higher than the 2013 volume. “In our view, this increase will not cause a significant negative effect on the market development either,” stressed Tschammler. While 88,000 sqm (almost 40%) of the 226,000 sqm completed in the first quarter are still available on the market, the share of unoccupied new stock will drop to 32% in the remaining quarters.

Total vacancies across all seven strongholds fell by a further 6% in the first quarter of 2014 to 7.2 million sqm. The average vacancy rate for all cities also fell by a further 15 basis points to 8.1%. In a 12-month comparison, Munich registered the strongest decline in vacancies of 14% to a rate of 7.0%. Cologne and Hamburg also recorded above-average reductions in their respective vacancy volumes of around 7%. Only in Düsseldorf did falling demand combined with an increase in new stock have an impact on vacancies, which grew by almost 3% to 1.04 million sqm. The vacancy rate here is 11.5% and therefore remains the highest among the property strongholds.


Prime rent rises only in Stuttgart in the first quarter

The strong demand coupled with the further reduction in vacancies caused the prime rent in Stuttgart to increase by 50 cents to 19 Euro/sqm/month in the first quarter of the year. This represented a 3% increase both on an annual and a quarterly basis. In all other cities, the prime rents were stable on a sequential basis. However, year-on-year the nominal rental prices grew by 6% in Düsseldorf, almost 3% in Frankfurt and around 2% in Munich. The JLL rental price index for all seven strongholds increased for the tenth time in succession to 173.14 points, which is its highest index level since Q4 2002.

“As the year progresses, we expect to see further slight rental price increases in Berlin, Frankfurt, Hamburg and Munich; the overall increase for 2014 is then likely to be around 1.5%,” said Scheunemann.