After nine quarters of negative performance, the Victor Prime Office Performance Indicator recorded a slightly positive trend for the first time in the third quarter of the year. At the end of September 2024, the new indicator stood at 165.9 points, 0.4% higher than in the previous quarter. It is now at the level seen between the fourth quarter of 2016 and the first quarter of 2017. From the indicator high in the first quarter of 2022 to the low in the second quarter of 2024, the decline in value was 29.4%. The decline was lowest in Munich at around 27% and highest in Frankfurt, where the negative cycle lasted two quarters longer than in Munich, at just under 33%.

In terms of performance compared to the previous quarter, all five locations are showing growth. Munich has already shown moderate indicator increases since the first quarter of 2024, followed by Düsseldorf and Hamburg in the second quarter and now Berlin and Frankfurt are also out of negative territory in the third quarter. Prime yields are stable, meaning that growth was driven exclusively by the rental market. Both prime rents and rents across the board increased in all five cities, albeit to varying degrees. Berlin's prime locations achieved the best performance. After nine quarters of indicator declines, the German capital recorded an increase of 0.8% to a new level of 179.6 points in the third quarter of 2024. Munich city centre came in second place with a performance increase of 0.4% to 182.0 points. Performance in the banking districts of Düsseldorf and Frankfurt both rose by 0.3%. The indicator in Düsseldorf thus stands at 150.5 points and in the city centre of Frankfurt at 147.8 points. Hamburg city centre follows close behind with 0.2% and 181.4 points. 

_{*Total Return: observed annual performance of the indicator plus the expected returns on the cash flow (net-initial yield of the previous year)}

Due to the good quarterly performance, the decline in Victor's annual performance calculated across all locations continues to slow significantly and now stands at -3.2% (comparison of indicator score Q3 2024 to Q3 2023), compared to -11% in the previous quarter. After three quarters of growth, Munich's annual performance of 1.0% is now also positive for the first time in seven quarters. The other four cities remain in negative territory, although the declines have slowed significantly. Hamburg recorded the smallest decline at -2.6%, followed by Berlin with -3.1% and Düsseldorf with -3.5%. Frankfurt is in last place with -6.6%.

Although the slump on the office investment market continues and the transaction volume in the five property strongholds under review here was even lower in the third quarter at around 500 million euros than in the two weak previous quarters with around 700 million euros each, a cautiously positive mood is spreading among market participants. Institutional investors, who had been reluctant to invest for a long time, appear to be taking a serious look at office properties again and the first fundraisings are starting to take place again. However, interest is focussing even more strongly than before on the prime segment. As Victor is focussing on the prime locations of the five top locations, it is not surprising that the positive trends are more evident here than in the market as a whole. The total return - the annual performance of the indicator plus the net initial yield at the same time last year - is also back in positive territory at 0.9%.

Overall, the stabilisation trends in the prime segment are consolidating and even if there will not be a typical year-end rally, further transactions are expected in the fourth quarter, which will provide additional data as evidence for prime yields.

VICTOR – Valuation performance indicator

Concept

Property markets exhibit cyclical fluctuations from which even the prime German prime office locations are not immune. The volatility of price performance emphasizes all the more how important a transparent market indicator is. In this context, JLL analyses the price development in the prime office locations of the cities of Berlin, Düsseldorf, Frankfurt, Hamburg and Munich. Holders of real estate port-folios and potential investors should be given the oppor-tunity to obtain greater transparency for clearly defined submarkets and identify developments and trends more quickly so they can act accordingly. The indicator analyses the following submarkets, which have a total area of approximately 12 million sqm:

• Berlin – Charlottenburg / Mitte / Potsdamer Platz und Leipziger Platz

• Düsseldorf – Banking district

• Frankfurt – Banking district

• Hamburg – City centre

• Munich – City centre

In these submarkets, the price development of the lettable office space stock is analysed. The analysis identifies the changes in value of the office space stock and reflects the performance (capital growth) over time. In the overall analysis (VICTOR Top-5), the price development of the abovementioned prime office markets was averaged (unweighted). As a result of the differing amount of existing office space and the differing value levels in the individual submarkets, these values were considered with a 20% weighting in the Top-5 Indicator.

Since 31 December 2003, the indicator has been calculated on a quarterly basis and will continue to be updated on a quarterly basis in the future. The short observation intervals provide an adequate picture of short-term market fluctuations and a realistic portrayal of current market trends. In this regard, the Valuation Performance Indicator VICTOR is a valuable benchmarking tool and a trend barometer for the analysed submarkets.

Methodology

The market valuation of the submarkets, based on the effective date, is carried out according to international valuation standards and is based on the JLL database. The assumptions in the model relate to real market data as well as the assessment of JLL professionals. In the model, we refer to an assumed fixed space inventory in the submarkets, actual vacancy rates as of the effective date and different quality proportions. This ensures a real-istic picture of the letting situation and temporal compara-bility of the indicator values. The calculation is based on a discounted cash flow model, which takes into account all valuation parameters relevant to market standard.

Inflation expectations, as well as the market rental growth anticipated by JLL, are explicitly considered in the analysis. The growth of the contractual rents was adjusted on the basis of market standard, assumed indexation regulation and the real inflation rate. The market rents of the prime office locations are analysed by JLL on a quarterly basis and incorporated into the model. The contractual rents are determined over a historic time series, so that a statement about the respective over / underrent status can be made. In addition, explicit ongoing building costs, letting costs and rental incentives as well as estimated void and reletting periods are considered in the cash flow.