Prime Office

Unweighted average of all submarkets

At -11.2%, the current annual performance of the VICTOR Prime Office Indicator in 2022 is falling more sharply than ever before. As early as the second quarter, the long-lasting growth phase turned negative. While the losses in the second and third quarters were still moderate (-2.2% and -1.5%), the decline in the fourth quarter was significant at -8.2%. Overall, the indicator score for the top locations observed in Germany's real estate strongholds stood at 207.1 points at the end of December 2022, down on the level seen in the fourth quarter of 2019. The key factor here is the stimulus from the capital market, with significant increases in prime yields. Although only a few transactions took place and the transaction volume on the office property market amounted to just EUR 1.9 billion in the fourth quarter, ongoing sales processes show that the effects of key interest rate increases as well as higher financing conditions are having an impact on investors' bidding behaviour. In addition, transactions at "old" price levels registered in the first three quarters of the year were now completely absent in the fourth quarter. By contrast, the rental markets proved stable in 2022. The trend is emerging that companies willing to relocate are often looking for somewhat smaller spaces because of the increased proportion of home offices. At the same time, they attach importance to modern, high-quality space in prime locations and are prepared to pay higher rents for it. This also explains why prime rents have risen in all the cities surveyed, while market rents have fallen slightly in some locations.

Overall, the total return for 2022 is at -8.6% and thus below the previous year's figure (+8.2%). It remains to be seen whether the current increases in yields have reached a bottom or whether further adjustments will follow. This depends to a large extent on the development of interest rate policy. The transaction markets will presumably not pick up again until there is more stability on the financing markets and market participants can once again make transaction decisions on a more reliable basis. In any case, demand for high-quality office properties is still present.

Market Comparison

Q1 2015 to Q4 2022

Comprehensive performance analysis

• Prime yields rise strongly in all real estate strongholds considered

• Hardly any transactions in the fourth quarter

• Letting markets prove robust

• Prime rents decouple from average rents

• Focus on space with very good quality fittings in top locations

• Importance of ESG compliance continues to grow

• Dusseldorf with strongest growth in rents

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 esti-mated void and reletting periods are considered in the cash flow.