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Ingo Hartlief

EXPERT VIEW  

Upward trend on the German commercial real estate market


By Ingo Hartlief, Chief Operating Officer, Corpus Sireo, Cologne

The year 2014 has made a very good start, and economic performance in Germany is encouraging. There is also a corresponding increase in investor interest in German commercial real estate. These investors are targeting strengthening demand for office space and rising rents. The following assumptions of Corpus Sireo - the leading German provider of investment and asset management services with a wide network of branches - are supporting the optimistic assessment of the German market for commercial real estate.

Assumption 1: Economic growth in Germany is resulting in increasing demand for office space

Despite ongoing uncertainty, also as a result of the Ukraine crisis, the leading indicators are pointing to further economic recovery. German economic growth is forecast to come in at 1.9%, the unemployment rate will fall further to 5.2% (ILO) and the employment rate will probably rise to 78.2% in 2014. These assumptions mean that demand is likely to increase for office premises. On the rental markets, we expect to see a reduction in vacancy rates and rent increases; it is foreseeable that this will be followed by price increases on the investment markets.

Assumption 2: Financing of commercial real estate is becoming cheaper

We are observing increasing competition and declining bank margins despite the trend towards higher interest rates. LTVs have risen to approx. 70%, and credit availability is good. Core properties continue to be the focal point of financing activities; this area is characterised by fierce competition between lenders. The margins for average commercial properties will fall to approximately 150bp despite slightly higher interest rates. Overall, financing for commercial real estate in Germany will become cheaper.

Assumption 3: Rising demand for office premises with a positive impact on rental markets

Demand for office premises will continue to rise as a result of economic growth; the rental markets are responding with a reduction in vacancy levels and rent increases. The currently moderate volume of completions is also having a positive impact on rental markets. Turnover with office premises was high during the past three years, and this trend will continue in 2014. The process of reducing vacancy levels is making progress particularly in top-20 cities. In consequence, there is likely to be a further increase in rent levels, and the discrepancy between prime rents and average rents is likely to decline.

Assumption 4: Ongoing investment pressure is driving transaction volumes and is reducing risk aversion

Strong demand from within Germany and abroad is resulting in higher trading volumes, prices and ‘side-stepping’ movements of investors. There is a strong inflow of funds from abroad, and we are observing increasing levels of activity particularly with regard to private equity and funds. Investors continue to focus on ‘core’ products; product availability is correspondingly low, and acquisition yields are falling. At the same time, there is strong investment pressure and yield expectations have risen. In consequence, we are already observing certain side-stepping movements in subprime locations, regional markets as well as properties with optimisation potential.

Conclusion and outlook: Investors focusing on German subprime locations

Core properties at attractive locations outside the German ‘Big 7’ are investments offering stable values and good yields prospects. This is also demonstrated by the annual study “GERMANY 21 – Regionaler Büromarktindex”, in which Corpus Sireo compares the German top-7 cities (Frankfurt, Hamburg, Munich, Cologne, Berlin, Düsseldorf, Stuttgart) with 14 regional cities (Aachen, Bonn, Bremen, Dortmund, Dresden, Essen, Hanover, Karlsruhe, Leipzig, Mainz, Mannheim, Münster, Nuremberg, Wiesbaden). A striking aspect is that the office market in the 14 regional cities mostly achieve a more stable performance than the traditional German prime locations. Overall, since the beginning of 2008, rents in the regional office locations have performed better in the centres of the cities than in the other municipal districts. New premises built since 1995 in the city centre have produced a particularly positive performance. Properties which were built before 1945 are also very popular. Rents for these properties have performed very well at the subprime locations, and are leading the index. The focus on German subprime locations is becoming more and more important for investors. And there are various reasons why this is the case: The vacancy rate is low, prime rents are stable and long-term rental agreements have been concluded with local companies. At the prime locations, prices are frequently driven by fierce competition between investors - this is (still) not the case in the subprime locations, and investors in such locations are less ‘driven’ by the market. This means that there are good prospects for investors. ih


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