A major co-working push in Germany helped to drive office turnover to above-average levels in the first half of the year, according to Catella.
Research by the investment management company reveals an above-average turnover and a significant number of large-volume individual transactions during the first half.
Prof Dr Thomas Beyerle (pictured), head of research group at Catella, says turnover is high because companies are pursuing expansion plans by hiring employees and expanding into new business areas.
“In the office segment, we are experiencing the first major co-working wave in Germany, and the residential segment is becoming more and more ‘institutional’,” he says. “Basically, these are the consequences of the very good economic situation, but also of the interest rate development and thus the run on real estate – especially of multi-asset managers. The allocation ratio in real estate has risen from 8.5 to 9.2 per cent in the last five years, not least because of this.”
The research shows take-up of office space in the top seven German office locations of Munich, Frankfurt, Berlin, Düsseldorf, Hamburg, Cologne and Stuttgart rose to 1.87 million sq m during the first half of 2019. All seven locations recorded growth in take-up apart from Munich, which recorded a decline of 9 per cent.
“In Munich, the decline was due to the very tense situation with regard to available space,” explains Beyerle. “In other words, although demand is there and the economic situation is still very good, the new construction/first occupancy segment is difficult to get on the market. This is also due to the fact that investors are also focusing very strongly on the residential segment and that larger office space is difficult to obtain.”
In the past 12 months, top office rents have continued to rise in all seven markets. The average rent at the end of the first half was EUR31.61 per sq m, about 5 per cent above the previous year's level. The strongest rise in prime rents was in Cologne, where it increased by 12.5 per cent to EUR24.75 per sq m.
In addition to deficits in new construction and strong demand, the extreme focus on the central business districts of German cities helped to push rents higher. “Investors as well as users obviously follow the doctrine that it is better to be in the inner cities than in the ‘cheaper’ hinterland. However, this depends on the respective industry,” says Beyerle.
Vacancy rates fell in all top seven German markets and currently averages 3.6 per cent, which is 0.6 percentage points lower than in the first half of 2018. However, the pace of vacancy reduction is slowing due to rising construction activity. In addition to Berlin, Munich and Stuttgart are now also approaching the 2 per cent threshold. In Dusseldorf and Frankfurt the vacancy rate was significantly higher at around 7 per cent.
The report suggests that with interest rates close to the zero line, there is yield pressure from traditional core investors, including life insurance companies and pension funds, into the value-add segment. “At the same time, more and more ‘opportunistic investors’ are focusing on value add as a return stabiliser,” adds Beyerle. “In other words, pressure is now coming from both sides – conservative and risk-averse – on the value-add segment.”
Due to the continuing supply shortage in the core office segment, the net initial yields in the top seven markets fell to an average of 3.03 per cent. In addition to Berlin and Munich, Frankfurt has also fallen below the yield threshold of 3 per cent. The peak yield fell most sharply in Cologne (-35 basis points) and, at 3.25 per cent, it is now almost at the Stuttgart level.
“There are still good arguments in favour of the stability and attractiveness of the commercial asset class,” concludes Beyerle. “At the same time we will receive a number of sentiments and forecasts in the coming weeks and months regarding an impending trend reversal of the economic indicators on the financial and capital markets, that are ahead of the real estate markets. In a nutshell: liquidity meets economic slowdown.”
The total transaction volume in the top seven markets was EUR13.22 billion, a reduction of 10 per cent from the previous year and the second-highest result of the past 10 years.
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