Guest column: ABBA Strategy: A selective approach for attractive office investments

Seeking out low-risk assets, the majority of investors are continuing to make a bee-line for office properties in the prime locations of the biggest German cities. The downside: astronomical price levels, low yields and intense competition. With an ABBA strategy, investors can avoid these pitfalls. Here's how.

Throughout the corona crisis, the German office property market has proven itself to be a safe and stable harbour. True to the motto, "location, location, location", core properties in the A-locations of Germany's biggest cities remain an embodiment of security and stability for many investors.

But this comes at a price. German price levels partly exceed those of the top European locations London and Paris, while the annual gross yields are falling, currently only ranging between 2.30% and 2.80%.

At the same time, bidding processes, with often 80 or more investors competing for an office property in an A-location in one of the top 7 cities, are now the rule rather than the exception. And even the supposed security of the A-location could turn out in the end to be a false dream in the end for many an office property. Tenants, whose business models come under pressure, could in future increasingly opt for the cost saving of more home office working, and reduce space or relocate to secondary locations.

ABBA revisited: Oldie but Goldie

For investors looking for attractive investment opportunities with reasonable returns, it is therefore worthwhile to turn to a classic: the familiar ABBA strategy. Modern properties with good transport connections and well-connected properties in the B-locations of the top 7 cities, as well as in the A-locations of the B-cities can offer cost and yield advantages, and are well positioned for the challenges of office transformation.

However, to avoid experiencing their own proverbial "Waterloo", investors need to adapt the ABBA strategy to the current profound changes in the office real estate (investment) market. These include both the transformation of working environments and user needs as well as the increasing demands for sustainable solutions. Success in the long term will mean selectivity - both in terms of location, and in "tenant-centricity" in choices of asset and property management.

From desk factory to multi-dimensional think tank

The office will remain an important anchor point for companies and a central building block of corporate culture. What is clear, however, is that hybrid working models will remain an integral part of the new working worlds beyond the pandemic.

According to a survey by the Nuremberg Institute for Employment Research (IAB), 65% of the companies surveyed with more than 250 employees are planning to expand their home office models. Because in the "war for talents", flexible working concepts have become a trump card for many employers.

Hybrid office worlds that meet the demands of this new working world must be more than mere desk factories. What is required are think tanks that function as places of exchange, promote the creativity of office users and ensure the well-being of users and visitors. At the same time, the building should be as energy-efficient and sustainably certified as possible.

To meet these New Work requirements, multifunctional, open and networked meeting spaces such as meeting rooms or café and lounge areas will be indispensable. Their share of the total office space should range between 30% and 50%. Spaces for concentrated work or for individual discussions will complement this space configuration.

In addition, such office space must offer a pleasant indoor climate and an agreeable 'atmosphere' to a greater extent than in the past. More important than ever will be the air-conditioning in the offices, the amount of daylight and air quality, along with services such as gastronomy, bicycle repair workshops or fitness facilities.

Office properties in ABBA locations are often well-positioned for this. Compared with properties in A-locations, they tend to be less dense and have a simpler but good standard of equipment and technology. Modern working environments that are equipped both with the flexible working culture once the pandemic is in the past, AND which meet future sustainability requirements, can be often found and operated in ABBA locations more easily and cost-effectively.

Commuting advantages

A key factor in all this are transport links. This is because well-connected workplaces in ABBA locations are often closer to home for many employees and visitors than the A-locations in city centres. B-locations close to the city centre, such as Hamburg's City-Süd, for example, offer good accessibility with short commuting times, but at the same time also offer attractive local amenities and excellent connections to the city centre.

In a scenario where up to a third of employees work regularly and on a rolling basis from a home office, an office rental in a secondary, well-connected location will meet the needs of many people for a hybrid working model.

Pressure for change and investment resources

For companies not dependent on being in a prime location for prestige reasons, and who need to keep an eye on costs, ABBA locations offer an attractive alternative. This is especially so if they do not want to do without modern office space nor are in a position to reduce personnel costs. The rental and ancillary costs per employee and square metre are significantly lower.

Rents in B-locations, for example, are between 50% and 100% below those in A-locations. A lower occupancy rate of the rented space in prime locations as a result of staff working from home will quickly make itself painfully felt in the profit and loss accounts.

And, last but not least, the higher-quality fixtures and fittings in buildings in core locations leads to higher operating and ancillary costs, with the property ageing faster than properties in ABBA locations. The same applies to the higher costs incurred when vacancies arise in the primest locations.

Selectivity is not only important for the properties themselves, but also with regard to the micro-location of the property. In addition to good transport links, important selection criteria are a heterogeneous tenant mix and viable demand in the localised market.

So, for example, in locations that are dependent on the demand for space from a large corporation, a switch to hybrid working can result in a reduction of office space and thus large-scale vacancies at this location. But equally important are factors such as positive demographic developments as well as attractive universities and a healthy local housing market - with more and more companies concentrating on locations that offer a well-trained reservoir of workers in the long term.

Flexibility is the key

At its heart, a successful long-term ABBA strategy involves having a close relationship with a property's tenants. Investors and portfolio holders need to fundamentally re-think their transactional understanding of the real estate business - that is, renting space for money.

In the future, it will be more about putting the tenant experience at the centre of their operational actions. In an era where products and services are increasingly available at all hours thanks to digitalisation, investors also need to keep pace and thoroughly digitalise their asset and property management services.

Providing virtual service platforms for tenants that offer a whole bundle of information and services such as booking systems for flex spaces, parking spaces or conference rooms are a logical step in this direction. Incidentally, these also help landlords to much better understand their customers' wishes and to react to them quickly. In this way, landlords can create a true hospitality environment for the end users of their office properties and foster a genuinely attractive tenant experience.

About the Author

Rolf Mensing is the head of Germany CLS Holdings.