German growth pointing to looming office shortage - study
New research published by London-based pan-European real estate investment manager Tristan Capital Partners suggests that a sharp tightening in supply in the German office market is just around the corner. With Germany’s rate of economic growth expected to almost double in the near term, the traditional lag between growth prospects and office take-up could start to shrink rapidly, leading to clear supply shortages.
According to Ric Lewis, CEO of Tristan Capital, “With unemployment in Germany the lowest since the early 1990s and real wage growth at a five-year high, Tristan forecasts that emerging strong pentup demand will squeeze real estate supply, particularly for offices, over the next year or so.”
The last few months have seen a remarkable increase in leasing activity, not just in the prime retail and office locations of bigger cities, but also in smaller markets all across the country, the company said. “This is reflected in the 33 leases that we have either regeared or signed for over 11% of the G3P fund’s total rental roll in just the past eight months,” added Ralf Nöcker, managing director of Tristan’s German Properties Performance Partners Fund (G3P).
German GDP expanded three times faster than the Eurozone average last year and this has helped to strongly boost consumer sentiment and underpin retail sales. However, the economic growth has not yet translated into higher office take-up volumes, reflecting the normal lag between firms becoming more confident in the outlook and them executing strategic real estate decisions.
Tristan claims pent-up demand for office space is building, and once positive business sentiment has reached a critical level, could be released. With vacancy rates at multi-year lows, supply-shortages are probable in the next year or two.
The G3P Fund manages a diversified portfolio of 44 properties, of which roughly half are offices and 40% retail, based on income contribution, with a total floor area of 168,912 sqm located in Germany’s ‘Big-5’ cities and a range of regional centres. Tristan Capital took over the fund’s management in September 2013 at the request of the existing investors, and has since stabilised and restructured the portfolio.
The increase in German leasing activity has not been confined to prime locations in major cities. Secondary markets that were, until recently, seen as peripheral and less attractive have also been picking up speed, the company said. Noteworthy deals closed recently by G3P include a 10-year 1,700 sqm office lease extension in suburban Cologne, Danish household goods retailer Tiger DK’s signing a retail lease in Kiel, and a new office tenant signing in Bochum despite the adverse economic impact on the city caused by the closure of a local Opel car plant.
At a wider European level, the renewed strength of office markets is already being reflected in the well-known European Office Property Clock from broker JLL, which shows for Q1 that, for the first time in two years peak office rents have risen not just on a quarterly basis, but on an annual basis. Peak rents in Dublin rose in Q1 by 20% and in Lyon by 15%, although in most other large cities rents have been fairly stable (Paris +3.5%, Moscow -4.3%). JLL expects to start reporting on rising rents soon, though – London will lead the pack, Paris is recovering, and most German cities are about to show “moderate growth”. Lease activity in London, Oslo, Moscow and Madrid showed no great deviation from the quarterly average of the last five years, nor from last year’s figure.