German investment and leasing markets drifting further apart

One of the notable features of the German real estate market through 2014 was widening gap between the investment markets and office leasing markets in Germany’s biggest cities. While the large brokers were cracking open the champagne bottles to celebrate a record year for investment transactions, their colleagues responsible for leasing were experiencing their weakest year for five years.

In the Big 6 cities of Berlin, Hamburg, Munich, Frankfurt, Düsseldorf and Cologne a total of 2.7m of new office leases were signed, 4.3% less than in 2013 and well below the 10-year average of 2.9 sqm. The figures are even starker when Hamburg and Berlin are excluded, as both those cities had an INCREASE of 12%, but this could not compensate for the -5% in Munich to the -31% in Düsseldorf.

At the same time (with the exception of Düsseldorf) all the main broker groups are at pains to point out the overall fall in the availability of office space in the bigger cities, such that the actual vacancy rates again fell – a trend likely to be continued in 2015, as more than half of the new-built office space coming on stream is already pre-let.

The winners in the current market are those locations on the edge of the cities’ classical Central Business Districts, where increasingly cost-conscious tenants are clustering.

Brokers Colliers and Savills are predicting for 2015 that the current drift between investment and leasing activity will continue. After moderate rental growth in 2014, office rents are expected to stabilise as potential tenants hold off on major leasing decisions in anticipation of falling rents. With less new office property coming on the market, however, a floor exists which will provide good support, say the brokers.

Both brokers however anticipate investment volumes of again, €35m to €40m, with the wall of money looking for suitable assets likely to drive yields in cities like Munich down to 2007 levels. Investors will be drawn into taking on more risk, and finance providers will also be drawn further into non-core financing. As a rule, investors’ yield expectations rise on average by 1.4% when they invest outside the tried and trusted A-locations, which they are increasingly being forced to do.