German Office – secondary locations gaining ground

Offices are being bought mainly in Germany's 7 biggest cities, but a new report shows that investors are increasingly settling for second-best or third-best locations.

According to a study by JLL, from 2007 till halfway through 2016, investors spent €130 billion on buying offices in Germany as a whole. €95 billion of these were spent on offices in Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne, Munich and Stuttgart - the so-called Big 7.

There is also a trend towards buying offices in second-best locations, partly because the capital values have risen by nearly 50% since 2009. The share of the Big 7 in the German real estate market has varied between 54% in the boom year 2007 and about 83% in 2010, as the economy began to recover from the world financial crisis, but the Big 7 are expected to remain dominant throughout 2016-17.

However, within the biggest cities, sub-markets outside prime locations have been attracting more investment over the last few years. For instance, till now in 2016, €4 billion has been invested in offices in second-best and third-best locations in the Big 7, which is more than double the sum invested in all the other 52 urban centres analysed by JLL throughout Germany.

Not surprisingly, the JLL researchers advise investors to ensure that properties satisfy certain conditions like having long-running leases and being top quality and worthy of credit. Moreover, since core properties available in prime locations are few and far between, investors will inevitably have to look further afield, but plenty of such assets are suitable mainly telecommunications enterprises, IT or industrial enterprises, since they have less need to be central than to benefit from lower rents.

This change in orientation has led to a change in relative values. Since the low point halfway through the year 2009, the capital values of top office properties in second-best locations have risen by nearly 50%, more than those of similar properties in prime locations.