German offices enjoy boom

Germany’s office sector is enjoying something of a boom. Prime rents in Germany’s Top 5 cities - Berlin, Frankfurt, Munich, Düsseldorf and Hamburg – have risen by between 2% and 7% this year, according to a survey carried out this autumn by Freiburg-based Center for Real Estate Studies (CRES) and Gesellschaft für Immobilienwirtschaftliche Forschung (gif). Düsseldorf witnessed the smallest gains, at 2%, compared to 5.6% in Frankfurt, 5.3% in Hamburg and 7% in Munich. However, those gains are dwarfed by the forecast for Berlin, where prime rents are expected to soar by 12% by the end of next year. As a result, Berlin’s office market has the best prognosis going forward – even after 2018, rents are expected to rise by 4.4% a year until 2021, which would represent the strongest rental growth of any major city in Europe, according to ratings agency Scope in Berlin.

‘What’s really interesting in Germany is that you have markets like Düsseldorf and Frankfurt, where vacancy rates are around 8% to 9% and then the other cities in the Top 7 where they are between 3% and 5%,’  said. ‘There are even sub-markets where vacancies rates are sub-3%. As a result, everyone is having a tough time estimating future rental growth because it’s not going to be the same if vacancy rates come down to 5% from 7% as it will be if they come down from 5% to 3%. Next year, we’re estimating around 2% rental growth in the Top 7, on average.’

BNP Paribas Real Estate Research is also forecasting growth in European office markets over the next few years, driven by ‘a considerably improved domestic demand’: ‘German cities are likely to see strong rental growth over the next few years, particularly in Berlin with the fastest growth due to the bottleneck of space and the catch up effect, followed by Frankfurt which could benefit from Brexit,’ said Thomas Glup a senior economist at BNP Paribas Real Estate.

The story of European investment since 2013 has been one of continued yield compression and accelerated capital growth, supported by record transaction volumes. As a result, as we move into 2018, the cycle in Europe is likely to be at a point of inflexion. Similar to the occupational market, cities across Europe are all at different stages in the cycle and the speed and magnitude of change will differ. Further yield compression is expected in most European markets and a stable income will be enough to ensure that total returns do not turn negative for most cities, according to BNP Paribas Research.

There will be around €55b in commercial real estate deals in Germany this year, according to JLL, of which offices are likely to account for between €25b and €30b. ‘Next year, I expect demand to stay strong, with prime initial yields tightening to 3% to 3.5%,’ Lütgering said. ‘I think yields will stabilize at this level, so in 2018-2019, we will see rental growth and capital value growth.’