Hamburg tops IPD/Alstria Index for rent adjustment potential

According to the latest soundings from the DMX German Office Rent Reversion Index, an annual survey undertaken by IPD Germany and Alstria Office REIT AG, there is further upward potential for up to 2.5% higher rents than are currently being paid in Germany’s commercial offices in its largest cities.

The somewhat complicated index is now in its fifth year, and IPD and Alstria present their findings every year at a presentation in Frankfurt. In essence, the index attempts to identify - by using a specially calculated model - the rent increase potential in each city, providing an indication (in rough terms) for investors as to the likelihood of their current investment falling off a cliff should the current tenant fail to extend their existing lease at renewal time. Yes, we think that’s what it is.

The index and its regional sub-indices are designed to bring more transparency to the German office market by comparing ‘contract’ rents with ‘sustainable’ market rents, and is based on IPD’s primary database of nearly 19,000 office leases across 28 cities.

The study suggests that existing ‘contract’ rents (in the IPD Germany database) rose on average by 1.5% to €13.05 per sqm per month, whereas the average ‘sustainable’ rent is €13.37 per sqm, a rise of 3.7%. (The sustainable rents are those assessed by valuation experts based on a host of relevant local factors).

A comparison of the differences between the contract and the sustainable rents led to this year’s figure of 2.5% upward potential. The corresponding figure last year was 0.3%. Interestingly, representatives of both sponsors expressed doubt about the realism of the valuers’ estimates of ‘sustainable’ rent.

Lars Dierkes of IPD Germany thought the estimate of 3.7% rise in sustainable rents was a tad optimistic. Alexander Dexne, chief financial officer of Germany’s first REIT Alstria Office AG, commented, “It raises the question as to how much valuers are prone to take an optimistic view on rent increases in order to maintain their valuations on a property. I tend to be a lot more sceptical when I meet valuers with lofty expectations of likely future rent increases.”

In any event, the clear winner with the highest potential for rental growth in office leases was Hamburg at 8.4%, followed by Frankfurt am Main at 5.5%, Berlin at 3.8%, Cologne at 3.6%, a range of 21 different B-cities at 2.5% and Munich at 1.2%. Negative potential for rental growth was seen in Düsseldorf with -7.5% and Stuttgart at -4-1%.

This high potential for Hamburg was driven by a strong increase of sustainable market rents of 5.3%, while contract rents only grew by 3.3% in the same period. The spread between the average of the two rents is what leads to the figure for higher potential. The city, in other words, is ‘under-rented’. The opposite is true for Düsseldorf and Stuttgart.

Back-testing the figures, there does appear to be a correlation between the DMX Rent Reversion Index and later developments. Over a ten-year period, the Berlin office market has ‘grown-in’ to its then expected upward potential of 6.5%, to its last-three-years average potential of 1.8%. Both Hamburg and Cologne have become more ‘under-rented’ in that time, while Munich and the 21 B-Cities measured have largely been neutral over the period.