JLL’s VICTOR Index at new high, but signals slow-down

Property advisor JLL’s VICTOR index, which tracks top office properties in Germany largest cities, rose by 3..6% in the fourth quarter of 2013 versus the same quarter a year earlier, which, while hitting an all time high, also flagged a slowing-down from the 5.5% the prior year.

The index says that office properties in the best districts in the Top-5 German cities produced a Total Return of 8.3%, made up of rental income and capital appreciation. This figure is much higher than the 3.6% calculated by IPD, but the JLL figures concentrate on the very top properties in the best locations in the central business districts of Berlin, Munich, Frankfurt, Hamburg and Düsseldorf, rather than the broader basis used by IPD.

The JLL figure is made up of 4.7% cashflow and 3.6% value appreciation – which while good, is below last year’s Total Return figure of more than 10%. Nonetheless, it does show how the index has gained a full 27.3% since the trend reversal noted in the second quarter of 2009, in the depths of the financial crisis, which proved a key inflection point for Germany.

Heading the list for Total Return was Frankfurt (10.1%), followed by Berlin (9%), Hamburg (7.3%), Munich (7.2%) and Düsseldorf (6.9%). The VICTOR Index hit its all-time high after ten years with the latest readings, despite the fact that expectations for returns fell steadily throughout the year; in January 2013 the expected premium for investment in office real estate over risk-free government bonds was 490 basis points, by December it had fallen to 406 bps.

Andrew Groom, head of valuation advisory at JLL in Frankfurt, commented on the latest VICTOR readings. “The performance of prime office markets, also shaped by the competition among institutional investors for core property, significantly profits from a clear preference from classic as well as alternative financiers such as insurers and pension funds, which still place security over possible high returns. Despite a tendency toward higher loan-to-value ratios, which can indeed influence investors’ transaction decisions, achievable returns as well as the already very high price level of these assets are increasingly coming to the fore.”