Performance of prime offices plunges on minimal transactions

VICTOR-Prime Office Index sees biggest-ever fall, led by Frankfurt

The JLL VICTOR Prime Office Index, which tracks the performance of the best offices in the best locations in Germany's TOP 5 business cities, saw its biggest-ever fall in the final quarter of 2022, plunging by 8.2% over the previous quarter. Overall the index fell by 11.2% for the full year.

Ralf Kemper, JLL's head of valuation, said that achievable prices and the ongoing bidding procedures were 'speaking a clear language', with the interest rate hikes having a clear impact on valuations. "We're not expecting these conditions to change in the short term", he added.

So far, though, there is little sign of a sell-off in prime offices - partly because transaction volumes in German office properties fell to an all-time low in Q4. In all the Big 5 cities yields rose while multipliers fell, which would have led to a sharper fall in performance if rents had not risen slightly over the year (which also influence the VICTOR performance criteria). Office rents in many instances are index-linked, and so have experienced an upward lift through Germany's surging inflation rate, helping to cushion the performance blow.

JLL's figures show an investment volume in Q4 of €1.9bn, a historic low, given that the average volume of the past 24 quarters was €7.1bn. JLL says it's observing less pressure now among sellers than at the time of the financial crisis in 2008 and 2009, when the last big downward trend in the VICTOR index was based on much clearer price visibility. This time around there is much more equity in the assets themselves along with generally more conservative financing, compared to the highly leveraged and LTV era prevailing then, says JLL.

The biggest loser over the year was the Frankfurt office market, which fell 14.1%. Accounting for cash flow yield, Frankfurt's total return amounted to -11.4%. Berlin also corrected at an above-average rate with a total return of -9.5%. Munich was the best performer with -6.1%, followed by Düsseldorf (-7.2%).

The average for prime offices in the five metropolitan areas of Berlin, Munich, Hamburg, Frankfurt and Düsseldorf for 2022 was -8.6% (balance of 11.2% decline in value and 2.6% rental yield). JLL has been compiling the index since 2004.

REFIRE: It's important to remember what the VICTOR index actually reflects - top office properties in Germany's top CBD locations. The emphasis on Spitzenmieten, or prime yields, should always be take in Germany with a pinch of salt, reflecting as it does only the poshest and slickest properties, the filet mignons of the office market, as it were.

Brokers like to stress how well the market is holding up by referring to these Spitzenmieten, which invariably remain high. In reality, this is a very small segment of the total office market, and hence office performance figures need to be viewed in perspective. Collectively, the market is talking of a downward move in valuations for most offices of in the region of 20% to 30%, depending very much on quality, energy rating, and of course, the availability of finance for putative buyers.

There is also plenty of evidence now accruing of companies looking to reduce their overall office requirements, due to a growing acceptance that working from home in some form is here to stay. Corporate planners have had a few years to think about this, and their input is now filtering upwards into board level decisions about actual space requirements, in advance of their existing office leases coming up for renewal. This won't affect the VICTOR Index, which will continue to produce somewhat more flattering figures than for the office market - even at the upper end - as a whole.