Prime German office returns stagnate in Q3, possible trend reversal

Property adviser JLL’s quarterly VICTOR Index, which measures the investment performance of prime office properties in Germany’s top five commercial cities, confirms that the market stagnated in the third quarter, primarily due to dampened occupier demand. Year on year the index is 4.4% higher, although the index points to a 1.1% fall in the relevant prime office prices in the third quarter – its first minus in nearly two years.

According to JLL’s head of valuation Andrew Groom in Frankfurt, it is difficult to say which way the trend will go from here. “There are several reasons to expect performance growth will also stagnate in the fourth quarter. In the third quarter we saw a somewhat lower rental volume due to a slowdown in economic development, leading to falling rents in some top locations.”

Hamburg led the group as top performer over the past 12 months, rising 7.5% in the quarter year-on-year. All the big cities actually rose, by 6.2% for Munich, 5% for Berlin, 3.2% for Düsseldorf and 2.1% for Frankfurt. Total 12-month return (rental plus price appreciation) fell to 9.1% from 10.2% in the second quarter, led by Hamburg at 12.2%, Munich at 10.6%, Berlin at 9.8%, 7.9% in Düsseldorf and 6.9% in Frankfurt.

Groom added, “Taking into account the expected return, investments into core property still remain lucrative at a lower cash-flow yield. The low interest rates are bringing more competition among banks, which means that cheap loans are available, especially for core assets.” As a result, transaction volumes in particularly Hamburg and Berlin core-plus and value-added investment has been rising. The quarterly reading also highlighted the gap between 10-year government bond yields and office property investment (the “JLL Prime Risk Premium”), now standing at 491 basis points.