What accounts for the difference between JLL's VICTOR and other returns?

JLL's VICTOR index of prime office prices in Germany’s Big Five cities rose by a median 1.3% in 1Q16 (compared to +2.5% in Q3 2015, +1.8% in Q4 2015) as a lack of product and rising uncertainty in the markets has seen growth slowing since 3Q15. Transaction volumes declined in the quarter as international investors were less active.

The index rose to a new all-time high, but price growth slowed from 2.5% in 3Q15 and 1.8% at the end of last year. Compared to 1Q15, it gained 6.9%. Total return rose by 11.3% over the year.

According to Ralf Kemper, head of valuation & transaction advisory at JLL in Germany, the reasons for the drop are "a mix of a lot of factors - among them uncertainty over Brexit, a shortage of suitable assets in favoured locations or sellers' unrealistic price expectations."

B-locations in the top 5 cities are seen as increasingly as acceptable alternatives by investors, along with smaller cities offering decent yields. “Yield expectations in the A locations are now simply too low,” said Kemper.

Among the top 5 cities, Hamburg recorded the strongest performance growth over the quarter, gaining 4.3%. Prime yields in the city fell to 3.75% from 4.3% over the year. Berlin and Düsseldorf both posted performance gains of 1.2%, Frankfurt 0.9%. The latter returned to growth after a fall in the last quarter, following the signing of several lease contracts in the high-quality segment. Munich’s index performance, though still the highest, showed no effective growth in the period.

Kemper said any negative effects from a Brexit vote would become visible in the second half of the year at the earliest. The vote, or any other imponderables that might negatively affect the world economy, should not unduly dampen spirits in Germany, which he anticipates putting in "another good year for turnover and transaction volumes."

Since the establishment of the JLL VICTOR Index five years ago, the premium office segment in the business districts of the Top 5 cities - Berlin, Munich, Hamburg, Frankfurt and Düsseldorf – the Index has recorded a total performance of more than 50%.

REFIRE: In a recent article in German trade publication Der Immobilienbrief, experienced real estate veteran and publisher Werner Rohmert raised the valid question of the effective returns of investment in the German office sector over the past five years. His starting point is the total return of 11.3% the VICTOR has gained for 2015 (which includes capital appreciation of 6.9%).

If the VICTOR Index shows a total performance return – rental yield and capital appreciation – of over 50% over the past five years, or more than 10% a year, how come other indices show a much more modest return? In other words, how many investors can confidently say that they cleared a real 50% return on their investment in that time?

A comparison with other indices shows a wide discrepancy. The German association BVI puts a real return over five years of a one-off investment including re-investment of dividends at 2.3%. The OFIX Index from IPD (now MSCI), which measures returns from mainly open-ended funds invested in quality office properties, at least 50% of which are in Germany, claims an annual return of 2.6% over the five-year period. German Spezialfonds, designed for institutional investors, have provided 3.6% returns, according to IPD.

So the funds reporting on real transactions suggest a real return of 12% over the five-year period. This is a big difference to the 50%+ that the VICTOR has enjoyed. What accounts for the big difference between the two, assuming (as we do) that all parties are reporting in the most professional manner?

Rohmert's article asks where has all the difference disappeared to. We (at REFIRE) accept that there is quite a lot of what professional stock market investors call 'slippage' that would account for a chunk of this. It would be like a stock tipster claiming superb returns on stock investment by always assuming he bought at the bottom and sold at the peak – highly unlikely in the real world. Real funds have to deal with expiring contracts, temporary vacancies, refurbishments, management issues and other writedowns. Returns slip away down a variety of drains.

Still, says Rohmert, given the favourable climate prevailing over the last five years – 4% rental yields, strong capital appreciation in Germany, Europe awash in cash and fund managers psyched more than ever to squeeze out maximum performance from their assets – many German funds will have to come up with better explanations for their investors as to the extent of the differential.