German office yields sinking faster than expected

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Market expectations for peak yields in German office property are being progressively corrected downwards, and are set to breach record lows next year, according to a new study by the German Society of Property Research (gif) and the Center for Real Estate Studies CRES of the Steinbeis private university in Berlin, based on a survey of professional researchers.

Office yields in Germany’s top five cities are set for record lows next year at 4%-4.4%, and even below the 4%-mark in Munich. The new figures are even lower than the gif/CRES survey results from May 2015.

The forecasts for vacancy reduction are also more favorable, especially for Munich and Frankfurt. In Munich, a fall of 100 bps is expected from a gross 6% vacancy rate, so that the city could then effectively proclaim "full occupancy."

Prime rents remain stable in 2015, apart from Berlin, where experts forecast a 3% increase and another 1.2% gain next year. Frankfurt tops growth expectations for 2016 at +2%, followed by Munich and Düsseldorf with +1.5%. Only Hamburg is not expected to show rental gains. “With growth rates between 1% and 2%, rental markets show no signs of overheating yet,” commented Felix Schindler, professor at CRES.

Speaking recently at a gathering of industry professionals, JLL Deutschland's international director Timo Tschammler said yields are being driven lower by huge capital inflows – both from European direct investors and foreign buyers working with managers. JLL is forecasting €55bn of deals in Germany this year, which would surpass the prior level of 2007, after volume reached €38.2bn by the end of the third quarter.

Tschammler expects prime office yields to fall under 4% in other German cities in 2016, averaging 25-35bp across the top seven urban centres in Germany. But he also expects more contraction in assets such as logistics where yields for prime have fallen sharply to 5.25%. “I would not be surprised to see sub-5% yields in logistics – perhaps not by the end of the year but certainly in the first quarter of 2016,” he said.

Separately, the JLL quarterly Victor Index, which tracks the performance of prime offices in Germany's major business cities, showed prime office prices rising by 2.5% in the third quarter, boosted mainly by a strong performance in Berlin.

According to Ralf Kemper, JLL Deutschland's head of valuation and transaction advisory, "Germany as a secure location, underpinned by positive fundamental

data for property as well as the general economy, is furthering the strong engagement of German and international investors. Among institutional investors, the property share has risen significantly over the past years from below 5% to up to 10% now, a mark we expect will be surpassed in the medium term."

Berlin is proving particularly attractive for investors, with a buoyant rental market and investors' belief in further growth potential. “The Berlin market is especially attractive for technology and start-up firms due to its innovative environment,” said Kemper, adding that this was having its effect on yields.

Of the other large German cities, Düsseldorf gained 2.7%, Hamburg 2.5%, Munich 2.3% and Frankfurt only 1%. There may yet be higher growth in the other cities over the last quarter, however, said Kemper, due to the still-low financing costs, which could bring prices and yields close to the peak year of 2007. Total return across the cities rose 12.1% from 9.4% in 2Q15. Here, performance was driven by Munich which posted 16.3%, followed by Berlin (+14.4%), Frankfurt (+11.8%), Düsseldorf (+8.6%) and Hamburg (+8.1%).