Still good yield potential in eastern German office markets – study

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The listed eastern German commercial property specialist TLG Immobilien AG published its latest “Property Market in Berlin and eastern Germany 2016” last week, and on the evidence the office property markets in the eastern part of the country are all showing continuous growth.

In a briefing to analysts, TLG's CEO Niclas Karoff said that the region's five principal cities, excluding Berlin – Dresden, Leipzig, Rostock, Erfurt and Potsdam – were all experiencing a rise in demand for office space unmatched by new supply, so that take-up was concentrating on vacant space in existing office schemes. Leipzig is the most affected, with vacancy rates falling by 6.1% since 2011.

Peak rents of €12.60/sqm in Leipzig and €12.20/sqm in Dresden are comparable to their peers in Mainz, western Germany. In Potsdam and Rostock, where peak rents have risen to EUR 14.00/sqm, markets have now reached a level comparable with Wiesbaden or Mannheim. Erfurt, the capital of the state of Thuringia, at €10.00/sqm still has good upside potential given its position as a major university location.

Average rents are highest in central Potsdam, the capital of Brandenburg, at €11.50, followed by Dresden and Leipzig at €10.00, then Rostock and Erfurt at €9.00 and €8.00 respectively.

Yields in the region's five biggest cities were from 7.4%-7.6% in fringe locations in Leipzig and Dresden, while yields of 8% in the other cities are commonplace, said Karoff. Yields on Erfurt offices in fringe locations with fair to average utility value were 8.8%, falling to 6.1% for very central locations. “Net initial yields have declined across the board in all five eastern German cities over the last twelve months. This is a direct result of the surge in demand for office properties in these locations”, he said.

Berlin operates according to its own rules, and is viewed a major capital city rather than a regional centre. Commercial property set a new record last year with investment totalling €8.3 bn – the highest twelve-month total ever in a single German city. This figure represents a year-on-year increase of 94 %, and lifted Berlin to top of the city rankings, pushing Frankfurt and Munich down to second and third spots. Germany's capital also occupied first place in the rankings for retail space take-up and retail property transaction volumes. “Berlin's office property market continues to exceed all expectations and confirms that the city has well and truly established itself in the top league of European investment locations”, said Karoff.

Among asset categories, office property dominated Berlin's commercial property investment market in 2015, at 54 % of all property transactions, up 14% on the previous year. Retail followed, rising by 4% to 25 % of Berlin's investment market.

In retail, with 42,000 sqm of retail space take-up and a transaction volume of €2.1bn (+135 % in comparison with 2014), Berlin was the dominant German market. Demand for large retail spaces in the Spree metropolis also surged, with top rent for retail spaces over 150 sqm rising by 19 % to €250/sqm.

Hotels attracted around 8 % of overall investment, in a sign of the growing importance of tourism for both Berlin and the regional centres. The region saw overnight stays jump 21 over the past five years, with 2.2m foreign tourists spending their holidays in eastern German in 2015 (excluding Berlin). The number of domestic tourists rose by 2.1% to 24.1m. The biggest regional jumps were recorded in Potsdam (up 6.7%) and Erfurt (up 4.8%), while Berlin had 30m overnight stays, up 5.5% on the previous year.

As the original owner of the Treuhandanstalt's non-operating properties, TLG floated on the stock market as a purely commercial property company in 2014. The company has been using more than 2,000 datasets to track the market in the eastern states since 1993, which almost certainly gives it the most complete knowledge database of key property metrics for the region of anybody in the industry, REFIRE imagines.

The full report “Property Market in Berlin and Eastern Germany 2016” is available for download at: www.tlg.eu.