JLL
Ralf Kemper - JLL
‘The levelling out of the Viktor Prime Office Index is only a temporary blip,’ Ralf Kemper, head of valuation and transaction advisory Germany at JLL, told REFIRE.
JLL’s Victor Prime Office Index flattened out in the second quarter, rising by just 0.2% to 169.7 points, according to data released this month by JLL.
Compared to the previous quarter, German hot spots failed to deliver significant growth. Hamburg and Frankfurt added 0.3% to 185.9 and 161.3 points, respectively. Berlin’s city centre rose by just 0.1% but still boasts the highest index level at 186.3 points. Düsseldorf and Munich remain unchanged at 145.5 and 177.1 points.
‘The levelling out of the Viktor Prime Office Index is only a temporary blip,’ Ralf Kemper, head of valuation and transaction advisory Germany at JLL, told REFIRE. ‘The main problem is that in the second quarter not sufficient prime deals were being done to justify further adjustments of prime yields, which are already historically low. Office yields in Berlin are now just 3% - only Zurich is more expensive, at 2.7%. There’s lots of liquidity in the market but not enough product.’
Many investors are undeterred by the lack of product coming to market: in June, European fund manager AEW Europe launched its first dedicated German office fund. It raised €118m from a number of unnamed institutional investors in the first close for the City Office Germany fund. AEW Europe is targeting total equity commitments of up to €250m which, with gearing, will give it €500m to invest. Also, in May, German asset manager DIC Asset launched its fifth institutional real estate fund, DIC Office Balance IV fund. The fund, which will invest in German offices, has a target size of up to €350m. Around a third of the target capital has already been raised, according to DIC.
Prime office yields and rents are also ‘virtually unchanged’ since the first quarter, according to JLL, suggesting that, at least for now, prices have flattened out. However, ‘uncoordinated Brexit talks’ or an increase in interest rates in the US could improve demand for prime offices in Germany, according to JLL.
There were €25.8bn of deals in Germany in the first half of 2017, of which offices account for around 40% (in line with 40-45% in previous years). ‘Demand is high enough to exceed that in the second half, if enough properties come to market,’ Kemper added.
‘In the past, it used to be more about whether demand was high enough – now it’s just about the lack of product because demand is very high. Given that the Springer deal has gone through and OfficeFirst has been sold – and that the Sony sale is expected to happen soon - it will be interesting to see if any big deals will come through in the second half,’ he said. (German publisher Axel Springer sold its future headquarters in Berlin to Norway’s sovereign wealth fund as well as its existing headquarters to Blackstone for a combined €775m last month. South Korea’s National Pension Service (NPS) is believed to be in the final stages of selling the Sony Centre in Berlin to Canadian pension group Oxford Properties for around €1.1bn, almost double what Morgan Stanley sold it for in May 2010.)