• Investment volume declines by seven percent to a good € 4 billion

• Office real estate as the most popular asset class, also thanks to accelerating momentum in the letting markets

• Product scarcity in the Core segment – investors increasingly turning to Core plus real estate and good properties in secondary locations

• Prime and average rents rise in the Top 5 locations

Take-up in the German office investment market stood at a good €4 billion in the first quarter. The transaction volume has therefore dropped by seven percent in comparison with the prior-year quarter. This is the conclusion of a current analysis prepared by the commercial real estate services company CBRE.

Office investments remain the most popular asset class
At a good €4 billion, almost half the transaction volume in the commercial real estate market (€8.2 billion) was invested in office properties. A total of 64 percent of the office investment volume in Germany in the first quarter of 2016 was accounted for by the Top 5 office locations of Berlin, Dusseldorf (incl. Hilden, Erkrath, Ratingen and Neuss), Frankfurt am Main, Hamburg and Munich (incl. environs). Outside the Top 5 markets, the investment volume came in at €1.4 billion and thus accounted for a share of 36 percent (up 10 percentage points in a year-on-year comparison). “Real estate investors are increasingly turning to regional and secondary locations in their search for attractive yields. Here, however, the focus is placed more strongly on Core properties, and the average investment volumes are smaller although these have also increased in a prior-year comparison, from €15.5 million to more than €20 million”, states Klein.

Properties between €20 and 50 million were particularly intensively traded throughout Germany and accounted for one third of the total transaction volume.

In the first quarter of 2016, the Top 5 markets saw office lettings climb by almost 19 percent in a year-on-year comparison. In the same comparison period, the volume of vacant office space in the Top 5 markets also dropped by another 16 percent. Moreover, the average vacancy rate fell by 1.3 percentage points to seven percent over the same period. “These figures affirm that office investment markets have not decoupled from the letting markets”, explains Linsin. “Instead, Germany’s dynamic economic development and record employment figures, accompanied by a rising number of white-collar workers, are making German office real estate extremely attractive. It can be assumed that both take-up and rents will increase, which is particularly applicable to cutting-edge office space in inner-city locations”, adds Linsin.

Asset and fund managers as the strongest buyer group
Investments in the office real estate market were largely made on a selective basis: Similar to the prior-year period, and in terms of the entire commercial investment market, the largest proportion of the investment volume is attributable to single transactions.

Asset and fund managers were the most active investors, buying office properties worth more than €1 billion, which represents 25 percent of the entire investment volume. The group of open-ended real estate and special funds took second place. Closed-ended funds and property developers upped their investments compared with the first quarter of 2015, each accounting for some 12 percent of the overall volume.

Mainly domestic investors purchased office properties in the first quarter of 2016: Across Germany, they invested around 72 percent of the volume in this asset class. In the first quarter of 2015, the proportion of domestic buyers was significantly lower at a good 57 percent. “We anticipate that the share of international investors in the overall transaction volume is set to increase significantly over the course of the year. Particularly demand for German assets from countries outside Europe that continues to run at a high level and the great number of newly initiated special purpose companies focused on Europe with large German allocations bear this out. In addition, the list of potential investors is filling in the context of structured bidding procedures, particularly with cash-rich investors from abroad who are desperate to find investment opportunities in Germany”, says Klein.

Yields remain stable at a low level
The strong demand and limited product supply in the Core segment ensure that the net initial yields for prime real estate in all asset classes remain under considerable pressure. In the office segment, figures in the top locations were still largely reported at a historically low level. Net initial yields moved within a range of 3.65 percent in Munich and 4.45 percent for prime properties in Dusseldorf, although the latter reported a ten basis point decline in prime yield in compared with the previous quarter. Consequently, the average prime yield for office real estate has settled almost 400 basis points above the risk-free benchmark yield of a 10-year bond that stood at 0.17 percent at the end of March 2016, constituting a major reason for reshuffling portfolios in favour of the real estate asset class.

Here, investors are increasingly turning to properties with upside potential, as well as to secondary locations in the large office locations. Project developments are also increasingly attracting the attention of institutional investors. “In view of the abundance of liquidity in the market and the associated investment pressure, we anticipate that yields will continue to fall, above all in the case of Core real estate in both the investment and in the regional locations”, comments Linsin. “The German office investment market is nonetheless in very good condition, supported by the robust fundamental data. We are not looking at a speculative price bubble, especially as we are also seeing rents rising”.

Increase in prime and average rents in the Top 5 markets
Prime and average rents in the Top 5 markets have generally increased again. While prime rents have grown by an average 2.8 percent over the last twelve months, average rents climbed 3.7 percent. “If Brexit does happen, good office market data may even improve, especially in Frankfurt. The financial center, which is home to the ECB and its supervisory authorities for many companies currently located in London’s financial district, could, among other reasons, be suitable as a new location exempted from trading restrictions in the event of Britain’s leaving the European Union”, comments Klein. In first quarter of this year, Frankfurt of the Top 5 locations again reported the highest figure for prime rent At €39.50 per square metre per month, an increase in prime rent of 1.3 percent was reported in a year-on-year comparison.

“We anticipate a good result in the office investment market over the course of the year that should nonetheless remain below the extremely successful prior-year figure. In particular, Germany’s robust economic condition and the country’s status as a safe haven for investment will ensure a steady and strong inflow of capital that will compete for increasingly scarce Core products. This is all the more applicable against the backdrop of growing geopolitical disruption and crises”, says Klein.

Prime yield for office property by submarket cluster (%)

Source: CBRE Research, Q1 2016

Investment volumes, net initial yields & yields of 10-year Bund

Source: CBRE Research, Q1 2016

Contact:
Fabian Klein
CBRE GmbH
Head of Investment Germany
+49 69 17 00 77 55
fabian.klein@cbre.com

Dr. Jan Linsin
CBRE GmbH
Head of Research
+49 69 17 00 77 663
jan.linsin@cbre.com