• Office investments boast a total market share of 51 percent

• Share of package deals climbs to 26 percent

• Foreign investors commit approximately 7.8 billion euros (39 percent)

• Asian investors expand their share of the market

The investment total on Germany's office property market in 2014 equalled 20.3 billion euros or a 51-percent share of the overall volume of the country's commercial property investment market. This means that office property investments during the calendar year concluded added up to roughly twice the volume of the entire commercial property transactions in 2010. This is the upshot of the latest Office Investment Report compiled by the real estate consultancy firm CBRE. During the year's concluding quarter alone, the investment volume totalled approximately 7.3 billion euros, marking a year-on-year increase by almost one third. “Going forward, German office properties will continue to play a highly prominent role for investors because of the country's stable occupier markets,” said Fabian Klein, Head of Investment at CBRE Germany. Among the most attractive occupier markets are the cities of Berlin, Hamburg and Munich. Frankfurt's central business district (CBD) has also registered a high letting take-up. “The accelerating reduction of vacancies and the relatively low completions volumes with their low share of speculative developments make it reasonable to predict a resurgent take-up,” Klein went on to say.

In 2014, the office space let on Germany's five biggest office markets – Berlin, Düsseldorf, Frankfurt am Main, Hamburg and Munich – added up to a total of 2.45 million square metres. “The intensified focus on high-end (new) schemes in central locations of the Top Five office centres, which attracted the bulk of the investments, has driven up the rent average even further,” observed Klein. At the same time, the achievable prime rent in Frankfurt perked up by 2.6 percent, and currently stands at 39.00 euros per square metre and month. As the year progressed, achievable prime rents also increased in Hamburg and Munich.

“Top Five” Cities Maintain their High Market Share While Significance of Regional Centres Grows
In the course of 2014, around 30 single transactions of more than 100 million euros each were registered, most of which involved property in Germany's five leading Class A cities. In Frankfurt, these included the office high-rises Silver Tower (Silberturm), WINX Tower and IBC as well as the acquisitions of Messeturm and Pollux towers that CBRE facilitated. Other big-ticket properties sold included the Hackesches Quartier in Berlin, the ISARTOR CITY office property in Munich, and Sumatrakontro in Hamburg, with CBRE advising the buyer in either case. On top of that, a number of portfolios were traded on the German office investment market, raising the package deal share of the total volume to 26 percent in 2014 (compared to 18 percent in 2013). Among these were the Leo-I portfolio with its billion-euro price tag that Patrizia Immobilien AG acquired for one of its institutional funds in Q1 2014, the sale of the Quattro portfolio of four office buildings from their French asset manager to Invesco, and the Dibag portfolios with properties in Germany's Top Five and regional centres that was acquired by HIH. Building clusters with presentable office sections – sometimes including mixed-use properties – also contributed to the record result. A case in point would be the acquisition of the Palais-Quartier plus the Nextower in Frankfurt by Deutsche AWM together with ECE, which was facilitated by CBRE on the buyer side, while other examples include the “yoo berlin” in Berlin, or the Domus property package in Düsseldorf sold by Portigon AG.

When set in relation to the total investment volume in commercial real estate, office properties accounted for more than 60 percent each in Berlin and Düsseldorf (2.3 billion euros or 64 percent, and 1.2 billion euros or 63 percent, respectively). The ratio in Hamburg was 2.6 billion euros or 72 percent, the one in Munich 3.7 billion euros or 34 percent. The highest office share was registered in Frankfurt with 3.9 billion euros or 77 percent of the total transaction volume in 2014.

“Compared to the previous year, the share of capital spent on office properties outside the top locations increased, which is to some extent attributable to portfolios with a nationwide spread,” Klein added. “At more than 13.7 billion euros, the Top Five cities still claim a share of almost 68 percent of the total volume invested in office properties, even though the prevailing product shortage in the core segment – where demand remains as high as ever – has prompted investors to look for alternatives in regional centres and Class B locations.”

Equity-rich Investors Remain the Strongest Group of Buyers – while Asset and Fund Managers with Higher Risk-Propensity Gain Noticeably
Accounting for 5.1 billion euros in investments or roughly one quarter of the total volume, open-ended property funds and institutional funds in particular topped the list of investors in this asset class. Asset managers and fund managers made up one fifth of the transaction total, investing 4.1 billion euros and thereby doubling their transaction volume year on year, while insurance companies and pension funds trailed them in third place with 2.9 billion euros invested (14 percent). The sums committed by foreign investors on Germany's office investment market were even higher than they had been the previous year, adding up to approximately 7.8 billion euros and thus making up 39 percent of the total. Compared to the prior year, when their relative share in the transaction volume made up barely 30 percent, this implies an increase by more than 71 percent or 3.3 billion euros. The most prominent buyers of German office property by geographic region were investors from the US and the UK, with 2.7 billion euros and 1.3 billion euros, respectively. The rapidly increasing interest that Asian investors have shown in commercial real estate in Germany is reflected in an investment volume of more than 1.5 billion euros. This means that investors from the Far East more than doubled their investment total year on year.

Prime Yields Continue to Soften Slightly
Pent-up demand in the core segment has continued to put initial yield rates in the office segment under downward pressure. “The short product supply and a rate of return that exceeds the reference interest rate of a risk-free alternative investment by nearly four percentage points keeps whetting the appetite of domestic and international real estate investors for commercial property in Germany, specifically office property,” Klein explained. Prime yields (net initial yields) in the office segment softened slightly quarter on quarter, and currently equal 4.55 percent in Berlin, 4.60 percent in Frankfurt (a drop by -10 basis points each), 4.40 percent in Hamburg and 4.30 percent in Munich (a drop by -15 basis points each). In Düsseldorf, the net initial yield rate for Grade A office properties in prime locations remained stable at 4.70 percent quarter over quarter, but there are signs suggesting they could slip further toward mid-year 2015. “The investors' alternative strategy of looking at non-core locations has resulted in a further yield compression in the secondary market segment of the top cities,” said Klein. “This puts the yields for high-quality product in secondary locations of Germany's Top Five under pressure. However, the yield spread between CBD locations, on the one hand, and city fringe locations, on the other hand, remains wider than it was before the boom, and therefore offers extra potential in non-CBD locations.” While the Core / Core-Plus segment continues to draw the majority of investments, there is an increasing willingness on the part of investors – and here even among market players that tend to be risk-averse – to accept increased exposure in the form of forward-funding deals for speculative office developments or existing properties with value-add potential. The stable occupier markets and particularly a very limited speculative development pipeline make it reasonable to assume that investments will prosper.

Investment transaction volumes and net prime yields for office property

Source: CBRE Research, 2015

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 Germany
+49 69 17 00 77 663
jan.linsin@cbre.com