REAL ESTATE – A new study by German property fund provider DEGI has provided further evidence of a recovery in the domestic commercial real estate market yet also questions the sustainability of that recovery.

According to the study, demand for rentable office space in major German cities – a key measure of the sector’s health – totalled 2.7m square metres in 2005, up 8.3% from a year earlier.

Not all cities benefited equally from the upward trend. While, for example, demand for office space in Berlin rose 23% last year, it declined 16.7% in the east German city of Dresden.

For 2006, DEGI expects another rise in office space demand in major cities to 2.85m square metres.

As further evidence of a recovery in the German market, the fund provider sees total real estate turnover up by 2% to €134bn though it notes that most of this turnover will be done in top (‘1A’) locations.

However, the DEGI study tempers its otherwise positive forecast by noting that vacancy rates in commercial property – currently at historic highs in cities like Leipzig and Frankfurt – will “remain at current levels until the end of the decade.”

The finding contrasts that of HSH Nordbank, which has said that vacancy rates would fall to 9.5% two years from now. The bank added that the decline would, in turn, put upward pressure on prices in major German cities.

DEGI itself believes that rents for office space in top locations will not increase dramatically before 2007. The exception is east Germany, where rents are still at a low level.

Turning to other developments, the DEGI study said the volume of real estate transactions in five major German cities (i.e. Berlin, Düsseldorf, Frankfurt, Hamburg and Munich) rose 70% in 2005. In Frankfurt alone, transaction volume more than doubled to €3.1bn from €1.2bn.

Finally, the study said that of the €42bn invested in German real estate last year, 37% came from domestic investors, while almost 28% came from the UK and 20.5% from the US.