These are good times for landlords in Germany, as the main markets are undersupplied, vacancies are low and demand continues to grow, experts agreed at the PropertyEU Germany Investment Briefing, which was held on Friday at Savills’ headquarters in central London.
Positive economic fundamentals, political stability and the country’s reputation as a safe haven combine to attract investments into the office sector, which represents 40-45% of total transactions.
‘In the last eight years economic growth has been the highest since reunification, and this has led to positive developments for the occupier market,’ said Fabian Sperber, Associate Research, Savills Germany. ‘Many more people are employed, more office space is required and supply is limited, so vacancies are down and rents are going up.’
Population and employment in the country’s top seven cities have grown significantly in the last five years and are set to peak in 2020. Demand for offices has led to vacancy rates as low as 2% in Berlin and 3% in Munich, creating a very tight market.
The situation of undersupply is unlikely to change in the short term because there has been very little construction in the past few years, partly because of past experience making developers over-cautious. ‘The German markets were oversupplied in 2003/2006 and then again in 2009/2011, and that memory is still fresh,’ said Sperber. ‘But since then the situation has totally changed and now all main markets are in a state of equilibrium or undersupply.’
The office construction pipeline will deliver only 800,000 m2 this year, a figure lower than the 10-year average and well below what is needed. The most active city is Berlin, with 210,000 m2 due to be completed, followed by Munich with 190,000 m2 and Hamburg with 150,000 m2. Frankfurt (pictured) lags behind with 55,000 m2.
The good news is that construction will pick up next year, rising to 966,000 m2 in 2018, and new office space will then more than double to 1.7 mln m2 in 2019, according to Savills figures. Frankfurt is set to add 222,000 m2 to its office stock, largely to accommodate a growing financial sector, but will still be behind Cologne with 515,000 m2, Berlin with 400,000 m2, Dusseldorf with 256,000 m2 and Munich with 250,000 m2.
The market should at that point reach more of an equilibrium between supply and demand.
Demand will remain at high levels, because the yield spread to government bonds is set to remain high. ‘Government bond yields, which had gone down to zero at the end of 2016, will increase but so will office yields, with the spread forecast to be around or above 200 basis points,’ said Sperber. ‘Office investment, offering average yields of 3.4% in the main seven markets, has become even more interesting.’
Looking ahead, prospects are good, said Sperber: ‘The economic forecast is for a 2% average GDP growth over the next few years and continued political stability. The environment is set to remain positive for investors.’
