Financial turmoil to push German yields higher

Yields in Germany's key real estate segments will rise sooner than previously forecast in the wake of the credit crunch, according to Frank Billand, board member of Union Investment, one of Germany's largest open-ended funds. 'With borrowing costs rising and higher equity ratios being demanded, higher yields will be required, particularly for properties entailing greater risk. The risk element has not been priced in a deal for the past 12 months. That has now changed and that's a positive market development. '

Billand believes office yields in Germany could rise by 50 basis points to just over 5% in the next two years starting in early 2008, arguing that the German market lags other mature European markets by one to two years. 'Take-up of space is now up by an average of 16% across all locations. The level of incentives is falling and the rents are going up slightly.' He pointed out that rental levels in Hamburg were about EUR 50 per m² in the early 1990s. 'They are now around EUR 34-35. There's still room for improvement.' He warned, however, that few companies are planning major expansions at present. 'Deutsche Bank was planning to increase the number of its employees by 4,000 to 80,000, but those plans have now been stalled.'

While yields may be rising, the level of investment volume in Germany is now expected to stabilise in 2007 at last year's figure of just under EUR 50 bn, Billand predicted, citing figures from Jones Lang LaSalle. 'Originally a slightly higher figure was expected, but several big deals are not going ahead,' he explained. Investment volume in Germany in the first six months of this year totalled EUR 27 bn, with foreign investors accounting for 73% of all transactions.

During a seminar in London on Friday organised by Union Investment for the international press, Billand said the securitisation sector is nearly dead. 'It will take at least six months to reanimate. Banks will tend to act more cautiously when it comes to commercial property finance. This implies a competitive advantage for investors with higher equity ratios such as ourselves. In the past we had 20 competitors for a deal, now we're only seeing five or six.' But, he added, although some of the highly-leveraged players may be disappearing from the market, there are still massive funds available from emerging markets such as the Middle East. 'The equity side will remain the same.'

In 2006, Union Investment experienced a net outflow of funds totalling EUR 1 bn. The trend so far this year has been positive with a net inflow of EUR 10.8 mln. But pointing to current pricing levels in the French capital, he said that he was reluctant to buy in the French capital at present. Pricing levels are currently also unfavourable in London and Spain, he added.