Falling yields in Germany's prime office locations are prompting investors to shift their attention to regional locations in search of better returns, according to research by Catella.
Analysis shows that the average peak yield in the seven major cities shrank to 3.06% in 2018, down by 24 basis points. The lowest yields were in Berlin at 2.8% and Munich, with 2.9%.
However, yields fell even faster in the C and D locations, according to Catella's analysis of 76 urban locations, indicating that investors are moving up the risk curve. In the 26 category D towns the average yield dropped by 28 bps to 6.7%.
Rental growth was strongest in the A locations, which recorded a 5.7% increase to an average level of €31.04 per m2. Frankfurt was the most expensive city to rent office space at €42 per m2, while the cheapest offices were to be found in Gera at €7.50 per m2.
Rents also picked up in the 13 B cities, rising by 4.1% to reach an average level of €15.54 per m2. By contrast, in most D locations rental growth had slowed or stagnated.
Prime rents in the C locations rose by 5% to €13.35 per m2, though the picture was distorted by rapid growth in hotspots such as Braunschweig, Bochum and Mönchengladbach.
Catella said the yield spread between the B and C categories was narrowing, falling from 91 basis points in 2017 to 83 points last year, suggesting investors are moving into outlying locations. Head of group research Thomas Beyerle said this was 'an indication that investor profiles are increasingly converging from core via value add to opportunistic.'
However, the research found that the bulk of capital would continue to be invested in core locations. 'Investors have a balanced risk-return understanding and prefer to invest in a sustainable cash flow,' said Beyerle.
