Investors are warning that Germany may not escape a fall in office capital values in the next 12 months, despite the current very strong demand for assets there.
Philip La Pierre, European chief executive officer of LaSalle Investment Management, cautioned that it is a time to be prudent and patient when there is so much uncertainty due to the Covid pandemic, particularly for the office sector.
La Pierre said his team was discussing every day ‘what asset classes to invest into, what our clients want, what our fund structures and portfolio structures look like, what we think are the trends to come out of this and where to deploy our clients’ capital most prudently’.
With offices ‘challenged’ and demand for leasing down this year by between 30% and 60% ‘we are back to 2009 post-GFC levels (of demand) for office space.’ This, he added, is when ‘the crisis hasn’t even unfolded yet.’
‘We see weaknesses in offices that haven’t repriced yet.’ In this environment it was ‘residential and logistics that feel good’.
La Pierre was speaking on 13 October at one of a week of webinars on the outlook for European real estate hosted by Colliers International Germany.
In another, Claus Becher, Deka’s head of real estate fund management, said that despite all of Germany’s qualities as a relative safe haven market, ‘sooner or later we will feel the results of recession here, and this will have some impact on the rental market.’
He acknowledged the support to real estate generally of the very loose monetary policy but continued: ‘In the next 12 months there will be a recession and there will be some results in the markets for sure. Whether it hits hard or less hard that is something we will have to asset manage.’
Matthias Leube, Colliers CEO of Germany said ‘quite an extensive wave of assets’ has come to the market in Germany since the summer. La Pierre’s view was that ‘more product means somebody is calling the office market...I would expect a lot more return for the risk - which is not knowing where offices are heading.’
Leube noted that sentiment may be knocked back by the cancellation of the hybrid EXPO event in Munich ‘at the last moment’ late on 12 October.
With many parts of Europe seeing a rise in Coronavirus infections, EXPO’s organisers said they took the decision because of the ‘worsening Covid-19 situation’, adding that Munich and other cities in Germany had been classified as risk areas as of 12 October.
For now, all talk in Germany about prime offices let on long leases is of further yield compression. BlackRock is said to have sold a prime CBD office building in Berlin at a 35 multiple equating to a yield of approximately 2.85% gross or 2.7% net.
Also speaking at one of the Colliers webinars was Ali Otmar. The Tristan Capital Partners deputy head of investments believed there will be opportunities soon for value add investors like Tristan. ‘The biggest wave of pricing correction whereby we reflect the reality of what is yet to happen in the economy is probably going to be the first half or middle of next year,’ he said.
“We’re so focused on Covid we are forgetting that we have put the world in an induced recession. It is inevitable that a large portion of the furlough schemes will lead to permanent redundancies. All the liquidity that is being pumped in sooner or later will run dry. And then we will see a second wave of GDP contraction.’
