Market Report 2011 GerMany - Europe Real Estate

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22 Office Market Scoring and prime initial yield 2011 10% 9% 8% 7% 6% 5% 4% Prime initial yield “poor dogs” 14.2% of the office stock of the random sample Ø = 6.95% Halle (Saale) Chemnitz Salzgitter The figure above compares prime initial yields of the 75 office locations under review (average yield 6.95%) with the values derived from the IVG office market scoring for the individual cities regarding their attractiveness for office investments. High scores indicate a high level of attractiveness while low scores indicate cities with a low level of investment attractiveness (average score 2.58). The figure shows that initial yields for offices in the individual German locations accurately reflect the prevailing general conditions in the individual office markets that were also taken into account in the office market scoring: The prime locations, which scored highest in terms of market volume, investment risk and future prospects, are concentrated in the lower right-hand quadrant. The high value estimation for the TOP 7 locations in particular is reflected in high prices and low initial yields. The locations rated as “poor dogs” due to their low scores are punished by investors in the form of significant price discounts. The lower left-hand quadrant contains the (few) locations rated as overpriced based on the score values and initial yields. By contrast, the markets in the top right-hand quadrant offer the potential for increased value based on their score/initial yield combination. Solingen Gera Weimar Heilbronn Siegen Hamm Cottbus Krefeld Magdeburg Schwerin Rostock Ludwigshafen Ø = 2.58 “Hidden Champions” 4.1% of the office stock of the random sample “B-cities” 23.8 % of the office stock of the random sample 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Overall score 5.0 Source: IVG Research Saarbrücken Kassel Ratingen Braunschweig Bielefeld Constance Leipzig Regensburg Heidelberg Aschaffenburg Ulm Mainz Essen Karlsruhe Erlangen Münster Wiesbaden Ingolstadt Bonn Dresden Nuremberg H annover Dusseldorf Cologne Berlin Frankfurt Stuttgart Hamburg “Top locations” 50.7% of the office stock of the random sample Munich Continued high demand in the investment market expected Demand for commercial and hence also for office property is likely to remain high. This view is supported by various economic arguments such as the prospect of rent increases and reductions in vacancies in the rental market, the anticipation of higher inflation rates and price adjustments to sovereign bonds as a result of interest rate hikes. The fact that Germany scored extremely highly as a real estate location in various recent investor surveys – such as those by INREV and ULI/ PWC – confirms the high level of interest among domestic and foreign investors in the German market. However, it is foreseeable that this high level of interest in the core segment will not be matched by a corresponding supply. While some property owners will use the next few months to complete sales given the advanced stage of yield compression, this coincides with an almost total absence of supply impulses emanating from modern projects yet to be constructed due to the shortened pipeline for new constructions.
Broad market recovery: secondary locations, centres and value-add In addition, the core segment offers new investors only limited potential to increase value through yield compression. Most market forecasts – including those of IVG – point to limited reductions in initial yields of prime office buildings in top locations during the current year, particularly given that interest rates on sovereign bonds (the opportunity costs of real estate investment) and financing costs are likely to increase over the coming months as a consequence of the economic recovery and higher expected inflation. Therefore, the willingness of investors to invest in office properties in secondary locations of the major markets as well as in the regional office centres will in all likelihood increase during the current year. As a result, yields in secondary locations and regional centres are also likely to shift in the short term, not least because the difference in yields compared to prime properties has increased significantly over the past year. However, investment demand will continue to focus on high-quality, modern properties because the rental market for properties of average quality in many locations is facing into a prolonged period of high structural vacancy. Some investors may seek opportunities to a greater extent in the value-add area: Given that the decline in new construction activity is leading to a shortage of efficient and high-quality available office stock and assuming the economic recovery continues, investments in modern well-situated properties with vacancy problems and in properties with refurbishment potential offer the prospect of exceptionally high increases in value. Aside from the limited supply of core objects, real estate financing continues to restrict a continued market recovery: In the light of new regulations under Basel III regarding equity requirements for banks, new lending business in the real estate sector remains limited. Any further relaxation of credit financing for real estate in the form of higher lending quotas or lower credit margins is therefore unlikely. By way of conclusion, it is important to note that recovery in the investment market will continue during the current year. A significant increase in the transaction volume above the €20 billion mark will be curtailed by the shortage of fully leased prime properties and the moderate willingness to lend on the part of the banks. The German investment market in 2011 will also be dominated by German and foreign investors supported by equity. Assuming that the economic upturn in Germany continues, they will to some extent be willing to accept higher risks again – either by expanding their geographical investment spectrum to include secondary locations and regional locations with moderate vacancy risks or by investing in the value-add segment. Major office transactions in 2010 (selected) Location Property Value € million Frankfurt Opernturm 580 Berlin Sony Center 572 Munich Siemens Neuperlach 330 Dusseldorf Vodafone Campus 300 Frankfurt Deutsche Börse 232 Frankfurt Fürstenhof 126 Hamburg Brahms Quartier 124 Berlin Nordbahnhof Carrée 116 Berlin Friedrich Carrée 105 Dusseldorf Spherion 102 Dusseldorf Moskauer Straße 19 97 Hamburg Metropolis Haus 93 Regensburg E. ON Bayern 90 Frankfurt Deutsche Bahn 73 Hamburg Centurion CC 71 Cologne Südliches Kranhaus 65 Stuttgart City Plaza 65 Dusseldorf Hofgarten Palais 60 Frankfurt Imtech am Flughafen 57 Frankfurt Mainpark Kaiserlei 53 Munich Renaissance Haus 53 Hamburg Zweier-Portfolio 52 Berlin Berlin Airport Center 52 Dusseldorf Living Office 52 Darmstadt Auge 51 Source: IVG Research Ø Prime office initial yields 8% 6% 4% 2% 0% 7 major office centres Source: IVG Research Regional Centres West Regional Centres East 23
Page 1: Market report GerMany 2011
Page 4 and 5: 2 Dear Readers, In forming a valid
Page 6 and 7: 4 Implications of IVG Research for
Page 8 and 9: 6 Leading economic indicators such
Page 10 and 11: 8 Modern office buildings in short
Page 12 and 13: 10 Problem of structural vacancy no
Page 14 and 15: 12 Frankfurt: steady increase in va
Page 16 and 17: 14 Stuttgart: extremely stable tren
Page 18 and 19: 16 Constance Freiburg Augsburg Muni
Page 20 and 21: 18 … only if rents are less volat
Page 22 and 23: 20 Investment market for office bui
Page 26 and 27: 24 Notes: German office markets 201
Page 28 and 29: 26 Office market scoring methodolog
Page 30: 28 Imprint IVG Immobilien AG Zander

Market Report 2011 GerMany - Europe Real Estate

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