Market Report 2011 GerMany - Europe Real Estate

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4 Implications of IVG Research for the investment strategy Leased core properties in the seven major markets: New investments constitute a bet that rents will rise as yield compression in this segment is already largely complete. For this reason, an exit strategy is worth mentioning. Leased modern properties in attractive secondary locations in the major markets: An interesting investment because entry prices are still relatively low and because this area offers prospects for value appreciation through yield compression and rent growth. Hold or invest! Leased core properties in the regional centres: An attractive investment due to relatively high initial yields and possible appreciation in value through yield compression and rental growth. Small markets offer opportunities as well as risks. Hold or invest! Speculative new building projects in the seven major markets: An attractive option but not without risks. Properties will be completed in 2013/2014, when the rental market is likely to have reached its peak – or have just entered another downturn. Restrictive financing continues to pose an obstacle to investment. Speculative new builds in regional centres: Attractiveness and risk depend on the respective market size. Assuming corresponding demand for space in the relevant location, pre-letting should be possible. Older and vacant properties in attractive locations: Value-add strategy in the form of modernisation (if economically feasible) and new lettings will benefit from the shortage in modern properties. Strategy can profit in the short term from attractive entry prices. Average number of vacant properties in poor locations: There is an on-going risk of incurring losses due to the extremely high probability of structural vacancy in this case. Properties are likely to be disposable only at a discount despite the market recovery. Properties in an over-rent situation: Interesting, as the over-rent is likely to reduce over the next two years during the expected market recovery. Attractiveness of office investments from yield/risk aspects Building type Newly refurbished property Older property Future development project Percentage of properties let 100 % 0 % 100 % 0 % 100 % 0 % Top 7: Central location Top 7: Good secondary location Top 7: Poor locations Regional centre from yield/risk perspectives Attractive Average Avoid Comment: Schematic, simplified presentation of alternative actions. The acquisition of vacant buildings is based on a value-add strategy in the form of renting or modernisation. Source: IVG Research SWOT analysis of the German office market Strengths Europe’s largest market: Seven locations with between 7.5 and 20 million m² of office space Economic fundamentals: High level of international competitiveness, low public debt In an international comparison, the market is characterised by moderate volatility and a high level of internal diversification No exchange rate risk for investors from the Eurozone Rental periods long: 5 years + optional additional 5 years Market players on an increasingly international footing Weaknesses Transparency regarding individual transactions could be improved (including rents, yields) Lack of uniform general conditions, e.g. property acquisition tax levied by Federal States, urban planning legislation Taxation of property yields is relatively high In some cases, contracts make no provision for inflation protection: Large number of possible adjustment rules in Germany Opportunities High demand for floor space: upturn and structural change Lack of new building, shortage of office supply and rental growth in the modern, efficient property segment Increased activity by international investors Yield compression outside the prime segment as investors accept higher risks Inflation is driving investors into real estate; rental growth Value-add, e.g. letting of high-quality vacant buildings in good locations, modernisations Threats The risk of another international economic crisis, e.g. Eurozone sovereign debt, Arabian upheaval, Japan Interest rate increases: Upward pressure on initial yields Danger of overheating in the medium term: Pro-cyclical new construction activity High level of structural vacancy is only being reduced slowly; long-term problems securing tenants in some office locations Demographic development is already leading to overcrowding in some regional centres Increase in the level of property acquisition tax (e.g. in North Rhine-Westphalia) Source: IVG Research
Macroeconomic conditions in Germany Economic growth: upturn remains intact During the past year, Germany recorded the highest economic growth since reunification. There were several reasons for the increase in economic output of 3.6%. The rapid and powerful recovery of the global economy led to a significant increase in exports. In addition, inventory investments made a significant contribution to growth. Since last year’s feared collapse in the labour market did not occur, even private consumption increased slightly. However, the growth momentum in Germany weakened in the fourth quarter of 2010. This was due primarily to the unusually cold weather conditions which affected the construction sector in particular. Aside from this, the upturn remains stable – the Ifo business climate is at a level similar to the high recorded during the reunification phase. The Purchasing Managers’ Index (PMI) and incoming order levels indicate that the German economy has picked up speed again during the first quarter of 2011. Most recent economic forecasts point to high economic growth of roughly 2.8% in Germany for the current year. A slowing global economy could see this figure drop to around 2% next year (due to the dampening effect of rising prices for raw materials and the consolidation of public budgets). In this context, domestic demand due to capital spending and private consumption is likely to play an increasingly important role. It is important to emphasise once again that the economy remains exposed to significant downside risks – it is not yet possible to estimate the consequences of the catastrophe in Japan for the global and the German economy given the uncertainty regarding developments at the Fukushima nuclear power plant. Political upheaval in the Middle East and not least the Libyan conflict could have serious consequences for the economic environment. And finally, there are persistent concerns regarding the unresolved sovereign debt crisis in the Eurozone, the UK and in the US. Labour market: expansion in the office-related sectors of the economy The economic upturn has also had a noticeable impact on the labour market over the last few months – the number of people in gainful employment in February was 40.29 million, which is an increase of 494,000 over the previous year. Seasonally adjusted, employment reached its highest level since reunification, totalling 40.717 million people. The growth in service sector employment was particularly strong: In the fourth quarter of 2010, a total of 388,000 new jobs were created in this sector representing a year-on-year increase of 1.3%. The vast majority, or 226,000, of these new jobs were created in the office-related sectors of finance, letting and corporate services. However, even the manufacturing industries successfully halted the job cuts of the previous year. Against this background, the unemployment rate fell within a year from 8.5% to 7.6% in March 2011. in % GDP growth 4 3 2 1 0 -1 -2 -3 -4 -5 '0 0 '02 '0 4 '06 '0 8 '10 '1 2e Source: Federal Statistics Office, forecast by IVG Research Index 2000 = 100 Ifo business climate Germany 120 110 100 90 80 70 '0 0 '02 '0 4 '06 '0 8 '10 Climate Location evaluation Expectation Source: Ifo economic survey in % Employment 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 '0 0 '02 '0 4 '06 '0 8 '10 '1 2e Source: IMF, forecast by IVG Research 5
Page 1: Market report GerMany 2011
Page 4 and 5: 2 Dear Readers, In forming a valid
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 24 and 25: 22 Office Market Scoring and prime
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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