German office investment market in Q4 2017

15 January 2018

Prices rise faster in peripheral locations than in the centres as deal sizes shrink

  • The transaction volume fell by around 3% compared with 2016 to €23.5bn
  • Germany's financial centre, Frankfurt, attracted more investment than any other city
  • Investor demand is being driven by rental growth potential
  • Prime yields hardened by an average of 39 basis points across the top seven cities to 3.3%

Property in the German office investment market changed hands for a total of approximately €23.5bn in 2017, a decrease of 3% compared with the previous year. This was partly attributable to a decline in the number of large portfolio deals. By way of comparison, the transaction volume for the entire German commercial investment market rose by around 4% compared with 2016 to approximately €57.1bn. Around 73% of overall investment in the office sector was attributable to the top seven cities in Germany. This compares with a five-year average of approximately 76%. “The seven largest markets remain by far the most sought after among office investors,” says Matthias Pink, Director and Head of Research Germany for Savills, adding: “Going forward, we can assume that creative and highly qualified personnel will be concentrated in the major cities to an even greater extent.”

Frankfurt achieved by far the highest transaction volume, with properties changing hands for more than €5.3bn (+12% compared with 2016). Berlin followed in second place with an investment volume of almost €3.7bn (+52%), while Munich ranked third with almost €2.9bn (-39%). “The strong demand for office properties in the top seven markets is also a result of rental growth expectations among investors,” says Marcus Lemli, CEO Germany and Head of Investment Europe for Savills. “While the booming start-up and technology sector in Berlin is fuelling expectations of long-term rental growth, Frankfurt's financial district is expected to be strengthened as a result of Brexit.”

The ten largest commercial property transactions in 2017 included just two office deals. The three largest deals in the office investment market were the disposal of the Apollo portfolio to Intown Invest, Tower 185, which was sold to Deka for approximately €775m and the acquisition of the Axel-Springer-Campus for approximately €425m by Norwegian sovereign wealth fund Norges Bank Real Estate Management. Overall, the average volume per transaction fell by 9% in 2017 compared with the previous year to around €42m.

At the same time, however, the prices paid for office property continued to rise. While prime yields across the top seven markets hardened by an average of 39 basis points to 3.3% in 2017, the prime yield reached 3% in Berlin by the end of the year and even fell below the 3% mark in Munich (2.9%). Frankfurt am Main witnessed the highest yield compression, with the prime yield hardening by 80 basis points during the year. “In 2018, we expect yield compression to be lower and that capital growth will, for the most part, likely be achieved by leveraging rental growth potential,” predicts Lemli.

The strong demand for office property also had a positive impact on secondary locations. Prime and average yields on properties in B-locations across the top seven cities hardened by an average of 60 and 70 basis points respectively. “Since modern office space is now a rare commodity in central locations, occupiers are also becoming increasingly interested in peripheral locations,” says Pink, adding: “This rental growth potential is being reflected in falling initial yields in the B-locations.”

An analysis of market participants reveals that open-ended special funds, by far the most active purchaser group over the last four years, were relegated to second place in 2017 with a 22% share of the transaction volume. Asset managers and fund managers were the new leaders, accounting for 29% of the acquisition volume, which is partly explained by increased activity from international investors in this sector.
German purchasers were responsible for around 57% of overall investment in 2017, an increase on the previous year’s figure of approximately 50%. Foreign investment was dominated by players from the USA, France and Great Britain.

In view of the very low vacancy rates, further rental increases and continued positive economic outlook, there is scarcely any reason to expect demand for German office property to subside. Long-term investors in particular are seeking assets with stable income, making office properties especially attractive from an investment perspective. Conversely, owners’ inclination to sell is likely to remain low. Furthermore, banks, private-equity funds and closed-end funds have already largely disposed of their holdings, meaning supply is likely to remain scarce. Consequently, the transaction volume is unlikely to increase in 2018.


 
 

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Key Contacts

Marcus Lemli

Marcus Lemli

CEO Germany / Head of Investment Europe
European Investment

Savills Frankfurt

+49 69 273 000 11

 

Matthias Pink

Matthias Pink

Director / Head of Research Germany
Research

Savills Berlin

+49 30 726 165 134