Market report Germany offices 2013

Transcription

1 Savills World Research Germany Market report Germany offices 213 Summary Top six office markets at a glance in the top six office markets was in line with expectations in 213, registering a decline of approx. 1% or some 3, compared with the previous year. Despite the fall in take-up, the average vacancy rate across the markets under review decreased by one percentage point year-on-year to. However, the distribution of vacancies is quite uneven with an oversupply of grade B and C offices in peripheral areas and a shortage of high-quality space in central locations. Companies with requirements for large contiguous space in good locations are faced with a particularly acute shortage of options. Indeed, lettings of such space are now almost only possible in new developments and these remain scarce. This situation is reflected accordingly in rental growth with prime rents rising in almost all cities. Against a background of rising economic activity, an increase in take-up and a further slight decrease in vacancy rates is expected for the The search for high-quality is increasingly challenging for companies. Many of them are forced to extend their leases. Marcus Mornhart, Head of Office Agency Germany savills.de/research 1

2 213 Real economy and financial environment Eurozone emerging slowly from crisis - danger of setbacks remains Once again, it is impossible to provide an analysis of the German economy without mentioning the term 'eurozone crisis'. The crisis has still to be overcome and has even become the 'new normal'. However, in positive terms, this also means that players in the eurozone are now accustomed to the challenging conditions and that the uncertainty regarding the future development of the single currency area is gradually giving way to confidence that the euro crisis can be overcome. The most recent bond issues in Ireland and Portugal lend strong support to this notion and an increasing number of indicators are pointing towards rising optimism. The Markit Purchasing Managers' Index for the eurozone rose to a three-month high in December and the second highest level for two and a half years. That GDP also grew in both quarters of the second half of 213, following six quarters of negative economic growth, is also encouraging. Without economic growth, it is unlikely that many countries will succeed in reducing the continued record levels of unemployment (average 12.1% in October 213) and lowering their debt to acceptable levels. In that respect, it is essential to act with caution since, despite the prevailing optimism, there are likely to be setbacks along the way out of the crisis. German economic growth driven by consumption In view of the fact that the eurozone crisis is now entering its sixth year, the state of the German economy is quite astounding. The unemployment rate has been in decline since 2 and has since almost halved. In the same period, the number of employees subject to statutory social security contributions has risen by more than three and a half million to almost 3 million; the highest level on record. These trends are also reflected in the consumer climate. Since its post- Lehman low in September 28, the GfK Consumer Confidence Index has risen more than five-fold. The positive consumer sentiment expressed by the index can be attributed not only to the healthy employment market but also to extremely low interest rates. Overnight interest rates are generally below 1% which, with inflation currently standing at around 1.%, means negative real interest rates. In this situation, private households appear to be reducing their propensity to save in favour of consumption. The German economy has benefited from this, growing by. over the last year, primarily due to private consumption. Consumption actually contributed.% to growth meaning that, without the rise in consumer spending, German GDP would have declined in 213. Net exports (exports minus imports) were negative at -.3%. This was unusual for the export nation of Germany and illustrates that, far from being GRAPH 1 Labour market Skills shortage in higher focus than unemployment % Source: Bundesagentur für Arbeit, Focus Economics GRAPH 2 Consumer climate Consumers are consumption-oriented Source: GfK Unemployment rate Employees Million TABLE 1 Macro-economic key figures at a glance* Significant brightening in 214 expected Figure (y-o-y change in %) Ø 8-12 GRAPH 3 Business climate Consumption keeps economy in growth mode.8 Net exports Gross investments Government consumption Private consumption Gross domestic product Private consumption Industrial production Consumer prices Exports Imports Basis points GDP growth 213 Source: Statistisches Bundesamt, Focus Economics / * 213 preliminary figures; forecast values Source: Statistisches Bundesamt, DekaBank savills.de/research 2

3 213 untouched by the eurozone crisis, the German economy has been markedly impacted. However, this also means that a slow recovery of the eurozone should lend impetus to German exports, lifting economic growth to a significantly higher level this year. The current consensus forecast for GDP growth is 1.7%, which would be more than double the average figure from Accommodating monetary policy and economic recovery send interest rate curve steeper The fact that the eurozone crisis has not yet been overcome can be seen from a glance at the key interest rate of the European Central Bank (ECB). The refinancing rate in the eurozone currently stands at. and the ECB has explicitly not ruled out a further reduction or even a negative deposit rate in order to stimulate bank lending and thus economic activity, particularly in the peripheral eurozone countries. The US Federal Reserve is also adhering to its accommodating monetary policy for the time being. While the Fed has commenced tapering, i.e. the reduction of its bond purchasing programme, it has simultaneously deferred any increase in its base rate into the more distant future. It therefore remains the case that no turnaround in interest rates in the form of rising benchmark rates of the major central banks is expected. Most forecasts expect the ECB's key interest rate to remain below up to and including 217. Nevertheless, driven by the favourable economic outlook and associated rising inflation expectations, yields on bonds of a longer maturity have trended upwards in recent months. Yields on 1-year German government bonds, for instance, have risen by more than 6 basis points since their April 213 low to a current level of around 1.. Yields on 1-year corporate bonds with a AAA rating have risen by the same amount to reach approximately 2.3%. With inflation lowering significantly to 1., yields on long-term corporate bonds at least are once again notably above the rate of price increases. However, since quoted prices remain on average above their issue price, despite the recent declines, long-term investments in bonds retain the risk that they will achieve a negative real return upon maturity. Investors must accept higher risk to maintain returns In contrast with bond prices, share prices continued to rise over the last year. The DAX rose almost 2, points to a historic high of nearly 9, points in 213. In the first few weeks of the current year, it added a further 2 points. The US Dow Jones index achieved a similar performance while European equities have also risen significantly in recent months. Evidently, such high share prices pose the risk of falling, at least while they are (still) not supported by corresponding earnings growth. However, with the continuing accommodating monetary policy and improving economic outlook likely to drive share prices even higher, equities remain a more attractive asset class than bonds for investors with a certain risk tolerance. Investors whose investment policy or legal framework prevents (high) allocations to equities are increasingly shifting into property. Consequently, values have also risen in this asset class. This creates a somewhat challenging set of circumstances for investors. Bond yields are low with prices trending downwards, valuations on equities in the major indices are high and initial yields on core property are low. In other words, if investors wish to at least maintain current returns in their portfolios, they will be forced to accept higher risk in their investments. This trend is likely to significantly characterise the capital markets in the forthcoming months, particularly since the accommodating monetary policy of the central banks means that there is more capital in circulation seeking investment. The competition for assets with attractive risk-return profiles is, therefore, likely to further intensify. GRAPH 4 ECB prime rate and inflation Yield trough seems to be overcome % Source: Thomson Reuters Euro Government Bonds (1Y) BBB Corporate Bonds (1Y) New Government AAA Corporate Bonds (1Y) Further regulation expected The new German government has been in office for just a few weeks but its place in the history books is already secured. 'GroKo', the German abbreviation for the grand coalition between the CDU/CSU and SPD parties, was voted word of the year for 213 by the German Language Society. Whether the GroKo will prove similarly enduring via its policy remains to be seen over the next four years. However, the key pillars of the coalition's policy have already been laid down in its coalition agreement, offering an early insight into the political agenda for the current legislative period. Regardless of the concrete details, this primarily entails an increase in regulation. For instance, many of the planned measures, including the minimum wage and rental cap, are aimed at preventing free pricing in the markets, or only allowing this within a prescribed range. The stated objective of these measures is to provide greater (distributive) justice. Whether the intended measures can actually contribute towards greater justice remains to be seen and the question cannot be answered in any case without an agreed definition of justice. In addition, the prospect of greater justice via such state intervention is also intertwined with risks. Perhaps sensible investments will be prevented while less desirable projects are supported. In brief, there is a risk of misallocations that would reduce the competitiveness of the German national economy and thus its longterm growth potential. savills.de/research 3

4 213 Top six office markets at a glance Eurozone crisis clearly reflected in office markets As expected, the rather weak economic growth of the last 18 months has also impacted the major German office letting markets. in the six markets of Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne and Munich totalled approx million ; almost 3, or 1% less than in 212. The size structure of the take-up also reflects the economic situation in Germany and the eurozone. Last year, there were just 22 deals of over 1, compared with 2 in the previous year. This is a manifestation of the fact that, faced with rather weak global economic growth and a shrinking economy in Europe, large international groups in particular are being somewhat reticent and deferring their leasing decisions. Employment growth is supporting take-up That take up was just moderately below its 1-year average of approx million, despite the reservations of major occupiers, is also a consequence of the sustained upturn in the employment market in spite of low economic growth. In all top six office markets, the number of people in work rose more sharply between 2 and 213 than in Germany as a whole, where employment growth stood at 7.. The available statistics for office employment only reach as far as 212. However, this has been even stronger than employment growth as a whole; a trend that is likely to have continued last year. The number of people in work rose by an average of. across the six cities compared with 212. Significant fall in vacancy rates This employment growth has not only supported take-up but was also a principal reason for the decline in vacancy rates in all six markets last year. At the end of 213, an average of of office stock in all locations stood vacant compared with 9% in the previous year. However, not only did vacancies decline, they were also distributed quite unevenly. While dated offices in peripheral locations are characterised by high vacancy rates, modern space in central submarkets is now scarce. Occupiers searching within the large office segment in particular are faced with an acute shortage of supply. This surplus demand is not least attributable to the low completion volume. Last year, some 86, of new office space came to the market, which represents a increase on 212. However, compared with the average figure for the last five years (approx. 97, ), this was still relatively low. Prime rents the highest since 21 The gradual shift in the markets in favour of landlords, particularly in the prime segment, is also reflected in GRAPH Office employment Continuous growth - especially in Berlin 2 = Berlin Düsseldorf Frankfurt Hamburg Cologne Munich * Source: Bundesagentur für Arbeit, Savills / * forecast GRAPH 6 and vacancy Decrease in vacancy proceeds million * % % TABLE 2 Office market key figures New developments and shortage of high-quality space are driving rents () (%) Vacancy (m ) Prime rent ( per /month) Average rent ( per /month) Q4 213 y-o-y change Q4 213 y-o-y change Q4 213 y-o-y change Q4 213 y-o-y change Berlin 68, -22.9%. -4bps.9 -.% % Düsseldorf 342,4 +1.% 1.8-3bps % Frankfurt 439, -13.9% bps % Hamburg 427, -.7% 7.2-9bps % % Q4 213 y-o-y change Cologne 27, +14.9% bps % Munich 616, bps % % % Top six 2,77, -9.7% 8. -1bps % savills.de/research 4

5 213 rental growth. Prime rents rose by an average of 3.7% in 213 compared with the previous year; the strongest increase since 28. Four of the six markets even registered increases of more than % while Hamburg was the only city where the prime rent showed a modest decrease. The average prime rent across all six markets stood at per /month at the end of 213; the highest since 21. This underlines the fact that numerous occupiers are competing for the few high quality offices available, enabling landlords to raise rents accordingly. This is particularly true of new developments in central locations. Lettings in such developments are in large part responsible for prime rents rising so sharply despite the modest take-up. Oversupply in peripheral locations Although such pre-lets also caused average rents to rise in most cases by the end of the year, exceeding their average from the previous year by 2., rental growth was not positive across the entire market. Companies seeking office space outside the central locations are highly pricesensitive. They are also benefiting from the fact that the supply shortage in central locations is contrasted with excess supply in peripheral submarkets, with the resulting competition for tenants reflected in rents. Consequently, rents in these locations fell during the year in most cities, stabilising by the end of the year. Furthermore, a large amount of low-value office space was taken off the market last year, decreasing the oversupply somewhat. This allowed vacant space in Frankfurt alone to be reduced by approx. 12,, almost two thirds of which has been earmarked for conversion into apartments. A similar trend can also be observed in other cities, reflecting the fact that, after steep increases in recent years, residential rents are now at the same level as office rents in many locations and in some cases are even higher. As this trend is unlikely to change in the foreseeable future, conversions of offices into residential accommodation are likely to continue to contribute to a reduction in the base vacancy rate in major office markets over the coming years. Greater activity expected in 214 Despite the above-average volume of space being withdrawn from the market, vacancies are not expected to decline at the same rate that they did in 213 over the coming year. The overall solid performance of office markets in recent years and the increase in prime rents in some locations in particular are resulting in a marked increase in development activity. This is further buoyed by an increased willingness to lend. As a result, completion volumes will rise further over the coming years. For the present year, we currently expect completions to total approx. 1.1 million (+2 compared with 213), while almost 1.3 million of space is in the pipeline for 21 (+1). However, speculative development starts remain rare. Not only is supply side activity expected to increase this year, demand is also expected to rise. In view of the projected greater economic activity in Germany and Europe, take-up is expected to at least equal the 1-year average, with large occupiers once again playing a more active role. Prime rents are not expected to change significantly in terms of the average across all six markets, although these may well rise somewhat further in individual markets (particularly Berlin and Munich). GRAPH 7 Rental levels Despite lower take-up prime rents at highest level since 21 per /month * Prime rent - Ø Top 6 Average rent - Ø Top 6 GRAPH 8 Development pipeline Increasing development activity 1,4, 1,2, 1,, 8, 6, 4, 2, * 21* TABLE 3 Forecast top six markets will decrease, hardly any change in vancancies y-o-y change 2.89m 2.78m +4.% Prime rent Average rent Vacancy rate per /month 14.8 per /month per /month 14.2 per /month +/-.% % 8.% -3bps savills.de/research

6 213 Office market Berlin No deals above 1, Following the record volume in 212, take-up in the capital was significantly lower last year. Overall, deals totalled 68, ; almost 23% lower than in the previous year. However, despite the significant decrease, takeup was still in line with the average over the last ten years. Indeed, the sharp decline in take-up was primarily attributable to a lack of major lettings. Across the top six markets, only Berlin failed to register a single deal above 1, last year. Berlin also witnessed the sharpest fall in lettings within this size category after 1 deals above 1, were completed in the capital in 212. Large lettings almost only possible in new developments Other office market data showed a more positive trend than the take-up figures. The vacancy rate declined by a further 4 basis points last year, ending 213 at %; by far the lowest figure across the top six markets. Particularly in the central submarkets (namely Potsdamer / Leipziger Platz, City East and City West), and notably in terms of large contiguous space, there is now a noticeable supply shortage and a gradual shift towards a landlords' market. Lettings of, and above are, therefore, almost only possible in new developments. Rents rise significantly The increased proportion of (highvalue) pre-lets is reflected accordingly in rental growth. The prime rent recorded its first notable increase since 27, ending the year at 22. per /month; some % higher than a year earlier and the highest level for five years. The average rent also showed an upward trend last year, rising almost 3% year-on-year to stand at 12.3 per /month at the end of 213. While this too is partly attributable to the relatively high number of pre-lets, there is also another reason. Rents in the more central locations, such as Checkpoint Charlie, rose appreciably last year. This, in turn, is a consequence of the high demand for space in these areas, as can be seen from the take-up analysis by submarket. While the City fringe submarket accounted for by far the highest proportion of take-up once again last year with 4, the three central submarkets of City East (23%), City West (9%) and Potsdamer Platz / Leipziger Platz (3%) shared more than a third of take-up. Focus on new-build space foreseeable despite further decline in vacancy rate However, it is not only the central locations but also high-quality space that is largely dominating demand. A total of 379,, or more than half of overall take-up, was attributable to new-build space. An additional 84,6 (approx. 1) of space let last year was in refurbished property. This is almost an identical distribution to that seen a year earlier. However, in view of the decline in the vacancy rate and the greater supply shortage, particularly in the soughtafter new-build segment, this explains the increase in rental levels. Rents to trend upwards again this year This year too, both the prime and average rent are expected to trend at least moderately upwards. In contrast with last year, a number of large lettings are expected over the coming year, producing an increase in take-up, which should reach the 7, mark. At the same time, the completion volume will remain low at a projected 2, (213: approx. 19, ) and the majority of space coming to the market this year () is already pre-let. Consequently, the decline in vacancies is expected to continue this year, reaching the 4.% mark during the course of 214. GRAPH 9 and vacancy Increase in takeup expected for 214 GRAPH 1 Rental levels Prime rent with significant plus for the first time since 27 per /month 1,, 9, 8, 7, 6,, 4, 3, 2, 1, GRAPH 11 by submarket Almost half of the take-up in City outskirts 38,7 67,8 776, 768,3 696,4 66,3 74,7 778, * * East/North/ South/West City West 9% City East 23% 834,8 68, 7, 1% 9% 7% % 3% 1% % y-o-y change prime rent Prime rent Average rent Potsdamer Platz / Leipziger Platz 3% 1% 1% % % -% -1% -1% City outskirts 4 savills.de/research 6

7 213 Office market Düsseldorf rises by 1% Office take-up in Düsseldorf rose by more than 1% last year compared with 212 to reach 342,. Indeed, Düsseldorf was the only top six market besides Cologne where take-up registered an increase last year. This was not least attributable to the fact that major occupiers in the Rhine metropolis were anything but reticent. The ten largest deals last year were all in excess of the, mark and totalled almost 13,, or more than a third of overall take-up. Thus, major lettings contributed significantly to take-up last year and were a decisive factor in the annual figure reaching an aboveaverage level. Supply shortage in the centre, oversupply in the periphery Even more remarkable was the growth in the prime rent, which rose by a further. from its already high level to reach 27. per /month at the end of 213. Such a high level has not been seen since the start of the 199s, which is also a reflection of the shortage of high-quality space in central locations. While the vacancy rate declined by just 3 basis points to 1. during the year (the second highest of all top six markets), this was distributed very unevenly. Whereas the numerous available grade B and C offices in the peripheral submarkets attracted relatively little demand, the few available high-quality offices in central locations reflected a marked supply shortage. With the next projects in the financial district and city centre submarkets not scheduled to complete until 21/16, the latter situation is not expected to change this year. Occupiers seeking such accommodation are, therefore, being forced to consider alternatives. For tenants who already occupy highquality offices, extending existing leases and taking on additional space where required is the first option. Occupiers for whom this is not possible because they are relocating from another city, for example, or there is no additional space in their existing building, are seeking space in the submarkets close to the centre, such as Kennedydamm. As a result, demand for space is also on the increase in these locations. Airport is establishing itself This is not true of all submarkets in Düsseldorf, of course, but it is particularly true of the central locations. Indeed, supply shortage is currently a problem even in those submarkets that are not located immediately in the centre. Medienhafen, for example, continues to be regarded as a good location by companies yet, owing to a lack of available space, ranked just ninth in terms of submarkets by takeup last year with deals totalling just 13,. In the two previous years, Medienhafen was among the top five. The 'Düsseldorf North / Airport' submarket has also established itself in this group in recent years and was even the strongest submarket by take-up last year with 19% of overall office space let. This underlines that the airport has developed into an increasingly sought-after office submarket over recent years. Among its advantages as a location are the favourable transport links via the Rhine-Ruhr axis; a key decisionmaking criterion for many companies when choosing to locate here. to remain high in prime rent to fall The shift in Düsseldorf towards a landlords' market is likely to continue this year with take-up expected to equal last year's level. The completion volume is expected to rise only moderately to around 14, (213: approx. 12, ), meaning that the vacancy rate is likely to fall slightly further. However, the prime rent may well have peaked last year and is likely to fall back slightly. This is not due to a decline in demand for high-quality space but simply a lack of space for which rents upwards of 27. per /month could be achieved. GRAPH 12 and vacancy on continuous decline 28, 267,142 GRAPH 13 Rental levels Prime rent reaches all-time high per /month 7, 6,, 4, 3, 2, 1, ,4 2,7 424,1 22, * 373, 312, 31, 342,4 1 34, 1 1% % y-o-y change prime rent Prime rent Average rent * 1% 1% % % -% -1% -1% GRAPH 14 by submarket Due to shortage of space, only marginal take-up in harbour other submarkets 33% Seestern City centre 9% Düsseldorf North / Airport 19% City South 1 Kennedydamm 1% savills.de/research 7

8 213 Office market Frankfurt below average In terms of take-up, 213 was a relatively weak year for the Frankfurt office market. Deals totalled approx. 439, ; almost 1 below the previous year's level and slightly short of the average figure for the last five years (approx. 41, ). This decline in take-up was primarily attributable to the low number of major lettings. Last year saw just four deals of over 1,, which was just half the amount completed in the previous year. Modern space of, and above in short supply That the number of large deals was so low is not only attributable to the lack of demand for such space but also to the limited supply. In central locations in particular, modern space of, and above is a rare commodity, leading many companies to extend their existing leases. In the large office segment alone, leases were extended on space totalling 2,. By far the largest extension was that by the ECB on approx. 46, in the Eurotower. This extension was also unique insofar as it also represented a de facto change of tenant. The ECB personnel who have occupied the space to date will move into new-build offices in the Ostend submarket at the end of the year, with the new banking regulator moving into the Eurotower following refurbishment. Nevertheless, this extension will not count towards the take-up figures. Lettings driven by rationalisation A number of lettings, not least in the financial sector, were primarily associated with the objective of rationalising space. Consequently, open-plan space was at the top of occupiers' wish list in terms of office layout, reflecting the fact that the financial sector remains in a state of consolidation. Nevertheless, finance remained the most active sector of the economy by take-up accounting for more than a quarter of office space let last year. Office stock rises only slightly Despite the overall below-average take-up, vacancies continued to decline in the final quarter of last year. The vacancy rate fell to 11.9%, ending the year 2.4 percentage points below the previous year's level. This further decrease is explained by the relatively low completion volume, with just 1, of offices coming to the market in the fourth quarter and almost as much space being withdrawn from the market (approx. 13, ). The same applies for the year as a whole. Some 164, of office space was built or refurbished while almost 12, was withdrawn from the market, meaning only a slight net increase in office stock. More than 7, of the office space withdrawn from the market last year is earmarked for conversion into apartments; a phenomenon likely to continue over the coming years in view of both the shortage of residential property in Frankfurt and the sustained very high base vacancy (approx. a third of the overall vacancy rate). Prime rent shows strong increase Rents remained largely stable in the fourth quarter as the spread in the market consolidated. While rents of more than 4 per /month were achieved on new-build offices in prime locations, rents in peripheral locations trended downwards. The latter resulted in a slight decrease in the average rent in the final quarter to 17. per /month (-2. compared with 212), while the prime rent remained unchanged at 38. per /month (+.). Higher take-up expected in 214 Over the current year, we expect the average rental level to stabilise while the prime rent should increase slightly further in view of the continued short supply. is expected to rise to at least,, not least because of a rising number of large deals. GRAPH 1 and vacancy Decreasing vacancy despite of low take-up 47, 33, GRAPH 16 Rental levels Rents drift apart - also in 214 per /month 1,, 9, 8, 7, 6,, 4, 3, 2, 1, , 6,, 3, 47, 41, * 9,9 439, 4, % % y-o-y change prime rent Prime rent Average rent * GRAPH 17 by submarket Bankenviertel remains top-selling market Eschborn 7% City West 7% other submarkets 1 Westend 13% Bankenviertel / City 3% Frankfurt West 27% 1% 1% % % -% -1% -1% - - savills.de/research 8

9 213 Office market Hamburg remains below average with reticence in the large office segment The Hamburg office market ended 213 with almost the same take-up level as the previous year. Occupiers completed deals on 427, of office space; just 1% less than in 212 and % lower than the average figure over the last ten years (approx. 41, ). In Hamburg too, the below-average take-up is not least attributable to the relatively low number of major lettings, with deals of, or more accounting for just a fifth of overall take-up. International companies in particular struggled to reach leasing decisions last year. Logistics sector particularly active A marked exception to this were companies in the logistics sector, which made a significant contribution to overall take-up and even agreed a number of larger leases. Deutsche Bahn subsidiary DB Schenker leased 7,4 in the City South submarket while other logistics companies accounted for several deals of more than 1,. In view of the strong nationwide growth in the logistics sector as well as its importance for Hamburg, this aboveaverage activity in the office market is of little surprise. Prime rent falls year-onyear though incentives are reduced A large proportion of take-up last year, almost a third in fact, was attributable to the City submarket. The fourth quarter in particular saw a number of larger deals in this area. Since many of these transactions were pre-lets, the prime rent rose significantly in the fourth quarter for the first time since mid-212, ending the year at 24. per /month; a fall of year-onyear despite the late rally. Incentives were also pared back somewhat in the prime segment during the year. On a five-year lease, the norm was three months rent-free compared with four to five months in the previous year. The average rent stood at per / month at the end of the year; some 1% above the previous year's level. City South popular with office occupiers Besides the City submarket, City South was also particularly in demand from companies, accounting for almost a quarter of overall take-up last year. The popularity of the submarket is explained by its relatively modern office stock, its proximity to the city centre and significantly lower rents than in the City submarket despite these advantages. The Altona submarket enjoys similar benefits as a location and was also one of the strongest submarkets, finishing third in the rankings with a 9% share. Outlook for 214: significant rise in takeup - prime rent to remain stable Vacancies fell only marginally in the final quarter of 213 to approx. 94,, with the vacancy rate remaining unchanged at 7.. However, this represents a significant decrease on the previous year as the vacancy rate fell by a total of 9 basis points during the course of the year. We expect vacancies to decrease again at least moderately this year. While almost 18, is awaiting completion, half of this space is already pre-let. Furthermore, in view of the larger requirements currently active in the market, this proportion is likely to rise considerably over the coming months with a majority of these occupiers seeking scarce, high-quality office space. As a result, the prime rent could rise slightly further, although a significant breach of the 24. per /month mark is unlikely this year. In terms of take-up, however, the increase could be somewhat more significant, with an annual figure of 46, (an increase of on 212) appearing realistic. GRAPH 18 and vacancy on decline since , 417, GRAPH 19 Rental levels Stable rents expected for 214 per /month 6,, 4, 3, 2, 1, , 7, 4, ,9 483, 33, * 43, 427, 46, 1 1% % y-o-y change prime rent Prime rent Average rent * 1% 1% % % -% -1% -1% GRAPH 2 by submarket Tenants in favour of central locations Outer Alsterlage 9% other submarkets 19% 7% Altona 9% City South 2 City 3 savills.de/research 9

10 213 Office market Cologne Significant rise in takeup - public sector and consultants the most active A number of large deals lifted the Cologne office market to a takeup of 27, last year; an increase of approx. 1% compared with the previous year. The annual total was also moderately above the average from the previous 1 years of approx. 26,. The strongest sectors by take-up were the public sector and management, legal and tax consultancies, each accounting for almost 19% of overall space let. The third most active sector of the economy in this regard was publishing and media, with companies in the sector accounting for 1 of overall take-up. Lack of alternatives a factor in the number of lease extensions The annual take-up could have been even higher if there had been an adequate supply of office space. In addition to several major lettings, there were also a number of lease extensions in the large size category, in some cases owing to a lack of alternatives. One of the largest of these lease extensions was that by KoelnMesse on almost 16, of office space. Prime rent rises as supply shortage worsens The acute supply shortage, particularly in terms of large, contiguous space in central locations, is also reflected in the vacancy and prime rental levels. The vacancy rate stood at 7.1% at the end of the year; 1.2 percentage points lower than a year earlier. Meanwhile, the prime rent rose by more than % to 22. per /month, a level that should be maintained this year with a majority of demand focused on the City submarket. Indeed, this submarket accounted for some of overall take-up last year and, in view of the lack of development activity in the location, the supply shortage is set to worsen. In the more peripheral areas, the supply situation is less strained, although here too there are few large offices available. A number of large deals at high rents The average rent rose significantly more sharply than the prime rent, growing by more than 1 to 12.8 per /month. This was a result of a number of large lettings being completed at above-average rents. On 17 of the 3 largest lettings, the contracted rent was in excess of 13. per /month. One deal for more than 2, was even agreed at a rent of around 2. per /month. 214: stable rents with a slight increase in takeup With the majority of Cologne's office occupiers remaining highly pricesensitive, the average rent is unlikely to see a significant rise this year. However, since demand remains high in all size categories and a number of large occupiers are already in negotiations for space, take-up is expected to increase slightly on last year. Office market showing long-term growth trend One prediction that can already be made with certainty is that take-up in the Cologne office market will exceed the 2, mark for the tenth year in succession in 214. Cologne remains the smallest of the six major German office markets but has also grown appreciably over the last ten years. Not only has take-up trended slightly upwards and the office stock increased by almost 1%, the number of large lettings has also risen. Last year, for example, a total of 49 deals were completed on offices in excess of 1,, meaning that this size category accounted for more than half of overall take-up (7%). By way of comparison, in Berlin, the same size category claimed just 37% of overall take-up. Against this background, Cologne will also be of increasing interest for institutional investors in office property and may play a larger role going forward. GRAPH 21 and vacancy will fall below 7% in , 23, GRAPH 22 Rental levels Prime rent will also remain high this year per /month, 4, 4, 3, 3, 2, 2, 1, 1,, , 28, 3, 2, 24, 319, * 23, 27, 28, 1% 9% 7% % 3% 1% % y-o-y change prime rent Prime rent Average rent * GRAPH 23 by submarket City is still the most favoured submarket Porz / Airport other submarkets Deutz Bayenthal / Marienburg 11% Ehrenfeld / Braunsfeld 13% City 1% 1% % % -% -1% -1% savills.de/research 1

11 213 Office market Munich Decline in take-up despite strong final quarter Despite a strong final quarter in terms of deals, take-up in Munich registered a year-on-year decline in 213. In total, some 616, of office space was leased by occupiers, equating to a 12. decrease compared with 212 (approx. 7, ). A number of large deals completed before the year end at least ensured that take-up approached the average figure from the last 1 years, although the annual total remained 2, short of the 1-year benchmark. Large office take-up increases contrary to nationwide trend On the whole, demand and thus takeup in all size categories was somewhat restrained with only offices larger than, registering an increase in deals, contrary to the nationwide trend. in this size category totalled approx. 27, ; around a third of overall take-up and 6 higher than in 212. In the small size category, i.e. deals for offices smaller than, on the other hand, take-up declined by 1 to approx. 131,. This is not least explained by the fact that smaller companies in particular are finding it difficult to make decisions to expand. Region North submarket sees jump in take-up - City West remains the strongest In terms of submarkets, City West registered by far the highest take-up last year, accounting for more than 13,, or 2 of overall takeup. The nearest rivals, albeit some way behind, were the Outskirts North (1) and Region North (13%) submarkets. While City West and Outskirts North were also the strongest submarkets in the previous year with similar shares of overall take-up, Region North returned to the top three submarkets in 213 for the first time since 21. This was primarily attributable to an owner-occupier deal by Allianz, with construction work on the "Allianz Deutschland Campus" in Unterföhring comprising approx. 36, of office space commencing at the end of April. Decline in vacancies boosts rents to multiyear highs The final quarter of the year saw almost no change in vacancy or rental levels. The vacancy rate consolidated at 6., which was.7 percentage points lower than in the previous year. The prime rent ended the year at 32. per /month; the same level seen at the end of the third quarter and an increase of almost year-onyear. This also represents the highest figure since 21, when the prime rent reached 33.2 per /month. The average rent also rose slightly last year to 1.2 per /month (+1.%), and ended the year at a significantly above-average level when compared with the multi-year benchmark. The 1. per /month has not been exceeded since 23. A generally stable 214 expected with rising activity in the second half year While the high rental levels should be maintained this year, rents are unlikely to show any significant growth. Demand for high-value space in particular has recently been somewhat restrained meaning that the prime rent is also likely to remain unchanged over the coming months. Furthermore, without a significant number of large active requirements in the market, take-up is also unlikely to increase, at least during the first half of the year. However, in view of the improving economic outlook and projected increase in activity, it is quite likely that there will be surplus demand in the second half of the year and that the 6, mark will be reached once again. Against this background, the vacancy rate should decline slightly further during the course of 214. This, in turn, will provide scope for modest growth in the prime rent in the second half of the year. An increase to 32. per /month, or almost year-on-year, would appear realistic. GRAPH 24 and vacancy Sideways movement expected for 214 1, 8, GRAPH 2 Rental levels Prime rent is also likely to increase in 214, average rent won`t per /month 1,2, 1,, 8, 6, 4, 2, , 747, 77, 18, * 86,8 847, 7,1 616,1 6, 1 1% % y-o-y change prime rent Prime rent Average rent * GRAPH 26 by submarket High take-up in northern office market zones other submarkets 3% Outskirts South City City West 2 Region North 13% 1% 1% % % -% -1% -1% - Outskirts North 1 savills.de/research 11

12 213 Savills Office Agency und Research Please contact us for further information Marcus Mornhart Office Agency Germany +49 () mmornhart@savills.de Christian Leska Office Agency Berlin +49 () cleska@savills.de Panajotis Aspiotis Office Agency Düsseldorf +49 () paspiotis@savills.de Marco Mallucci Office Agency Frankfurt +49 () mmallucci@savills.de Ken Hoppe Office Agency Hamburg +49 () khoppe@savills.de Simon Löseke Office Agency Cologne +49 () sloeseke@savills.de Nico Jungnickel Office Agency Munich +49 () njungnickel@savills.de Matthias Pink Research Germany +49 () mpink@savills.de Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 18, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. In Germany Savills is present with about 16 employees in the six most important property markets Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg and Munich. A unique combination of sector knowledge and entrepreneurial flair give clients access to real estate expertise of the highest calibre. We are regarded as an innovative-thinking organisation backed up with excellent negotiating skills. Savills chooses to focus on a defined set of clients, therefore offering a premium service to organisations with whom we share a common goal. This bulletin is for general informative purposes only. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The bulletin is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research. Savills February 214 yourreal estate experts savills.de/research 12