Trends in the Secondary Markets The Hidden Champions The Secondary Markets 1 1 Due to the high demand pressure and associated price rises in established office markets, smaller markets are becoming more popular. In order to identify and classify their income potential, bulwiengesa, on the instructions of Apleona, has investigated and compared market price trends in the German office markets. For several years, bulwiengesa has divided the German office into top to fourth tier markets ( A to D ) in order to cluster it according to its international importance and market size. Whilst A grade markets are regularly the focus of general attention, B and C grade markets (also referred to here as secondary markets) can offer interesting investment opportunities due to their market size and dynamic. An Overview of Structural Data for A/B/C Grade Markets existing (ø) take-up (ø)* new stock (ø)* A grade market 79,07,62 69,286 127,38 B grade market 37,9,101 77,71 23,1 C grade market 27,02,8 21,69 11,28 Source: RIWIS; all data in m² MF/G; *2016 - preliminary estimate Clear structural differences between the market types emerge when analysing average office space take-up (volume of lettings and owner-occupations per annum). For example, the average MF/G is around 70,000 m² in the, 77,000 m² in the, and 22,000 m² in the. Smaller market sizes limit the possible investment volume in smaller markets; however, interesting investment opportunities may also arise in the B and for investors willing to accept smaller lot sizes. Based on an analysis of rental and yield trends, bulwiengesa has therefore investigated price trends in these markets and compared them with the performance of the. Rental Trends In addition to the large, established markets Munich and Berlin, this is particularly true for a number of B and. For instance, average office rents in central locations in Leipzig increased more than in the A grade cities. This increase is generally attributable to active demand, which is confirmed by an analysis of office employment statistics as a relevant demand variable in the office market: in Leipzig, office employment rose by 8.% from 2012-201 (2016 figures are not yet available for statistical reasons), in Regensburg by 6.% and in Braunschweig by.0%. Rental Trends in the Top B/C grade Markets* 2012=100 120 11 110 L P BS N 10 R 100 2012 2013 201 201 2016 ø A Source: RIWIS; L=Leipzig, N=Nuremberg; P=Potsdam; R=Regensburg; BS=Braunschweig, A=A grade cities; *2016 - preliminary estimate Demand is generally focused on markets where construction activity is low and therefore supply is scarce, and the situation is further intensified by the conversion of vacant office space to residential buildings and its removal from the market. This is reflected in the falling volumes of vacancies: Changes in Vacancies in the Various Markets (in %)* 9 8 7 6 2012 2013 201 201 2016 Rental trends in the German market have proved to be very mixed in recent years. While some markets stagnated, others have recorded significant rental growth.
2 In B and C grade cities, the volume of available space has reduced significantly in recent years, leading to a fall in vacancy rates. This trend is most prevalent in eastern German markets: for example, in Magdeburg almost 1% of office space was vacant in 2000, but the vacancy rate has since dropped to around 7%. Starting at a high level of around 9%, vacancy rates in the A grade markets have reduced at a more significant rate than in the B and C grade cities in recent years. As a result, the vacancy rates for all three market types have fallen to below 6.0% (the average of all cities). Secondary Cities in the Investment Market The German office market is the focus of domestic and foreign investors. In 2016 alone, more than EUR 2 billion was invested in German commercial real estate; the third highest transaction volume ever recorded. Due to the scarcity of assets in the and high demand pressure, focus is shifting increasingly to secondary markets. In 201 for example, around EUR 2 billion was invested outside the major markets and in 2016, the transaction volume is estimated to exceed EUR 23 billion. Normally, secondary cities are characterised by smaller-scale investments. On the other hand, in the institutional investment market, the average size of an office property in B and C grade markets is around 10,000 m² MF/G; this rises to around 17,000 m² MF/G in A grade cities (office buildings only). The strength of demand is also reflected in yield trends: average net initial yields for office buildings in central locations decreased from 6.1% for and 6.6% for in 2012 to.1% and.7% in 2016, respectively. There was an even more notable reduction in the : here, yields decreased from just under % to their current level below %. The detailed analysis reveals that there are significant differences in yields in secondary markets. The role of Bonn s office market as a headquarters location for Dax companies and federal authorities is reflected in its low yield level: The prosperity of the cities of Nuremberg and Hanover is also evident, with net initial yields lyeng below.0%. In addition to the cities mentioned above, yields in several cities (including Dortmund, Essen, Freiburg, Heidelberg and Leipzig) are currently sitting at.0%. Net Initial Yields for Office Buildings in Central Locations* 7 2 Investment Volumes outside the * (in EUR bn) 30 20 in % 6 3 2012 2013 201 201 2016 10 0 2011 2012 2013 201 201 2016 There are different reasons for the investment activities in the individual markets. Increasingly, Leipzig is establishing itself as an alternative investment location to Berlin. Nuremberg and Hanover are growing office markets with a broad economic base. Heidelberg in particular has gained a considerable degree of prosperity through its Bahnstadt Heidelberg development zone. Other markets such as Regensburg are also benefiting from the willingness to pay high prices in the housing market, which is also reflected in the commercial real estate market.
3 However, yields remain at a much higher level in smaller markets with low market activity. For example, Rostock is currently around 6.0%, and Bielefeld, Saarbrücken and Wuppertal are even higher. NIYs for Selected B/C grade Markets in %* 2012 2016* Bonn.0.60 Hanover.80.70 Nuremberg.0.80 Münster 6.30.00 Mannheim 6.30.00 Leipzig 6.30.00 Karlsruhe 6.20.00 : : Rostock 6.70 6.00 Bielefeld 6.70 6.10 Wuppertal 6.90 6.0 Saarbrücken 6.90 6.0 The Champions of the Past Five Years Top 30 Office Markets: Rental Growth 2011-2016 The detailed results can be found on the map on the next page 1 Berlin 86.32% 2 Munich 71.08% 3 Leipzig 6.9% Dresden 1.6% Potsdam 0.92% 6 Erlangen 0.87% 7 Münster 38.3% 8 Hamburg 3.7% 9 Regensburg 33.% 10 Mannheim 32.11% 11 Aachen 30.73% 12 Freiburg (Breisgau) 29.9% 13 Wiesbaden 29.73% 1 Cologne 29.29% 1 Karlsruhe 29.0% 16 Bremen 28.3% 17 Nuremberg 28.07% 18 Augsburg 26.81% 19 Hanover 2.2% 20 Braunschweig 2.62% 21 Mönchengladbach 2.32% 22 Heidelberg 23.03% 23 Osnabrück 22.7% 2 Düsseldorf 22.16% 2 Kiel 22.12% 26 Mainz 21.9% 27 Stuttgart 21.67% 28 Magdeburg 20.69% 29 Frankfurt (Main) 20.1% 30 Dortmund 20.06% Source: bulwiengesa AG calculations 3
It is evident from the above analysis that the regional office markets are developing at different rates. In order to take a differentiated view, price trends between 2012 and 2016 were analysed on a city-by-city basis. The market price in EUR / m² is derived from the average rent (city locations) and net initial yield. Transaction costs (including the real estate transfer tax applicable at that time) and operational costs are taken into account. As expected, Munich and Berlin showed the highest growth rates. Both markets have proved to be very prosperous in the past few years. Rising rents have triggered growing investment demand, leading to a sharp rise in market prices of 86% in Berlin and 71% in Munich. However, significant growth rates were not only observed in the major markets: five B and (Leipzig, Dresden, Potsdam, Erlangen and Münster) are in third to seventh place in the ranking, and two more (Regensburg and Mannheim) are amongst the Top 10. Market price rises of over 22% were observed in a total of 20 secondary markets, above the level of established office markets such as Frankfurt, Düsseldorf and Stuttgart. The reasons for this prosperity are presented in the above analysis and are broadly diversified. In smaller markets, a high price level in the housing market can also have a dynamic effect on the office market. Several B and C grade markets are also benefiting from increasingly prosperous office markets, which is reflected in decreasing vacancies and rising rents. Office markets in the vicinity of established A grade markets also serve as alternative and expansion locations for the. A Brief Overview of the Main Points For investors who are not looking for investment opportunities exclusively in the high-volume asset segment, the secondary markets represent an attractive alternative to the established. For example, some markets have seen above-average price rises in recent years, attributable to sharply declining yields and rising rental levels. Secondary markets show very different structures which do not allow for uniform investment strategies. This analysis is therefore the beginning of a series of detailed studies on the secondary markets.
Rental Growth in the German Markets 2011-201 Changes in market rents for office space 2012-2016 Changes 2012-2016 in % > 0% > 20% - 0% 0% - 20% 0 0 kilometre Data: bulwiengesa AG, map basis: NAVTEQ