Germany Market Report and Investment Market H1 2016 Strong first half of 2016 on office leasing markets and investment markets Susanne Kiese Head of Research Letting The German office leasing market is in excellent shape. Just under 1.7 million sqm of office space was leased in the seven largest German markets during the first half of 2016, up 9.3% yoy. This is also a ten-year high in terms of take-up recorded in the first half of a year, reaching levels last recorded in boom year 2008. Take-up of Space in the Top Seven Cities (in 1,000 m²) Big 7 generated highest H1 take-up in 10 years Germany continues to act as Europe s economic engine despite current political and economic crises weighing on the European economy (EU-skepticism and Brexit, unresolved euro debt crisis, weak economic trends in important emerging countries, refugee influx). The leasing markets are benefiting from ongoing employment growth, currently driven by domestic demand resulting from high private and government spending. This can also be seen in the strong net absorption of 1.1 million sqm, i.e., take-up generated by new leasing activity and expansion over the past twelve months excluding companies who moved into new space. Commercial Transaction Volume in Germany (in billions of euros) with Munich in the lead Munich recorded the highest take-up among the office markets surveyed with 387,000 sqm, up 27% yoy and outperforming Berlin, which posted the top results in 2015. With a take-up volume of 347,000 sqm, Berlin also slightly exceeded the its 2015 results (+3%).
The public sector signed several large-scale deals in Munich. The Institute for Federal Real Estate (BImA) in Sendling and the City of Munich in Ramersdorf were involved in the largest leases signed in the city so far this year featuring 15,000 sqm of office space each. Comparison of Vacancy Rates (in %) The largest-scale lease by far was signed for space in Cologne. Insurance company, Zurich, will be leasing 60,000 sqm of office space for its Rheinland headquarters in MesseCity Deutz, which will be ready for occupancy at the end of 2019. Together with a lease signed by the City of Cologne for 13,000 sqm, Cologne experienced growth in take-up of more than 43%, the steepest yoy increase among the Big 7. The significant increase in demand for office space in some areas of the remaining German real estate hubs in Q2 was largely driven by leases signed in the space segment of less than 5,000 sqm. This particularly applies to Düsseldorf (+21%) and Frankfurt (+19%), where market-dominating large-scale deals such as the lease signed by Uniper for 28,000 sqm at MedienHafen Düsseldorf and the lease signed by the ECB for 17,000 sqm at Japan Center in Frankfurt had already been finalized in Q1. Comparison of Prime Rents (in /m²) Although leasing activity in the first half of 2016 was also lively in Stuttgart and Hamburg, a yoy decrease of leases signed in the space segment of more than 5,000 sqm led to a drop in take-up of 27% and 8%, respectively. Exceptionally low vacancy rates in Berlin, Munich and Stuttgart In view of high demand, the comparatively moderate amount of space added to the market, characterized by high pre-lease rates and conversion of non-lettable office space into residential space, has caused vacancy to continue to drop in almost all major office hubs. The average vacancy rate has fallen by 80 basis points yoy to 5.3%. The amount of space available for immediate tenancy now comes to 4.7 million sqm, down roughly 680,000 sqm from the previous year. Comparison of Average Rents (in /m²) With vacancy rates far below 5% in some locations, a number that constitutes an important fluctuation reserve for a functioning market, this theoretically favorable trend can actually be considered adverse. Vacancy rates have already dropped below this threshold in Berlin, Stuttgart (3.3% each) and Munich (3.4%). The vacancy rate of 8.1% in Düsseldorf is a little more tenant-friendly, although it has been dropping rapidly as well. Frankfurt was the only city in which vacancy remained stable yoy at 11.8% due to the completion of a number of speculative, large-scale properties (T8, Turmcenter, maro). This double-digit vacancy rate is actually a positive factor for the city in light of current developments. With financial corporations looking to relocate after Brexit, office space available for immediate tenancy will be key when it comes to making it onto the shortlist in competition with other European financial centers. 2 Market Report H1 2016 Letting and Investment Colliers International
Prime rents up again after standstill at start of year The importance of available, market-oriented, modern office space when it comes to rent trends was very evident in the past three months. Markets that were able to satisfy high demand for space in the high-price segment saw prime rents increase in Q2 following a standstill at the beginning of the year. This particularly applies to Berlin where rents experienced the steepest yoy increase, up by 10%. With prime rents of 25.30 per sqm, Berlin surpassed Hamburg for the first time, with tenants there currently paying 25.00 per sqm. However, Hamburg did post an increase in prime rents of around 4%. Prime rents in Stuttgart increased by roughly 9% to 22.80. Due to an increase in leases signed in prime locations, rents in Munich and Cologne were also once again on the rise in comparison with Q1. However, rent levels are still down yoy by 0.9% and 1.6%, respectively. In contrast, prime rents in Frankfurt stabilized at 38.50 per sqm, the highest among the Big 7. 3 Average rent trends were much more varied. With increasing demand for high-end properties in secondary locations from price-sensitive occupiers such as startups, growth was steepest in Berlin (+12.7%). However, a similar trend have also been seen in Düsseldorf, Munich and, marginally, in Stuttgart and Hamburg over the past 12 months. Even though Frankfurt continued to post the highest average rent at 19.00, drops were recorded in the city along the Main River as well as in Cologne at the other end of the price range with average rent of 11.80. Outlook: High demand expected to continue The large number of businesses looking to lease combined with the fact that economic conditions remain unchanged points towards ongoing high leasing activity in the second half of the year, as limited supply calls for quick decision-making. This will most likely lead to record take-up results by the end of the year. However, the increase in demand is already reaching supply limits in a number of locations. Market Report H1 2016 Letting and Investment Colliers International
Investment Commercial properties in Germany changed hands for 17.8 bn in the first six months of 2016. Although transaction volume was down 26% from the previous year s exceptional results, this was the second-strongest first half we have seen since the onset of the financial crisis. Overall, the trend we saw in Q1 an absence of major deals signed by foreign investors continued throughout the first half of 2016. One mega deal was inked in Q2 2015 when Canadian Hudson s Bay Company purchased more than 40 Kaufhof stores for 2.4 bn. Despite this development, the largest deal signed in Q2 2016 amounted to around 700 m. The portfolio deal involving nine highpriced hotels primarily consists of the Interhotel portfolio purchased by Starwood Capital and Brookfield Properties in 2015 and now resold to French investment company Foncière des Régions. Commercial Transaction Volume in the Top 7 Cities (in billions of euros) Transaction Volume according to Buyer Groups (in millions of euros) H1 2016 Although several other portfolio deals in the nine-figure range were signed in Q2 e.g., a warehouse store portfolio purchased by Patrizia on behalf of German insurance companies and pension for roughly 320 m the share of portfolio deals (29%) in total investment volume was considerably lower than in 2015 (38%). A German investor was also responsible for the second largest deal signed in the first half of the year, which was also the largest single-asset deal: The Frankfurt office complex IBC was sold by US-based RFR Holding to German asset and fund manager GEG German Estate Group for around 400 m. German investors dominate investment activity Two thirds, or 11.2 bn, of transaction volume recorded since the start of the year can be attributed to German investors. The acute investment pressure on institutional investors such as insurance companies, pension and open-ended real estate once again increased in Germany at mid-year. Due to the fact that interest rates remain low and further fueled by the ECB s expansive monetary policies (purchasing corporate bonds), German 10-year government bond yields dropped below zero for the first time in June. Compared to other low-risk investments, properties thus remain the only investment option for conservative investors looking for adequate yields. As a result, the share of real estate investments made by insurance companies has grown to an almost double-digit percentage and continues to grow with this investor group still required to generate interest rates from existing contracts despite the drop in guaranteed interest for new life insurance contracts as of 2017. The supply bottleneck in the core and core plus segments is increasingly proving to be a limiting factor. This lack of adequate investment opportunities can be seen among open-ended real estate with Union Investment and Deutsche Bank responding with a refusal to accept further investment capital. Development of the Gross Initial Yield Berlin Düsseldorf Frankfurt/M. Cologne Hamburg Munich Stuttgart Retail Industrial & Logistcs 4 Market Report H1 2016 Letting and Investment Colliers International
The strongest buyer groups by far in the first half of 2016 were asset and fund managers acting on behalf of third parties ( 4.3 bn, or 24%) and German and foreign openended real estate and special ( 3.5 bn, or 19%). Project once again dominated sell side with a market share of 22% (transaction volume of 3.9 bn), another indication of increasingly limited supply. Pressure on institutional investors increases Brexit is going to exacerbate this overall situation. Now that the UK has decided to leave the EU, an unexpected move for many investors, long-term investments planned for London will soon be largely reallocated. Risk-averse investors are currently questioning the political and economic stability of Europe s leading investment destination. Investment activity in Germany, however, remains high as the country has proven stable in times of crises on several occasions. Short-term temptations such as benefiting from the current weakness of the pound will at most attract a few opportunistic investors. Brexit is not the only reason to expect investments from abroad to increase throughout the remainder the year. Foreign capital only amounted to one third ( 5.9 bn) of total transaction activity in the first half of 2016 (2015: approx. 50%). For the time being a withdrawal of British capital, currently the most common source of foreign investment in the country ( 1.8 bn, or 31%), from Germany is not expected. Asset and fund managers poured around 58% of total capital into the market, often on behalf of investors based outside of Europe. Due to the greater language commonality and business contacts established over long periods of time, these investors will continue to prefer British institutional investors. Ongoing shift in demand in favor of hotel and logistics properties Reinforced by positive signals from the leasing market, office properties remained the most popular asset class with a total investment volume of 7.7 bn and a share of 43% in total transaction volume in the first half of the year. However, we also saw ongoing structural shifts among other asset types, in particular due to limited supply and an increased tendency towards taking risks. Retail property investment activity, which accounted for 18% of capital invested, is currently being driven by warehouse store portfolio deals (discounters, supermarkets and DIY stores) outside of the major investment hubs in place of large-volume transactions in particular shopping centers. The yoy drop in market share of 20 percentage points can be attributed to this development and to the Kaufhof deal signed in 2015. Due to the sale of the highvolume Interhotel portfolio as well as the promising general conditions of the German tourism market, the share of hotel assets grew to 12% in the first half of 2016 and is currently neck-and-neck with logistics properties ( 2.1 bn each). The latter have become even more popular with investors due to attractive prime yields and excellent growth perspectives in the sector. Decrease in transaction volume in the Big 7 trails Germany-wide trend The 25% yoy drop in transaction volume in the Big 7 was only slightly lower than on the overall German market (-26%). On the one hand, this can be attributed to the decrease in high-volume transactions due to a lack of supply in investment hubs as mentioned above. This drop hit Cologne (-55%), Frankfurt (-38%) and Munich (-33%) particularly hard. On the other hand, this development was the result of the expanded search profile of German investors. Based on sound market knowledge, these investors are increasingly diversifying their investment portfolios with portfolio deals in the retail, logistics and healthcare segments in secondary and tertiary locations. Stuttgart is the only Big 7 location to experience a positive trend (+17%). Total investment volume throughout all Big 7 locations amounted to 9.2 bn, reflecting roughly 52% of total volume in Germany. Berlin is the only location to exceed an investment volume of 2 bn, followed closely by Hamburg ( 1.9 bn) and Munich ( 1.8 bn). Cologne, which surpassed Stuttgart and Düsseldorf with its exceptionally high results in 2015, came in seventh with a total investment volume of 0.4 bn. Prime yields once again dropped on numerous markets despite high price levels. In view of the ongoing upturn on the leasing market and the lack of supply in the premium segment, the downside potential has not yet been fully realized. In addition to Munich, where prime yields have already decreased to 3.5%, and Hamburg (3.7%), office prime yields in Berlin also dropped below the 4% mark in Q2. Cologne is currently home to the highest yields among the Big 7 (5.0%). Outlook: Untapped transaction volume potential outside of core segment Based on the demand observed in current negotiations as well as the liquidity available in the market, transaction volume on the German investment market is once again expected to reach a record high. However, limited supply in the core and core plus segments is becoming increasingly evident. This makes it more difficult for foreign investors to find suitable investment properties. Brexit and several other factors are leading to a further increase in purchase prices. At the same time, however, more than other European real estate markets Germany offers attractive investment alternatives with reasonable risk and secure income potential outside the Big 7 investment hubs and established office and retail asset classes. If buyers and sellers active outside the premium segment manage to find common ground when it comes to pricing, they could exploit further investment potential. 5 Market Report H1 2016 Letting and Investment Colliers International
Letting and Investment Market Germany H1 2016 Key Facts Top 7 BERLIN DÜSSELDORF FRANKFURT HAMBURG COLOGNE MUNICH STUTTGART 1,679,600 Take-up 2016 in m² 1,679,600 347,000 204,300 211,000 230,000 192,000 387,400 107,800 Take-up 2015 in m² 1,521,200 337,000 169,000 177,700 251,000 134,000 305,700 146,800 Change y-o-y + 9.3 % 3.0 % 20.9 % 18.7 % -8.4 % 43.3 % 26.7 % -26.6 % Prime rent 2016 in /m² 25.30 26.50 38.50 25.00 20.00 33.60 22.80 Prime rent 2015 in /m² 23.00 26.00 38.50 24.00 20.32 33.90 21.00 Change y-o-y 10.0 % 1.9 % 0.0 % 4.2 % -1.6 % -0.9 % 8.6 % Average rent 2016 in /m² 15.50 15.00 19.00 14.70 11.49 16.20 12.30 Average rent 2015 in /m² 13.75 13.90 20.00 14.60 11.77 15.20 12.20 Change y-o-y 12.7 % 7.9 % -5.0 % 0.7 % -2.4 % 6.6 % 0.8 % Vacancy 2016 in m² 4,729,037 610,500 618,400 1,360,350 680,000 443,700 763,886 252,200 Vacancy 2015 in m² 5,411,171 795,500 739,300 1,365,170 729,200 507,000 991,800 283,200 Vacancy Rate 5.3 % 3.3 % 8.1 % 11.8 % 5.0 % 5.7 % 3.4 % 3.3 % Germany BERLIN DÜSSELDORF FRANKFURT HAMBURG COLOGNE MUNICH STUTTGART Commercial Investment Market Transaction volume in millions of euros 2016 17,830 2,053 670 1,692 1,910 380 1,849 663 Transaction volume in millions of euros, 2015 24,202 2,700 705 2,751 1,950 850 2,779 569 Change y-o-y -26 % -24 % -5 % -38 % -2 % -55 % -33 % +17 % Largest group of investors Openended real Open-ended Open-ended Asset Corporates / Open-ended Asset real estate real estate managers/ Owner real estate managers/ estate Fund occupiers Fund Special Special managers Special managers 27 % Special 24 % 30 % 34 % 35 % 29 % 45 % 25 % Largest group of sellers Most important type of real estate 22 % 43 % Opportunity Private equity 28 % 55 % Banks 19 % 85 % Asset managers/ Fund managers 33 % 81 % 48 % 71 % Corporates / Owner occupiers 20 % 76 % 33 % 64 % 31 % Prime yield office 3.90 % 4.35 % 4.30 % 3.70 % 5.00 % 3.50 % 4.30 % Prime yield retail 4.00 % 4.10 % 3.50 % 3.60 % 4.20 % 3.00 % 3.90 % Prime yield industrial 5.90 % 5.60 % 5.00 % 5.00 % 5.80 % 5.40 % 5.70 % 46 % Source: Colliers International, Grossmann & Berger (Hamburg, comparison figures from 2015), Larbig & Mortag (Köln) 6 Market Report H1 2016 Letting and Investment Colliers International
554 offices in 66 countries on 6 continents United States: 153 Canada: 34 Latin America: 24 Asia Pacific: 231 EMEA: 112 2.3 billion In annual revenue 103 billion in transaction volume with more than 80,000 investment and leasing deals Author: Susanne Kiese Head of Research Germany T +49 211 86 20 62 47 susanne.kiese@colliers.com Colliers International Deutschland Holding GmbH Dachauer Str. 65 80335 München +49 89 540411-050 186 Million square meter under management 16,000 professionals worldwide About Colliers International Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIG) is a global leader in commercial real estate services with more than 16,000 professionals operating from 554 offices in 676countries. With an enterprising culture and significant insider ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include brokerage, global corporate solutions, investment sales and capital markets, project management and workplace solutions, property and asset management, consulting, valuation and appraisal services, and customized research and thought leadership. Colliers International has been ranked among the top 100 outsourcing firms by the International Association of Outsourcing Professionals Global Outsourcing for 10 consecutive years, more than any other real estate services firm. For the latest news from Colliers International, visit Colliers.com, or follow us on Twitter: @ColliersIntl and LinkedIn. To see the latest news on Colliers International in Germany follow www.colliers.de. colliers.de Credit: Berlin, Potsdamer Platz; SeanPavonePhoto/Kollektion istock 479315839/Thinkstock Copyright 2016 Colliers International München GmbH. This document has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International and/or its licensor(s). 2016. All rights reserved.