While economic growth has slowed in recent months, Germany’s office market has remained robust. Indeed, increasing occupier demand for office space is likely to put upward pressure on rents in Germany’s major cities, particularly Frankfurt and Munich, as this year progresses. As a result, these cities are expected to outperform in the short-term. However, occupiers may be drawn to look outside of these cities where rental growth is relatively stable.
A combination of change of use developments (to residential or hotels) and the withdrawal of many offices from the market, has led to falling availability. A reduction in vacancy rates has ultimately caused prime rents to increase across the major cities – the highest rents being in Munich and Frankfurt, at €34.50 and €38.00 per sq m per month. Year-end take-up levels for the top five cities in 2014 are predicted to be in excess of 2.3 million sq m, once figures are finalised; in line with 2013’s figures.
With many Q4 transactions awaiting confirmation, full year transaction figures for German offices are expected to be approximately €16.5bn. The top five cities are projected to be in the region of €11.8bn – an increase of approximately 10% on 2013. National investors accounted for approximately half of all office transactions in the major cities, although the capital is beginning to see more international interest. In the next six to nine months, we expect international investors to focus increasingly on second and third tier cities where rental growth has yet to re-emerge.
Germany will continue to remain a “power house” as the second largest market for investment in Europe. It is considered a safe haven for investors with its steady rental growth, falling vacancy rates and stable yields.
Heena Kerai, Analyst, International Research, Knight Frank, commented; “Regardless of economic trends, German real estate continues to offer a good depth and breadth of opportunities for investors. Apart from the size of the market, key attractions include yield stability and the prospect of rental growth as the supply of prime office space continues to fall over the coming year.”
Joachim von Radecke, Partner, Head of German Desk, Knight Frank, commented; “We expect Germany to be once again one of the most sought after investment destinations in Europe in 2015, with an increase of transaction volumes and more international investors buying in Germany. Given the weight of capital trying to buy commercial real estate in Germany, we will see more investors shifting their focus from core to core+ and value add not just in the top 5 cities but also in second tier markets and therefore prices to increase, also helped by more attractive financing terms available on the market.