Deep changes cloud outlook
If you read the headlines in professional publications referring to the German real property market, one gains the impression that market conditions are flourishing. Following this overall statement, we must, of course, differentiate - is total market development good, which segments stand out more and which less? Due to the fact that Germany’s horizontal and vertical property markets have their own profiles a diversified approach to all segments is required.
At the beginning of the new millennium a wide range of general topics has to be taken into account while reviewing the current and forecasting the future developments of the market. Relevant trends derive from far reaching structural changes in the economic and political environment such as European integration and globalisation. In addition, the cyclical situation of the German economy, ongoing tertiation and de-industrialisation, general demographic trends from changing household structures to senescence and on to commercialised leisure patterns. As a result an increasing splitting of the different sub-markets is becoming apparent.
For years, we have been observing growing atomisation of the property market, reflected in the economic development of the German property market. The commercial sub-market - and here primarily the office and retail trade segment - features extensive diversification strategies, demonstrated in the development of innovative special real estate.
Since the beginning of the 1990s, in particular, when a recessive phase dominated the whole market, attempts have been made to use innovative products to maintain rent levels and boost the market opportunities of new properties. In our opinion, the range of different property products will continue to spread, whilst combination to form mixed-use, multifunctional properties will simultaneously serve to maintain the life span (for example multifunctional arenas, UEC).
A further indicator of the upward trend on the German property market is property turnover, which shows a rising tendency.
But proceeding to a concrete analysis of the commercial property market, the upswing in the German office properties market is continuing on a broad basis, particularly against the background of an improving economic climate. Undiminished development into a society of services and knowledge in the form of continuing tertiarisation constitutes a central control function here. A visible indication of the continuingly positive trend is rising turnover figures and a decreasing number of empty properties in the major service centres. The majority of office locations boast record levels of renting volumes in 1999.
The confidence of professional investors in the market for commercial properties has been regained.
Here, it is predominantly the business centres of Hamburg, Berlin, Munich, Cologne and Düsseldorf which show significant rises in turnover in comparison with the previous year. The renting volume fell significantly in Leipzig (-28.5%) and Dresden (-7.7%) only. The total renting volume of the seven largest office property markets (Berlin, Düsseldorf, Frankfurt, Hamburg, Munich, Cologne and Stuttgart) rose in comparison to the previous year by about 17% to a total of 2.875 million m2. The leaders are the service metropolises of Munich with 700,000 million m2(+27%) and Frankfurt - with an unchangingly high turnover of 680,000 million m2. A major part in the high turnover is played by the high-growth sector of company-related services (especially companies in the TIME industries) and the financial services sector.
To return to the number of empty properties - a look at structure is essential here. The ‘basic empty properties’ that are increasingly found are mostly office premises not meeting the changed, high quality requirements of tenants in terms of quality, efficiency and fittings. Thus they are very difficult to let even in the long term, if no fundamental redevelopment work is done.
Turning to the development of rents, almost all the large office locations in the states of former West Germany record rising rents in top positions in view of the good demand and high turnover. This trend is particularly obvious in Frankfurt, with peak-level rents of DM82 per m2. Rent rises were registered in top positions in Berlin as well, thanks to the high attraction of the eastern city centre. A shortage of space is beginning to emerge in the best city centre locations, producing an increasing absorption of market-relevant office premises in areas at the edge of the city or in city districts. This year, we anticipate unchanging or sometimes rising top-level rents in the best locations.
A greater international orientation of property players is also apparent through amended portfolio strategies, which are developed against the background of increasing market transparency - primarily to exploit market cycles in each European business area. Open-end and closed-end property funds, insurance companies and pension funds are among the major professional investors on the commercial property market, together with property leasing companies. The high investment pressures of institutional investors - illustrated particularly by high volumes and large cash inflows in open-end property funds - produce a rapprochement in the European yield level as part of the rise of purchase prices in the other European countries. The high liquidity with low availability of classic investment properties means that investors are increasingly turning to project development and considering investments in market niches little used before. Besides in office properties, investments are primarily being made in retail trade properties, commercial parks and business buildings. Special properties, such as hotels, old people’s homes, leisure and logistics properties, solely serve to diversify portfolios.
Retail trade properties are currently experiencing great momentum, meaning, on the one hand, that there is a high risk as regards costs and investment but, on the other, that a wide variety of operating and sales forms are being created and thus chances for niche products too. We believe that concepts based to a greater extent on the idea of a shopping experience will, in the future, have good chances of surviving in the face of more intensive competition. We also see e-commerce as an innovative business approach with a forward-looking market position creating additional pressures, but not replacing the stationary retail trade. The ongoing discussion of factory outlet centres will continue in the medium term, while the first such centres are opening.
As far as preliminary mentioned the German property market is affected by a large number of fundamental changes relating to both location and content, which contribute to making the future development more complex and less transparent. In view of this situation, one of the essential success criteria for investments - both in Germany and in other European countries - is a local presence and a knowledge of local markets and features. Sound property research plays a key role.
Thomas Beyerle is a director of Dresdner Bank Immobilien Gruppe in Frankfurt