Five years ago, officials in the City of London were becoming worried that Frankfurt was challenging the City as Europe’s premier financial location. Now Germany looks as if it has followed Japan into long-term stagnation and, as rents in the City of London have bottomed out, Frankfurt is scarcely mentioned as a competitor.
A recent occupier survey by Cushman & Wakefield Healey & Baker found 64% of respondents believed London will be the most important financial centre in Europe over the next five years, with less than 20% opting for Frankfurt.
Only seven companies surveyed said they planned to open shops, offices or logistics centres in Frankfurt within the next five years, compared with 12 for London and 20 for Paris.
However, after several years of falling rents and capital values, some in Germany believe the occupier market has hit bottom and that opportunities are arising for the brave investor. “The next two years will be the time to get in to Frankfurt offices,” says Ovier Obert, head of Frankfurt offices for real estate adviser Jones Lang LaSalle. “It is a comparatively small and volatile market, so it is always of interest to investors who have the confidence to try to exploit the cycles.”
Some opportunity funds are already active in the city. Blackstone acquired a e1bn portfolio from Deutsche Bank a year ago, mainly properties occupied by the bank. Blackstone is now able to offer vacant space in some buildings in Frankfurt on competitive terms. The availability of such good terms - with rent-free periods of up to 18 months available - is starting to bring a breath of fresh air to the occupational market.
Not everyone believes Germany is such a terrible place to do business: in its ‘Global Competitiveness Report 2004’, the World Economic Forum places Germany among the 10 countries with the highest global competitiveness.
The report looked at growth and labour market data and also evaluated the quality of public infrastructure, human capital and the efficiency of financial markets. Nonetheless, many potential overseas investors are still put off by the sluggish economy and over-regulated labour market.
German GDP growth was 1.7% in 2004 and 1.2-1.6% is predicted for 2005. Not strong figures, but Europe’s largest economy shrank 0.1% in 2003 after growth of just 0.2% in 2002 and 0.8% in 2001. Most of the 2004 growth came from exports, while the home market continued to be depressed and confidence is not high.
However, there is the prospect of falling inflation and the first increase in consumer spending for three years this year.
John Slade, head of international investment at DTZ, is more cynical about the prospects for Frankfurt. “Germany is generally a very interesting market at the moment and there are a lot of opportunities arising.
“There are already some investors getting in at what they perceive to be the bottom of the market. I think generally the bottom has been reached, but we are still crawling along it and could do so for the next two years. That said, I don’t think anyone buying in the next six months will lose out if the deal is right.”
Slade says a number of investors are taking advantage of rising yields in Germany to exploit the gap between yields and debt costs. “You can buy at 7-8% and get 5% on top the cost of debt,” he says.
However he says for larger office schemes in Frankfurt a stalemate exists between owners and potential buyers. “Owning investors think long-leased prime buildings are worth paying 6% for and that’s not the case,” he says. “The situation is complicated by the open-ended funds, which own a lot of assets. But they are obliged to sell at book value and their book value is way above market value.”
However he said recent moves towards transparency by the open-ended funds could bring much-needed liquidity to the market. The moves follow the withdrawing of private investor capital from the funds, in response to poor returns on German property. The sector’s problems have been exacerbated by bribery investigations involving DB Real Estate and Deka.
According to figures from JLL, office take-up in the third quarter was around 85,000m2 making total take of 210,000 m2 for the year to September, down 39% on 2003 and down 43% on the 10-year average. Total take-up for 2004 is estimated at 330,000m2. The city was unable to recover from the dramatic collapse in take-up in the first half of the year. In 2004 the market did not see the major deals - for more than 10,000m2 - which had bolstered take-up in the preceding two years, says Obert.
“The vacancy rate is now about 17% and we do not expect it to rise further. We believe take-up hit the bottom last year and that we will see it rising towards 400,000-450,000m2 this year – close to the long-term average,” he states.
Even in the midst of the present economic crisis, banking is still one of the most prominent sectors. Banking/financial services and ‘other business services’ each accounted for approximately 26% of office space take-up.
The latter sector was responsible for a significantly higher take-up of space than in the previous two years – as a reflection of the weakness of the banking/financial services sector which showed below average take-up.
Between January and September 2004, JLL recorded a total new-inquiry volume of just under 200,000m,2 with the volume in each quarter up on the previous quarter. Nonetheless the figure is below average and down 29% in a year-on-year comparison. The majority (around 62%) of inquiries are from companies looking for less than 500m2, said Obert.
In the past three months, the vacancy volume has risen once again and thus continues at a record level. Together with those areas offered for sub-letting and space currently under construction, more than two million m2 of office space is currently available to potential tenants. Nearly a fifth of the total vacant space is registered in the banking district.
The top rent achieved in Frankfurt has remained stable over the past six months. At the end of September it stood at e34.50 per m2 per month and was thus 4% down year-on-year, however anecdotal evidence suggests that incentive packages, such as rent-free periods, are still increasing. The bulk of office space take-up occurred in the rent bracket from e10 per m2 per month to e20 per m2 per month.
Piotr Bienkowski of ATIS Real Mueller International in Frankfurt agrees that top office rents bottomed out towards the end of last year. “The total available supply of space has peaked and will not rise any more,” he says.
However, he warned: “For the many lower-quality - and thus less attractive - office premises, however, prices will remain under pressure. Owners are still willing to offer incentives.”
n One sign that the end of the German real estate slump might be in sight is the recent offloading of pools of non-performing loans by German banks. These loans - which are in arrears or default - have so far mainly been residential, but a move to purchase commercial loans will be seen as a positive sign.
German banks are finally facing up to the problems of non-performing loans and are selling them to a steady stream of US buyers, more experienced in extracting value from this emerging asset class and eager to get in on the act.
Late last year German bank Eurohypo announced its decision to transfer a portfolio of non-performing residential mortgage loans of around e2.4bn to a special purpose company, which it will set up jointly with Citigroup.
As of January the new company will be available as a transaction partner to all businesses wishing to dispose of non-performing real estate loans in
The partners say their new joint venture is an unprecedented model in Germany for addressing NPLs. “Citigroup and Eurohypo jointly developed a new business model for the acquisition and servicing of non-performing loans and the further pursuit of new non-performing loans business,” said Eurohypo.
Other US funds targeting German non-performing loans include Lone Star, Soros Real Estate Partners and Blackstone.
However, Slade says: “There are commercial non-performing loans portfolios around but they are small in comparison to the residential pools.”