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Offices drag down German returns

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In June, IPD and DID published the DIX Property Index containing annual performance figures for 2003. The total value of the properties included in the DID Databank is e48bn. However, only properties with a valuation date between October and March are included in the DIX Index. The total value of these 2,200 properties at December 2003 was e34bn.
Returns from the DIX/IPD German Property Index declined for the second successive year in 2003, falling from 5.9% in 2001 and 4.3% in 2002 to 2.5% in 2003. This dip in property returns ensured that property was the bottom-performing asset in Germany in 2003. After a poor year in 2002, equities achieved an annual return of 37.1% in 2003 and, although bond returns halved to 4.1% in 2003. they remained ahead of those on property for the second successive year.
The decline in German property returns came as the fall in capital values doubled from –1.1% in 2002 to –2.4% in 2003. The trend in sustainable rental value growth deteriorated sharply – by German market standards, to –1% in 2003 from 0.7% in 2002.
Over the past three and five years property returns have exceeded those on equities, due in large part to three exceptionally poor years for equities in 2000, 2001 and 2002. Over the past eight years – the period IPD has covered the German property market – property returns, at 4.4% a year, trail those on equities and bonds, at 7.3% and 6.1% a year respectively.
For the first time in the eight-year history of the DIX/IPD Databank, residential was the top-performing sector in the German market in 2003. The residential sector was unique in seeing returns improve on the previous year, climbing from 3.1% in 2002 to 5.2% in 2003. This was thanks to a modest – but again, unique – increase in capital values of 0.9% based on sustainable rental value growth of 0.7%.
Returns in the retail sector held firm, slipping only slightly to 4.9% in 2003 from 5.4% in 2002. Strong income return of 5.9% formed the bedrock of returns. However, capital values declined by –1% as the rate of sustainable rental value growth fell from 1% in 2002 to –1.7% in 2003.

Office sector returns fell to an eight-year low of 1.6% in 2003, from 4.6% a year earlier, as capital values dropped by –3.4%. A fall in sustainable rental values of –0.9% was largely to blame. This pattern of sector returns – offices coming in much weaker than retails and residentials – is not unique to the German market, as Table 1 shows.
Detailed office market data for 2003 reveals that Frankfurt, with total returns of just 0.7%, was one of the worst-hit locations. Breaking down this market into its constituent parts – as shown in Figure 2 – shows that returns ranged from –5.3% in the Westend/Nordend area up to 5.1% in Sonstiges Stadtgebiet.
Over the past three, five and eight years, retail has been the top performing sector in the German property market, as shown in Table 2. While residential is the second ranking sector over the past three years, offices outperform over five and eight years.
Offices dominate the German property market and comprised 57% by value of the Databank at the end of 2003. Some 28% of these offices are in Frankfurt, a further 13% in Munich and 6–8% each in Berlin, Hamburg, Cologne, Dusseldorf and Stuttgart.
Figure 3 shows the performance of these seven cities over the past five years, together with the patterns of investment. The chart ranks the cities by total return over the past five years – ranging from the top performers on the left to the poorest performers on the right. It also shows how their share of the office portfolio has changed and unbundles these changes in portfolio weights into ‘active’ changes resulting from investors’ deliberate asset allocation decisions (net investment shift) and ‘passive’ changes caused by variations in the rate of capital growth.
The chart shows that while Frankfurt and Berlin have been among the poorest-performing cities in terms of total returns, they have benefited from high levels of net investment. By contrast, smaller centres such as Cologne and Stuttgart have achieved superior total returns but have not seem levels of investment commensurate with their performance.
Dominic Smith is a senior researcher at Investment Property Databank (IPD). Email marketing@ipdindex.co.uk.
Deutsche Immobilien Datenbank (DID) was established in April 1998 and is a joint venture between the European Business School in Germany and IPD. DID is an independent service provider, offering property performance measurement and property portfolio analysis for institutional investors with property investments in Germany.

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