Survey Ofﬁce Market: Investment Opportunities in German Secondary Locations

Client: DEMIRE - Deutsche Mittelstand Real Estate AG Frankfurt am Main, March 2019 SURVEY bulwiengesa OFFICE MARKET: INVESTMENT OPPORTUNITIES IN GERMAN SECONDARY LOCATIONS

TABLE OF CONTENTS

Page

PRELIMINARY REMARK 1

1 EXECUTIVE SUMMARY 2

2 SOX – SECONDARY-OFFICE-INDEX 4

3 FOCUS SUBJECT: THE OFFICE REAL ESTATE MARKETS OF GERMANY’S SECONDARY LOCATIONS 6

4 PERFORMANCE POTENTIAL OF SECONDARY LOCATIONS 13

SUMMARY OF FINDINGS 14

ANNEX

PROPRIETARY INFORMATION The results and figures presented in this survey have been conducted led to disclose the survey or parts hereof (always citing the source) for on the basis of existing and compiled sources according to the best of the purpose agreed at the time the survey was commissioned. The re- our knowledge and with appropriate care. A guarantee for factual accu- production, publication and dissemination of contents to any third party racy can only be made with regard to information and data that has is not permitted except after prior written authorization by bulwiengesa been elaborated by bulwiengesa AG themselves. A guarantee for the AG (original source must be cited). Exempt from the foregoing is the factual accuracy of data and information provided by third parties can- use of this evaluation or parts thereof for marketing brochures. In this not be made. case, prior written approval must be requested from the bulwiengesa AG without exception. The results are interpreted and assessed in the bulwiengesa AG remains the owner of this survey (electronic or printed context of bulwiengesa AG'S experience in its German and European form) until the agreed fee has been fully paid. The survey is protected research and consultancy activities. by copyright and registered by bulwiengesa AG. Only the client is entit-

bulwiengesa AG

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PRELIMINARY REMARK Source of the Data

The German property company DEMIRE (Deutsche Mittelstand The survey draws on the real estate market data on record in 1 Real Estate AG) has commercial real estate holdings in mid- the RIWIS information system and other sources (e.g. Deut- sized cities and in up-and-coming locations on the periphery of sche Bundesbank) for the purpose of raising awareness for, German metro regions. To raise awareness for, and increase and the transparency of, Germany’s secondary locations. the transparency of, so-called secondary locations, DEMIRE asked bulwiengesa to conduct an analysis of selected cities in Overview of secondary locations Germany, this being the third edition of the survey.

The focus of this edition of the survey is on the office segment. The secondary locations analysed in depth (cf. also Chapter 3) are mapped in the chart below. The survey covers a total of 31 cities. As far as the size of the floor space stock goes, the analysis includes not only major markets like those of Bonn and Essen with a total office stock of more than 3 million sqm RAC each but also smaller cities like Kempten and Stralsund whose floor space stock amounts to less than 350,000 sqm RAC.

This survey is also the first that will use an index (SOX – Sec- ondary-Office-Index) that was developed by DEMIRE and bulwiengesa in order to rate the environment for office properties in the Class A and secondary locations. The index will be introduced in detail in Chapter 2.

Survey Structure

The survey now before you divides into four chapters that are thematically interlinked. It starts with an Executive Summary that outlines the return / risk representation of the secondary locations. The second chapter, as suggested above, is dedicated to the Secondary-Office-Index (SOX). Next, the secondary locations will be discussed in detail in Chapter 3. It will compare them to the Class A or "Big Seven" cities. Parameters used for this comparison include the trends in office occupancy, in office vacancy, in office employment and in office take-up as well as construction activity, transaction volume and net initial yield. Source: © NAVTEQ Having profiled the market environment in the secondary locations in its third chapter, the survey will discuss the yield upside of value-add properties in the secondary cities in Chapter 4. The survey concludes with an overview table listing the most significant office market performance indicators in the 31 secondary locations that were examined. 1 RIWIS = bulwiengesa’s proprietary regional information system for Germany’s real estate industry

1 EXECUTIVE SUMMARY Trend in Office Take-up The office take-up is an indicator for the attractiveness and ac- No analysis of the German real estate market would be com- tivity of a given market. The booming economy has pushed de- plete without a discussion of the economic cycle in which it is mand for office space both in the Class A cities and in many embedded. For this reason, bulwiengesa – in collaboration with secondary markets to a high level. The ramifications are obvi- DEMIRE – developed the SOX (Secondary-Office-Index) which ous when looking at the vacancy rate which lately dropped well tracks the environment for office real estate in the Class A and below the fluctuation reserve as a result of the subdued build- secondary markets. This survey will take a close look at the of- ing activity of recent years. The pent-up demand has led in turn fice market performance indicators for the period 2009 through to an upward rental trend. 2018 that are used by the SOX. The analysis returned the fol- lowing findings: Investment Market Trend in Average Rents On the commercial investment market, office real estate re- The robust economic situation has resulted in job growth – and mained the most coveted asset class in 2018. It is in this asset office employment benefited from the trend more than other that roughly 52 % of the commercial property investments were categories. The subsequent rise in office space requirements is transacted. The persistently keen demand – in a time of limited also reflected in upward rental growth. Apart from the Class A supply – has sent net initial yields on a nosedive to new all-time cities, the secondary locations achieved substantial rent in- lows. In addition to Class A cities, the focus of investors has creases in their own right during the analysis period. lately shifted to include secondary locations. In 2018, they attracted c. 23 billion euros in investments. The aspects that make such secondary locations a winning proposition are Trend in New Office Completions higher yields combined with more stable rent rates. Secondary locations tend to be characterised by a demand- driven volume of new construction. Speculative construction projects (i.e. developments pursued without forward commit- Risk- / Return-Representation ments) have become the exception. This ensures a balanced In the present survey, the Class A markets and secondary mar- relation of supply and demand, and therefore helps to prevent kets were also studied with respect to their stability of income market upheavals. and the achievable return on investment. The outcome is rep- resented in the chart on the next page. It reveals that every one of the secondary locations examined has a higher yield upside Trend in Vacancies than the Class A markets. The bracket of achievable net initial The vacancy rate is an important indicator for the condition of a yields extends from 4.0 % in Bonn and Freiburg (B.) to 6.7 % in given office market. In the wake of the robust economic devel- Stralsund. By contrast, the weighted average net initial yield opment and the growth in office jobs, many office markets re- achieved in Class A cities at the moment is around 2.97 % only. port full occupancy now, and not just Class A cities like Munich or Berlin but even secondary locations. Due to the demand- The stability of income in most of the secondary locations is driven building activity in the secondary locations, there is no also reflected in a rent volatility: Dortmund, for instance, has a reason to expect the strain on the regional office markets to very low spread of average rents, which minimises the risk of ease in the coming years. rent corrections on the market side. Conversely, Class A cities like Berlin and Munich – but also places like Kempten and Leip- zig – combine market fluctuations with a comparatively high rent volatility. Trend in Office Employment The economic growth of the past few years has fuelled the To put the return potential and the earnings risk in relation, a creation of white-collar jobs in Germany. In the time between quotient of yield and volatility was created. It is mapped in the 2009 and 2018, the Class A cities registered a growth of chart on the next page. As the chart suggests, cities like Bonn around 20 %. Some of the secondary locations generated even and Dortmund have very favourable relations, whereas the faster growth. And the years to come are projected to bring a Class A cities (Berlin, Munich and Hamburg) but also the sec- further increase in office jobs in virtually all secondary loca- ondary locations of Leipzig range at the bottom of the list be- tions. The currently strained situation on the office markets – cause of their massive rent fluctuations. with their low supply of office accommodation – could therefore tighten further.

Risk- / Return-Representation

7.5 Class A cities Selected secondary locations 7.0 19 10 6.5

11 6.0 3 14 23 2 5 16 21 31 13 5.5 18 7 22 5.0 12 25 15 26 34 4.5 1 33 9 30

(net initial yield, 2018, in %) in 2018, yield, (net initial 8 17 27 35 20 4.0 6 32 Return

3.5 28 24 4 3.0 29 36 37 38 2.5 0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2 Rent volatility (coefficient of variation = relative standard deviation of the average rent*)

Selection of cities sorted by return- / risk-quotient** 1 Dortmund Sec. locations 14 Flensburg Sec. locations 27 Münster Sec. locations 2 Koblenz Sec. locations 15 Bremen Sec. locations 28 Cologne A cities 3 Reutlingen Sec. locations 16 Göttingen Sec. locations 29 Frankfurt A cities 4 Düsseldorf A cities 17 Mannheim Sec. locations 30 Dresden Sec. locations 5 Bayreuth Sec. locations 18 Wuppertal Sec. locations 31 Kempten (Allgäu) Sec. locations 6 Bonn Sec. locations 19 Stralsund Sec. locations 32 Freiburg (B.) Sec. locations 7 Rostock Sec. locations 20 Karlsruhe Sec. locations 33 Regensburg Sec. locations 8 Darmstadt Sec. locations 21 Jena Sec. locations 34 Potsdam Sec. locations 9 Essen Sec. locations 22 Kassel Sec. locations 35 Leipzig Sec. locations 10 Chemnitz Sec. locations 23 Lüneburg Sec. locations 36 Hamburg A cities 11 Schwerin Sec. locations 24 Stuttgart A cities 37 Munich A cities 12 Ulm Sec. locations 25 Osnabrück Sec. locations 38 Berlin A cities 13 Leverkusen Sec. locations 26 Ingolstadt Sec. locations

* The relative standard deviation (average rent) refers to the period between 2009 and 2018. ** The risk/return quotient is obtained by dividing the net initial yield by the relative standard deviation of the average rent. Source: RIWIS

2 SOX – SECONDARY-OFFICE-INDEX tions" category. Data from the RIWIS information system were used to analyse the office and investment markets. Sources for the macroeconomic key ratios include Deutsche Börse (DAX The performance of office real estate markets depends heavily and DIMAX), Deutsche Bundesbank (base rate pursuant to on the economic parameters. For this reason, bulwiengesa col- HGB) and the European Commission (ESI). In each case, the laborated with DEMIRE to develop an index that maps the en- data of the current year were used (cut-off date: 31 December). vironment of office real estate in Class A and secondary locations. The so-called SOX (Secondary-Office-Index) represents SOX input variables a real estate economy index that analyses the national key per- Individual indicators Variables formance indicators (financial market – DAX, DIMAX, ESI) and regional parameters (economic development, labour market, – DAX – German Stock Index – DIMAX – German Real Estate Equity In- real estate market, investments) on site and in different classifi- dex cations – Class A and secondary locations. Accordingly, the – ESI – Economic Sentiment Indicator 1) Economic situation SOX provides a guideline for real estate investments. The sub- (adjusted for seasonal variation, in sequent sections present the most important details about the points) newly developed index. – Real gross domestic product (regional), in million euros (year-on-year change) List of Variables – Base rate pursuant to Art. 247, German 2) Public finances Commercial Code (HGB)* The SOX includes important macroeconomic key ratios (indi- – 10-year government bonds (in %), ac- vidual indicators: 1 through 3) and office market performance cording to Maastricht criteria** indicators (individual indicators: 4 and 5). The macroeconomic survey integrates the indices DAX (monitoring the general state – SSC employment (YoY change) of the financial and stock markets), DIMAX (indicating the state – Office employment (YoY change) – Rate: Share of office jobs in SSC jobs of listed companies from the real estate sector) and ESI (cap- 3) Labour market – Inbound SSC commuters (workplace) turing the sentiment of the business community in regard to – Migration balance business development and business expectations). The mac- – Student enrolment in universities roeconomic survey also considered the base rate (the base rate pursuant to Art. 247, German Commercial Code [HGB] be- – Planning approvals for office and admin- ing the only officially announced and thus the only official mar- istrative buildings (in sqm EFA) ket interest rate in Germany). A variety of components in the la- – New office space added (in sqm RAC) – Office space per employee (in sqm) bour market context were taken into account as regional key 4) Office market – Office vacancy rate RAC (in %) 2 ratios (social-security-covered [SSC] employment inbound – Office take-up (in sqm RAC) SSC commuters, et al.). These serve as indicators for the at- – Avg. office rent, inner city (euros/sqm tractiveness of a given city. "Office market" and "investment RAC) market" show the key ratios of the respective market. Overall, the SOX takes into account data of Germany’s most – Investment volume (in euros m) 5) Office investment important or "Big Seven cities" (Berlin, Cologne, Düsseldorf, – Net initial yields, office (in %) market Frankfurt am Main, Hamburg, Munich, Stuttgart) for the "Class – Capital growth (YoY change, in %) A" category and another 120 markets for the "secondary loca- * The base rate in Germany is a variable interest rate used for the valuation of capital services. It is recalculated and officially an- 2 Social-security-covered (SSC) employment = the term covers nounced by the Deutsche Bundesbank at the beginning of each all workers and employees, including those in training (apprentices, half-year in accordance with the specifications of the European et al.) that are obliged to pay into a health insurance, pension plan, Central Bank. long-term care insurance and/or are obliged to pay contributions to the Federal Labour Agency (unemployment insurance pursuant to ** The ten-years government bonds serve as benchmark for the the Employment Promotion Act [AFG]), or for whom the respective long-term funding conditions of an investment. employer has to pay into a statutory pension insurance scheme.

Methodology a result of the crisis of the New Economy were balanced only in the secondary locations. The individual indicators taken into account by the SOX – business cycle, public finances, labour, office and investment mar- The recovery phase ended, of course, with the onset of the fi- kets – were subjected to a weighting. In the process, the indi- nancial and economic crisis of 2007 / 2008. In many countries, vidual indicators "economic situation" and "public finances" the latter caused the economic growth to slow down sharply or were equally weighted. Conversely, the investment market was even slide into recession. Real estate prices also slumped weighted slightly more strongly than the labour market. But the again in the wake of the financial and economic crisis. In Ger- focus was placed on the office segment. The five individual in- many, the SOX registered downturns both in the Class A cities dicators identified above were compiled into an aggregate indi- and on the secondary markets. During the period of time, the cator. The base year of the survey is the year 2000 (2000 = secondary locations again proved less volatile and therefore 100). more stable than Class A cities. Since 2010, the SOX has experienced a steady recovery. The trend is explained not least Findings by Germany’s economic growth and the concomitant rise in employment figures. Office employment in particular reported The first downturn the SOX registered after the year 2000 was brisk growth and resulted in a rising demand for office accom- the implosion of the so-called New Economy. The bubble that modation. Annual peak levels were also registered in markets had formed on the stock markets strongly impacted the eco- not covered by the SOX. nomic development as well. Employment statistics – especially in the internet industry – declined. The job loss in this sector in Conclusion turn had consequences for office space requirements, not least The SOX (Secondary-Office-Index) reflects the economic because the major markets showed a high degree of specula- context and the market developments of urban clusters (sec- tive building activity at the time. The dip in demand predictably ondary locations and Class A markets). It shows that, while resulted in rising vacancy figures. During this phase (years office markets are principally subject to cyclical fluctuations, 2000 through 2005), the Class A markets suffered a steeper the major markets respond more sensitively to downward decline (-27 %) than the secondary locations (-19 %). movement than the smaller ones do. These benefit from a The market upheavals, which were felt more keenly in the ma- lower volume of speculative building activity, on the one jor real estate markets, were followed by a consolidation phase hand, and, on the other hand, from an environment that is that was accompanied by a lull in building activity. The financial dominated by local market operators with great loyalty to lo- market environment was dominated by deregulation trends. As cation. Thus, market growth potential is not limited to Class a comparatively undervalued market combined with a finance- A cities. The real estate markets of the secondary locations friendly environment, the SOX resumed its upward climb until it are characterised by a large number of so-called hidden peaked again in 2007. The set-backs the index had suffered as champions and a strong mid-market sector.

SOX (Secondary-Office-Index) vs. A cities

160

140 forecast

120

100 Index 2000 = 100 2000 Index

60 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

A cities Secondary Locations (SOX)

3 FOCUS SUBJECT: THE OFFICE REAL 6 %, Darmstadt brings up the rear in the case selection. How- ESTATE MARKETS OF GERMANY’S ever, the city represents an important office centre among the SECONDARY LOCATIONS Class C markets and benefits from its location within the Frank- furt-Rhine-Main metro region. The SOX introduced in the previous chapter illustrates that secondary locations – compared to the "Big Seven" cities – have market growth potential despite their superior stability during Development of the average rent (CBD offices) in the down cycles. The sections below will take a closer look at the cities surveyed (2009 - 2018) office market performance indicators used within the SOX for Kempten 45 % selected cities. They will analyse the construction activity and A cities 39 % the liquidity of each market in addition to the development of of- Leipzig 35 % fice rents, office vacancies, office employment and office take- Potsdam 35 % up on those markets. The period under review is 2009 through Kassel 33 % 2018. Regensburg 32 % Lüneburg 30 % Trend in Average Rents, Inner City (2009 - 2018) Osnabrück 29 % Freiburg (B.) 27 % Based on an economic and political environment that is stable Dresden 26 % even and especially when compared to other European coun- Jena 26 % tries, the office markets of Germany’s secondary locations Wuppertal 25 % show a positive performance. The analysed variable of average Stralsund 24 % rent, among others, suggests as much. During the period be- Münster 24 % tween 2009 and 2018, all of the markets included in the survey Leverkusen 23 % registered rental growth. The rent hikes ranged from around Schwerin 23 % 6 % in Darmstadt to 45 % in Kempten. Just like in the previous Göttingen 23 % 2018 survey, Kempten and Leipzig scored the steepest rates of Karlsruhe 23 % increase again. Next in line were the cities of Potsdam, Kassel Ingolstadt 23 % and Regensburg with rent hikes by over 30 %. Chemnitz 20 % Mannheim 19 % In addition to its function as campus town, Kempten represents Flensburg 18 % 16 % the economic and cultural centre of the Allgäu region as its Ulm Bremen 13 % largest city. On the strength of its low average rent level (2009: Rostock 13 % 5.50 euros/sqm RAC), Kempten began to evolve into an estab- Reutlingen 12 % lished office market in Bavaria’s alpine foothills – subject to cor- Koblenz 12 % responding rent increases. Essen 11 % Bayreuth 10 % Leipzig similarly experienced a drastic surge in average rents Bonn 9 % by around 35 % between 2009 and 2018. In fact, the city now Dortmund 7 % counts among the leading office markets in Eastern Germany, Darmstadt 6 % together with Berlin and Dresden. The city’s positive economic conditions naturally left their mark on the office market as well. 0 % 10 % 20 % 30 % 40 % 50 % Average and prime rents, for example, perked up whereas the vacancy rate plummeted. The fact that the vacancy rate re- 2009 - 2018 mains comparatively high is explained by the excess supply Source: RIWIS created during the 1990s.

Another East German city that saw its average rents rise Interim Summary quickly (at around +35 %) is Potsdam. In this case, the city’s The robust economic situation has resulted in job growth – proximity to Berlin comes into play. The strained situation on and office employment benefited from the trend more than the office market of the German capital, which is mirrored by a other categories. The subsequent rise in office space re- vacancy rate of 1.7 % (2018) and a rise in average rents by quirements is also reflected in upward rental growth. Apart around 63 % (2009 through 2018) resulted in a windfall for the from the Class A cities, the secondary locations achieved office market of Potsdam, the state capital of Brandenburg. By substantial rent increases in their own right during the analy- contrast, the trend in average rents in Bonn, Dortmund and sis period. Darmstadt has been less dynamic. These cities are on record with growth rates below the 10 % mark. With an increase of

Trend in New Office Completions (2009 - 2018) ised by a demand back-log that will have positive impact on the demand for office space. The trend in demand for office accommodation is also reflected Floor space stock (2018) in relation to new-built (09 - 18) in the completions total. The section below analyses new-build Office stock, ... thereof new-built completions in the surveyed cities during the same period, City in sqm RAC 2009 through 2018. In the chapters to follow, these will be set in relation to the trend in office jobs and the vacancy rate. Ingolstadt 648,000 22 % Ulm 866,000 14 % The highest completion figures among the secondary locations Freiburg (B.) 1,381,000 12 % analysed were registered in the Class B markets during the Kempten 317,000 12 % past ten years. This market cluster includes Essen, Bremen, Regensburg 1,047,000 12 % Dortmund, Münster, Mannheim, Bonn and Karlsruhe. Conver- Leverkusen 685,000 12 % sely, the lowest number of completions were reported from the Essen 3,171,000 12 % Class D cities included in the survey, namely Reutlingen, Darmstadt 1,617,000 11 % Flensburg, Schwerin, Lüneburg and Stralsund. On the whole, Mannheim 2,105,000 11 % the size band of completions ranges from around 700 sqm Bremen 2,668,000 11 % RAC/year in Stralsund to 37,000 sqm RAC/year in Essen. Dortmund 2,651,000 11 % Münster 2,227,000 11 % Within the selection of cities, Karlsruhe had the largest volume Jena 607,000 11 % of new office space added in 2018 with 38,000 sqm RAC. It A cities 79,890,000 10 % thus clearly topped the ten-year mean of about 19,300 sqm Potsdam 1,362,000 10 % RAC. This robust result is due specifically to the completion of Osnabrück 922,000 10 % the building of the KVBW public pension scheme with a floor Kassel 1,161,000 9 % area of around 16,000 sqm RAC. KVBW will owner-occupy the Koblenz 998,000 9 % bulk of the space. The market action in the city is generally Bayreuth 433,000 9 % dominated by the public sector, including public administration Flensburg 397,000 8 % (Karlsruhe being the seat of the eponymous administrative dis- Karlsruhe 2,420,000 8 % trict), the university (KIT) and the Energie Baden-Württemberg Reutlingen 454,000 8 % utility. Another major employer in the city is the dm-drogerie- Rostock 1,015,000 7 % markt drugstore chain. At present, the company is raising a Bonn 3,243,000 7 % new headquarters of around 41,000 sqm GIA in Karlsruhe-Dur- lach. Karlsruhe is also an important location for Germany’s judi- Göttingen 724,000 7 % cial sector, being home both to the Federal Constitutional Court Chemnitz 1,323,000 6 % and to the Supreme Court of Justice. Dresden 2,636,000 5 % Leipzig 2,768,000 5 % Overview – new office space added Wuppertal 1,626,000 4 % Lüneburg 328,000 4 % City Market size, New office space 10-years-ø, in sqm RAC* added, in sqm RAC* in sqm RAC** Schwerin 722,000 3 % Stralsund 210,000 3 % Karlsruhe 2,420,000 approx. 38,000 approx. 19,300 Source: RIWIS Leipzig 2,768,000 approx. 35,000 approx. 13,200 In the cities of Schwerin and Stralsund, few new office units Dortmund 2,651,000 approx. 34,000 approx. 28,500 came onto the market (see table of the relation of floor space Essen 3,171,000 approx. 33,000 approx. 36,600 stock / new-build construction). The fact is attributable mainly Mannheim 2,105,000 approx. 30,000 approx. 22,900 to the excess supply created in the 1990s, after the country’s * Base = 2018; Period = 2009 - 2018 reunification. Vacancy rates in Schwerin and Stralsund cur- Source: RIWIS rently stand at 9.6 % and 10.9 %, respectively, and are thus The completions volume in Dortmund in 2018 exceeded the well above the average of comparable Class D cities (which ten-year average of around 28,500 sqm RAC, too, as a total of was 5.6 % in 2018). around 34,000 sqm RAC came on-stream. The single-largest Interim Summary share of the total was contributed by the Amprion utility com- Secondary locations tend to be characterised by a demand- pany with around 22,000 sqm RAC of office space. Generally driven volume of new construction. Speculative construction speaking, Dortmund is the most populous city in the Ruhr metro area and serves as the region’s economic and trading projects (i.e. developments pursued without forward commit- centre. The city has been undergoing a structural change that ments) have become the exception. This ensures a bal- is driven by a mixture of forward-looking industries and the ro- anced relation of supply and demand, and therefore helps to bust development of incumbent groups (RWE, Signal Iduna). prevent market upheavals. As a consequence, especially office employment is character-

Trend in Vacancy Rates (2009 - 2018) around 7,500 sqm RAC annually (2009 through 2018) helped to bring down the high vacancy rate (2000: 17.5 %). Office employment has grown in sync with the robust economic development and in turn generated a growing demand for office accommodation. This is reflected in the current floor space Trend in vacancies in percentage points supply or inversely in the vacancy rate of the office markets. (2009 - 2018) During the period of 2009 through 2018, declining vacancy Leipzig -14.5 rates were reported from all of the cities. The one exception is Jena -6.6 Freiburg (B.). A cities -6.1 Rostock -4.7 Across the spectrum of cities surveyed, the vacancy rates Kempten -4.1 ranged from 1.4 % in Münster, Göttingen and Freiburg (B.) all Dresden -4.0 the way to 11.2 % in Chemnitz. The table below clearly shows Regensburg -4.0 that the cities in the East German states – Chemnitz, Münster -4.0 Stralsund, Schwerin, Leipzig, Dresden – have the highest va- Kassel -2.9 cancy rates within the case selection. To this day, they reflect Chemnitz -2.6 the market upheavals caused by the massive building activity Schwerin -2.4 in disregard of actual demand during the 1990s. Koblenz -2.2 Karlsruhe -2.2 Mannheim -1.7 Overview – Vacancy Rate (2018) Potsdam -1.7 Vacancy Osnabrück -1.6 City Vacancy Rate in sqm RAC Leverkusen -1.6 -1.6 Chemnitz 148,000 11.2 % Flensburg Bonn -1.6 Stralsund 23,000 10.9 % Darmstadt -1.5 Schwerin 69,000 9.6 % Reutlingen -1.3 Leipzig 230,000 8.3 % Stralsund -1.3 Dresden 180,000 6.8 % Essen -1.1 Lüneburg -1.0 : : : Wuppertal -0.9 Bonn 72,000 2.2 % Ingolstadt -0.9 Ingolstadt 11,000 1.7 % Dortmund -0.9 Freiburg (B.) 19,000 1.4 % Bremen -0.8 Göttingen -0.6 Göttingen 10,000 1.4 % Ulm -0.4 Münster 32,000 1.4 % Bayreuth 0 Source: RIWIS Freiburg (B.) 0.2

-20 -15 -10 -5 0 5 10 Freiburg (B.) was the only municipality among the secondary locations that registered a modest increase in vacancy rate (+ 2009 - 2018 0.2 percentage points). This increase provided only a negligible Source: RIWIS relief to a strained market because its vacancy rate of only 1.4 % means that the city has no fluctuation reserve left. This, however, is something that an office market needs in order to function. Thus, the modest increase in vacancy rate in Freiburg (B.) has no adverse effects on the city’s office market. Interim Summary The fastest drops in vacancies during the period under review The vacancy rate is an important indicator for the condition were recorded in Leipzig (-14.5 percentage points), Jena (-6.6) of a given office market. In the wake of the robust economic and Rostock (-4.7). The economic structure of the Hanseatic development and the growth in office jobs, many office mar- city of Rostock, for instance, has been defined by the growing kets report full occupancy now, and not just Class A cities service sector in addition to industrial job growth. This develop- like Munich or Berlin but even secondary locations. Due to ment has ramifications for office employment, too: The number the demand-driven building activity in the secondary loca- of office jobs increased by around 10 % during the past ten tions, there is no reason to expect the strain on the regional years. Consequently, the low new-build completions total of office markets to ease in the coming years.

Trend in Office Employment (2009 - 2018) Trend in Office Employment* The number of white-collar workers3 within a given office mar- (2009 - 2018) ket represent an important indicator for the local office space requirements. During the analysis period, all secondary loca- Ingolstadt 41 % tions – with the exception of Stralsund – registered an upward Leipzig 23 % trend in the number of office jobs. The fastest growth in office Regensburg 23 % 22 % employment was recorded in Ingolstadt with 41 %. Trailing it Freiburg (B.) 21 % with growth rates of more than 20 % are the cities of Leipzig, Ulm A cities 20 % Regensburg, Freiburg (B.) and Ulm. Münster 19 % Jena 18 % Just like last year, Ingolstadt topped this year’s office employ- Reutlingen 17 % ment growth ranking for the survey period with +41 % (2008 Bayreuth 15 % through 2017: +39 %). The economic clout of Ingolstadt is Essen 15 % rooted in the manufacturing industry, specifically the automo- Karlsruhe 15 % tive industry, because Audi AG has its corporate headquarters Dresden 14 % here as well as its largest manufacturing site. The completions Lüneburg 13 % and take-up totals of recent years kept setting new high-water Mannheim 13 % marks whereas the vacancy rates continuously declined. The Göttingen 12 % main factor driving the trend is the steady increase in office Kempten 12 % jobs. Darmstadt 12 % Leverkusen 12 % Another city with a massive increase in office workers, while Dortmund 11 % trailing far behind Ingolstadt, is Leipzig (+23 %). By the end of Bonn 11 % 2018, around 120,000 of the city’s workforce held office jobs. Flensburg 11 % The growth is sustained by the region’s stable economic struc- Bremen 11 % ture. The latter is exemplified by the fact that a number of pres- Potsdam 10 % tigious large corporates, including from the automotive and lo- Osnabrück 10 % gistics industries, moved to Leipzig and set up permanent es- Rostock 10 % tablishments in recent years. The upward trend in office em- Kassel 10 % ployment is expected to continue in this city known for its trade Koblenz 9 % 9 % fairs in the years ahead. Chemnitz Wuppertal 4 % Schwerin 0 % At the other end of the scale, the drop in office employment in Stralsund -6.5 % Stralsund actually accelerated to -6.5 % when compared to the period analysed for the previous survey (2008 through 2017: - -10 0 10 20 30 40 5.5 %). The reason for this development is the city’s demo- graphic change and the corresponding drop in social-security- 2009 - 2018 covered jobs. Moreover, certain government authorities were Source: RIWIS merged in conjunction with the territorial reforms in Mecklen- burg-West Pomerania.

The forecast period of 2018 through 2022 is expected to bring Interim Summary positive growth in office employment for all of the cities sur- The economic growth of the past few years has fuelled the veyed, with the exception of Wuppertal, Schwerin and creation of white-collar jobs in Germany. In the time between Stralsund. The fastest rate of increase is expected in Ingolstadt 2009 and 2018, the Class A cities registered a growth of at around +8 %. Next in line are Freiburg B. (+7 %) and Mün- around 20 %. Some of the secondary locations generated ster (+6 %). Office employment is also expected to rise by even faster growth. The years to come are projected to bring more than 5 % in Regensburg, Leipzig and Ulm. The map be- a further increase in office jobs in virtually all secondary lo- low (see page 10) illustrates the findings in a convenient over- cations. The currently strained situation on the office mar- view. kets – with their low supply of office accommodation – could therefore tighten further.

3 The number of office jobs is determined via a drilldown of insurable employees by professions. It is based on profession-specific quotas for insurable employees according to the Dobberstein method, and these are supplemented with specific quotas for civil servants, self-employed persons and family workers.

Trend in Office Employment in % (2018 - 2022)

Secondary Locations Trend in Office Employment 2018 to 2022

under 0 %

to 5 %

5 % to 10 %

Trend in Office Take-up (2009 - 2018) Office Take-up

The demand for office accommodation is mapped in the repre- Take-up in sqm RAC Take-up in % of the City sentation and analysis of the take-up. Among the secondary lo- (ø 2009 - 2018) total stock cations, the highest take-up volumes by year-end 2018 were Frankfurt 452,400 4.5 % recorded in the Class B markets covered by the survey, mean- Munich 569,400 4.1 % ing Essen, Leipzig, Bonn, Bremen and Dresden (cf. table). Düsseldorf 310,600 4.1 % Leipzig 103,400 3.7 % Overview – Office Take-up (2018) Hamburg 512,400 3.7 % Berlin 707,000 3.7 % Office Take-up City Cologne 275,000 3.6 % in sqm RAC Essen 112,500 3.6 % Essen 137,000 Bremen 86,900 3.3 % Leipzig 135,000 Dresden 85,200 3.2 % Bonn 128,000 Stuttgart 251,800 3.2 % Bremen 102,000 Mannheim 66,200 3.2 % Dresden 85,000 Dortmund 81,100 3.1 % Source: RIWIS Bonn 93,800 2.9 % Osnabrück 26,200 2.8 % Darmstadt 44,300 2.7 % On the whole, the take-up in the analysed cities ranged from Münster 57,100 2.6 % around 113,000 sqm RAC/year in Essen to 4,700 sqm RAC/ Regensburg 26,000 2.5 % year in Stralsund. In fact, Essen topped the list not only with Ingolstadt 14,900 2.3 % the highest volume of new-build completions (the ten-year av- Stralsund 4,700 2.2 % eraged being 36,600 sqm RAC/year) but also with the highest Leverkusen 15,100 2.2 % office take-up. With around 3.1 million sqm RAC, Essen has Jena 12,800 2.1 % the fourth-largest office market among the Class B cities, and it Flensburg 8,000 2.0 % is fuelled by a brisk dynamic compared to the other cities. The Koblenz 19,400 1.9 % average take-up of the past ten years approximated 113,000 Kempten 6,100 1.9 % sqm RAC/year. The start of developments intended for owner- Potsdam 25,500 1.9 % occupancy and decisions to relocate head offices here ac- Ulm 16,100 1.9 % counted for a substantial share of the construction activity dur- Kassel 21,000 1.8 % ing the past five years, including developments by ThyssenK- Karlsruhe 43,600 1.8 % rupp, Funke Media Group and Aldi Nord. The trend coincides Freiburg (B.) 23,800 1.7 % with a fast increase in office employment (2009 through 2018: Bayreuth 7,300 1.7 % +15 %). A breakdown by sectors shows that office employment Lüneburg 5,400 1.6 % focuses on the manufacturing industry, legal, tax and corporate Wuppertal 24,800 1.5 % consultancy as well as on the technology media and communi- Rostock 13,600 1.3 % cations sectors. Reutlingen 5,800 1.3 % Göttingen 8,200 1.1 % Similarly, Dresden reported a take-up in 2018 that more or less Chemnitz 12,700 1.0 % matched the ten-year average with around 85,000 sqm RAC. Schwerin 6,800 0.9 % At the same time, the office take-up here in the Saxon capital Source: RIWIS has remained stable over the past years and slightly exceeded the average of the other Class B cities. The city’s vacancy rate, which is still comparatively high, has been declining as a result. Interim Summary The office take-up is an indicator for the attractiveness and By contrast, the lowest take-up figures are reported from the activity of a given market. The booming economy has cities Reutlingen (5,800 sqm RAC/year), Lüneburg (5,400 sqm pushed demand for office space both in the Class A cities RAC/year) and Stralsund (4,700 sqm RAC/year). Judging by and in many secondary markets to a high level. The ramifi- their floor space stock, the cities named above count among cations are obvious when looking at the vacancy rate which the smaller markets in the case selection. lately dropped well below the fluctuation reserve as a result of the sluggish building activity of recent years. The pent-up demand has led in turn to an upward rental trend.

Investment Market (2009 - 2018) Overview – net initial yield (2017 / 2018)

Transaction volume commercial property ( 2009 - 2018) City NIY 2017 NIY 2018 Basis points

40 100 Chemnitz 7.0 % 6.6 % -40 35 Freiburg (B.) 4.4 % 4.0 % -40 30 50 Schwerin 6.5 % 6.1 % -40 25 Koblenz 6.1 % 5.7 % -40 20 0 15 Bayreuth 6.0 % 5.7 % -30 10 -50 % in year Darmstadt 4.6 % 4.3 % -30 in billion euro billion in

5 – previous change Flensburg 6.0 % 5.7 % -30 0 -100 Göttingen 6.0 % 5.7 % -30 09 10 11 12 13 14 15 16 17 18 Ingolstadt 5.0 % 4.7 % -30 A cities Change Sec. Locat. Jena 6.0 % 5.7 % -30 Sec. Locat. Kempten 6.0 % 5.7 % -30 Source: RIWIS Osnabrück 5.0 % 4.7 % -30 Regensburg 4.8 % 4.5 % -30 The commercial investment volume in 2018 added up to c. 61 Stralsund 7.0 % 6.7 % -30 billion euros and thus reached a new peak level during the pe- Wuppertal 5.8 % 5.5 % -30 riod under review (2009 through 2018). Year on year, the trans- Bonn 4.2 % 4.0 % -20 action volume registered an increase by around 5 %. This Karlsruhe 4.4 % 4.2 % -20 means that the persistent demand for commercial real estate4 Kassel 5.5 % 5.3 % -20 that started in 2009, in the wake of the financial crisis, is here to stay. Worth noting is that foreign players accounted for Lüneburg 6.0 % 5.8 % -20 around 42 % of the entire commercial investment volume since Mannheim 4.5 % 4.3 % -20 2009. Potsdam 4.8 % 4.6 % -20 Dresden 4.6 % 4.4 % -20 Now, as then, the investor focus is on Class A cities. Roughly Bremen 4.7 % 4.6 % -10 63 % of the commercial investments were transacted in the "Big Seven" cities in 2018. The share of the secondary loca- Leipzig 4.4 % 4.3 % -10 tions plunged back to around 37 % (2017: 47 %). Leverkusen 5.7 % 5.6 % -10 Münster 4.4 % 4.3 % -10 Reutlingen 5.9 % 5.8 % -10 ø-Transaction volume A Cities 3.1 % 3.0 % -10 Secondary Period A cities Dortmund 4.6 % 4.5 % -10 Locations Essen 4.5 % 4.4 % -10 2014 - 2018 30.5 billion euro 23.5 billion euro Rostock 5.5 % 5.4 % -10 2009 - 2018 21.6 billion euro 16.5 billion euro Ulm 5.1 % 5.0 % -10 Source: RIWIS Scource: RIWIS

Around 52 % of the commercial investments made in 2018 in- Interim Summary volved office real estate (2017: 43 %). The sustained demand On the commercial investment market, office real estate re- for well-positioned office properties – including ones in secon- mained the most coveted asset class in 2018. It is in this as- dary locations – has impacted the trend in net initial yields.5 set that roughly 52 % of the commercial property invest- They reached another trough in 2018. The table below shows ments were transacted. The persistently keen demand – in a the trend across the selected cities. time of limited supply – has sent net initial yields on a nosedive to new all-time lows. In addition to Class A cities, the focus of investors has lately shifted to include secondary loca- 4 Commercial real estate = office, retail and logistics real estate along with certain other properties (hotels, senior-living real estate, tions. In 2018, they attracted c. 23 billion euros in invest- etc.) ments. The aspects that make such secondary locations a 5 Net initial yield (NIY) = this ratio puts the net rental income in winning proposition are higher yields combined with more relation to the purchase price before the property-specific incidental acquisition costs. Accordingly, a low net initial yield rate suggests a stable rent rates. high asking price.

4 PERFORMANCE POTENTIAL OF IRR – Secondary0 2 Locations4 (office:6 core) 8 SECONDARY LOCATIONS Bonn 1.9 3.7 4.2 Freiburg (B.) 1.7 3.9 4.3 A standard method to measure the performance of real estate Darmstadt 1.8 3.3 4.3 investments and to compare alternative investment opportuni- Karlsruhe 1.7 3.8 4.4 ties is the internal rate of return (IRR). Under this method, the Mannheim 2.0 3.3 4.5 return on a given investment is measured on the basis of cash Münster 1.9 3.7 4.6 flows over a specific period of time. Accordingly, it represents a Essen 2.2 3.9 4.7 dynamic investment calculation method. Dortmund 2.3 3.9 4.7 Regensburg 2.1 4.2 4.7 The annual survey that bulwiengesa compiles to determine lu- Bremen 2.0 3.8 4.8 crative investment destinations ("5 % Studie: Wo investieren Ulm 2.7 3.8 5.0 sich noch lohnt") uses the IRR to appraise the return potential Potsdam 2.4 4.5 5.0 of diverse real estate segments and locations.6 The survey dis- Ingolstadt 2.4 4.3 5.1 tinguishes between core real estate (stable rental situation, Osnabrück 2.0 4.3 5.1 good location) and non-core real estate (impaired properties). Dresden 2.3 4.7 5.1 To permit a transparent comparison of property yields, other ef- Leipzig 2.3 5.2 5.4 fects are ignored, such as interest levers, for example. The Kassel 2.5 4.6 5.7 methodological approach assumes an ownership period of ten Koblenz 3.2 4.9 5.8 years, followed by a sale (exit). Rostock 3.1 5.1 5.8 Reutlingen 3.3 4.8 5.8 The analysis of the findings for the examined secondary loca- Bayreuth 3.1 5.2 5.8 tions, which are outlined in the chart on the side, shows that Wuppertal 3.0 5.0 5.8 notwithstanding the enormous need for yield in the Germany Leverkusen 3.1 5.0 5.9 real estate market there are office markets where an IRR of Kempten 3.0 5.3 6.1 5 % or more is still achievable. Cities of this type therefore Flensburg 3.4 5.8 6.2 stand well apart from the Class A cities where yield rates are Jena 3.6 5.6 6.2 down to just 2.9 % on average. But the high-potential cities are Schwerin 3.4 5.4 6.4 also found nationwide: Not just East German cities like Lüneburg 3.6 5.8 6.5 Stralsund or Chemnitz offer high yields (of up to 7.2 % each) Göttingen 3.6 5.9 6.5 but also West German cities like Lüneburg and Göttingen (up Stralsund 4.0 6.4 7.2 to 6.5 %), for instance. The elevated net initial yields (and thus Chemnitz 4.5 6.7 7.2 lower selling prices) that characterise these cities have a positive impact on the performance. Worth noting in this context is 0 % 2 % 4 % 6 % 8 % that even larger markets deliver quite adequate total returns in IRR from... IRR base value spite of their lower initial yield rates. Leipzig stands out in this ... IRR max. up to regard with a modelled IRR of up to 5.4 %. This is explained by Source: bulwiengesa "5% Studie 2018" (2019 update) the excellent condition of the market, which makes it reason- able to expect a further increase in rents. Successful invest- Conclusion ments of this kind, however, presuppose proper local and sec- The return potential (core) outlined may actually be ex- tor know-how. Key factors include the right location and a mar- ceeded through active property management. Yield-oriented ket-consistent dimension of the investment target. investors therefore shop for real estate with shortcomings (vacancies) in locations with upside potential. Vacancy re- ductions and/or rent increases can sustainably raise the 6 The figures cited in the 5 % Study 2018 were recalculated for value of such properties and with it their return on invest- this survey. ment.

Summary of findings

ø-rent, CBD, in eu- Trend in ø-rent, Development of NIY*** Trend in NIY, central Vacancy rate 2018 ros/sqm RAC CBD; forecast vacancy rate; fore- central locations locations; forecast (**) 2018 (*) through 2022 cast through 2022 2018 (**) through 2022

Bayreuth 7.4 (+2.8 %) 2.8 % (0) 5.7 % (-30)

Bonn 11.0 (+3.8 %) 2.2 % (-60) 4.0 % (-20)

Bremen 8.8 (+2.3 %) 4.1 % (-10) 4.6 % (-10)

Chemnitz 7.8 (+4.0 %) 11.2 % (-60) 6.6 % (-40)

Darmstadt 10.1 (+1.0 %) 3.7 % (+10) 4.3 % (-30)

Dortmund 10.7 (+1.9 %) 3.0 % (-120) 4.5 % (-10)

Dresden 10.2 (+3.0 %) 6.8 % (-80) 4.4 % (-20)

Essen 10.5 (+2.9 %) 5.0 % (-150) 4.4 % (-10)

Flensburg 7.7 (+6,9 %) 4.0 % (-80) 5.7 % (-30)

Freiburg (B.) 12.7 (+1.6 %) 1.4 % (-10) 4.0 % (-40)

Göttingen 9.2 (+7,0 %) 1.4 % (-30) 5.7 % (-30)

Ingolstadt 9.8 (+1.0 %) 1.7 % (-30) 4.7 % (-30)

Jena 9.8 (+3.2 %) 2.5 % (-50) 5,7 % (-30)

Karlsruhe 9.8 (+5.4 %) 3.1 % (-20) 4.2 % (-20)

Kassel 7.2 (0 %) 3.5 % (-40) 5.3 % (-20)

Kempten 8.0 (+2.6 %) 3.2 % (-30) 5.7 % (-30)

Koblenz 8.4 (+2.4 %) 2.3 % (0) 5.7 % (-40)

Leipzig 10.4 (+4.0 %) 8.3 % (-160) 4.3 % (-10)

Leverkusen 8.0 (+3.9 %) 5.0 % (-10) 5.6 % (-10)

Lüneburg 10.0 (+5.3 %) 4.0 % (0) 5.8 % (-20)

Mannheim 12.1 (+5.2 %) 4.8 % (0) 4.3 % (-20)

Münster 10.5 (+2.9 %) 1.4 % (-40) 4.3 % (-10)

Osnabrück 9.0 (+2.3 %) 2.7 % (-50) 4.7 % (-30)

Potsdam 10.8 (+4.9 %) 2.9 % (-40) 4.6 % (-20)

Regensburg 9.6 (+1.1 %) 3.3 % (-100) 4.5 % (-30)

Reutlingen 8.4 (0 %) 4.2 % (-50) 5.8 % (-10)

Rostock 9.0 (+4.7 %) 5.4 % (-50) 5.4 % (-10)

Schwerin 7.0 (+1.5 %) 9.6 % (-90) 6.1 % (-40)

Stralsund 6.5 (+3.2 %) 10.9 % (-50) 6.7 % (-30)

Ulm 11.3 (0 %) 3.6 % (-20) 5.0 % (-10)

Wuppertal 8.5 (+4.9 %) 4.6 % (-30) 5.5 % (-30)

*Wuppertal The figure in brackets represents the percentage change on year earlier.; ** The figure in brackets represents the change on year earlier in basis points.; *** NIY = net initial yield

ANNEX

General Classification of Cities

Overview A-, B-, C- and D-Cities

City Category City Category City Category City Category Berlin A Lübeck C Gelsenkirchen D Neuss D Düsseldorf A Magdeburg C Gera D Oberhausen D Frankfurt (Main) A Mainz C Gießen D Offenburg D Hamburg A Mönchengladbach C Görlitz D Oldenburg D Köln A Mülheim (Ruhr) C Göttingen D Paderborn D München A Offenbach (Main) C Greifswald D Passau D Stuttgart A Osnabrück C Gütersloh D Pforzheim D Potsdam C Hagen D Plauen D Bochum B Regensburg C Halberstadt D Ratingen D Bonn B Rostock C Halle (Saale) D Ravensburg D Bremen B Saarbrücken C Hamm D Recklinghausen D Dortmund B Wuppertal C Hanau D Remscheid D Dresden B Heilbronn D Reutlingen D Duisburg B Albstadt D Herne D Rosenheim D Essen B Aschaffenburg D Hildesheim D Salzgitter D Hannover B Bamberg D Ingolstadt D Schweinfurt D Karlsruhe B Bayreuth D Jena D Schwerin D Leipzig B Bergisch Gladbach D Kaiserslautern D Siegen D Mannheim B Bottrop D Kassel D Solingen D Münster B Brandenburg (Hl.) D Kempten (Allgäu) D Stralsund D Nürnberg B Bremerhaven D Koblenz D Suhl D Wiesbaden B Chemnitz D Konstanz D Trier D Coburg D Krefeld D Tübingen D Aachen C Cottbus D Landshut D Ulm D Augsburg C Dessau D Leverkusen D Villingen-Schwenn. D Bielefeld C Detmold D Lüdenscheid D Weimar D Braunschweig C Düren D Ludwigshafen D Wilhelmshaven D Darmstadt C Eisenach D Lüneburg D Witten D Erfurt C Flensburg D Marburg D Wolfsburg D Erlangen C Frankfurt (Oder) D Minden D Würzburg D Freiburg C Friedrichshafen D Moers D Zwickau D Heidelberg C Fulda D Neubrandenburg D Kiel C Fürth D Neumünster D

Classification of Locations The cities picked by bulwiengesa AG for the RIWIS database are grouped into 4 categories depending on their functional significance for the international, national, regional or local real estate market.

Class A cities: Germany's leading centres, having national and in some cases international significance. Large functional markets across segments.

Class B cities: Major cities of national and regional significance.

Class C cities: Important cities of regional and to some extent national significance, and serving as centre for the surrounding region.

Class D cities: Small towns of regional focus with a central role for the directly surrounding countryside; marked by lower market volume and take-up.

Client DEMIRE – Deutsche Mittelstand Real Estate AG

Editorial desk bulwiengesa AG Eschersheimer Landstr. 10 60322 Frankfurt am Main Telefon: +49 69 7561 46 - 760 www.bulwiengesa.de

Index of figures Cover: DEMIRE; Page: 1 / 4 / 13: DEMIRE