Real Estate Market Germany 2017 | 2018 Tight Supply Drives Rents for Offices and Residential Real Estate – Retail Rents Stable, at a High Level
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REAL ESTATE MARKET GERMANY 2017 | 2018 TIGHT SUPPLY DRIVES RENTS FOR OFFICES AND RESIDENTIAL REAL ESTATE – RETAIL RENTS STABLE, AT A HIGH LEVEL A RESEARCH PUBLICATION BY DG HYP | OCTOBER 2017 Real Estate Market Germany 2017 | 2018 TABLE OF CONTENTS Preface ____________________________________________________________________ 2 Summary __________________________________________________________________ 3 Current economic situation in Germany ______________________________________ 6 Upturn on the German hotel market is continuing ____________________________ 7 Some of the shine has come off the environment for investments in commercial real estate ___________________________________________________ 10 Retail properties ___________________________________________________________ 12 Offi ce properties ___________________________________________________________ 27 Residential properties ______________________________________________________ 40 Overview of forecasts ______________________________________________________ 45 Imprint ____________________________________________________________________ 46 Disclaimer _________________________________________________________________ 46 DG HYP offi ces _____________________________________________________________ 47 1 Real Estate Market Germany 2017 | 2018 PREFACE Dear Readers, As the commercial real estate bank within the Volksbanken Raiffeisenbanken coop- erative fi nancial network, we regularly analyse those markets we actively cover, in order to better assess opportunities and risks. The present report – now in its tenth year – continues our series of studies concerning the German real estate market. This research study, which is regularly published in October, looks at market developments for retail, offi ce and residential real estate in Germany’s seven largest metropolitan areas. The German real estate market continues to benefi t from the positive macroeconomic development. The benign labour market situation in Germany has triggered marked growth in the number of offi ce workers, together with increased need for fl oorspace – which cannot be suffi ciently met. Hence, it is fair to expect rising offi ce rents during the current year and next. Likewise, demand for residential real estate remains strong. Completions in residential construction cannot keep up with the number of people moving into the economic centres, thus constantly increasing the demand gap. This development offers scope for further rent increases. Rents for retail properties are reaching their limits, given the high levels reached and growing online commerce. The latest market report presents a special feature covering developments on, and prospects for the hotel market – a segment which increasingly attracts the attention of investors as well as project developers, given the continued professionalisation of the hotel real estate sector, a continuously increasing number of overnight stays, as well as attractive potential returns. The German real estate market report is of course also available in German. All previously published DG HYP market reports can be downloaded from our website (on www.dghyp.de/en/unternehmen/market-research). Yours sincerely, DG HYP October 2017 2 Real Estate Market Germany 2017 | 2018 SUMMARY » The German real estate market is still running at top speed. There are many The present issue is the tenth reasons for this: the continued expansion in the German economy is a factor just edition of our market report on the as much as the employment market. With employment repeatedly reaching new commercial real estate market in highs, combating unemployment has taken a back seat. The focus is instead in- the seven top locations creasingly concentrated on the growing shortage of workers. The indicators for the position of companies and consumer confidence are correspondingly positive. The population is also expanding through immigration and rising birth rates once more. And given low capital market returns, many investor billions are still on the hunt for property investments offering higher returns. But these are now just as difficult to find as commercial space and residential properties. » The fact that rents and purchase prices are continuing to rise in this environment is just unsurprising as the continued slump in initial rental returns. However, there are signs that saturation point is gradually being reached. Following an upward trend in rents dating back many years, this is particularly true for the retail sector, as sales in pedestrian precincts and shopping centres are only seeing modest growth despite good consumer conditions. High-street sales are being curbed by the burgeoning online-shopping market. In contrast, there is no sign of an end to the boom in residential and office property. As previously occurred on the housing market, the supply of office property is becoming ever scarcer. » In the present tenth edition of our market report, as in previous years, we analyse developments in the retail, office and residential segments of the market in the seven top locations in Germany, namely Berlin, Dusseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart. In addition, we look at the trend in yields in these segments in two short sections and subsequently examine the ongoing boom in the German hotel market. » Conditions for retailers are still favourable even if they will not improve any further Retail sector: the upward trend is and there are signs of a slight slowdown. Although the trend in both employment over for the moment; however, there and incomes remains positive, the increase in consumer prices leaves scarcely are no signs of a market slump anything over from the nominal growth in real terms. However, the consumer climate is still good. Private households are still confident as far as their own economic future is concerned thanks to the positive employment situation. TOP LOCATIONS: RENTS FOR OFFICES AND HOUSING ARE STILL RISING – HOWEVER, THEY ARE STAGNANT IN THE RETAIL SECTOR top locations: rent yoy in % 15 12 9 6 3 0 -3 -6 -9 -12 -15 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018e retail prime rent office prime rent residential average rent first letting average Source: BulwienGesa, DZ BANK Research forecast 3 Real Estate Market Germany 2017 | 2018 The retail sector is also benefiting from population growth in all top locations and flourishing tourism. In 2017, however, high-street sales will only receive half the increase in retail sales – estimated at plus 2 per cent by HDE. The rest will be absorbed by the rapidly expanding e-commerce sector. » While retailers in areas close to city centres benefit from online shopping thanks to their hybrid sales concepts, demand for retail space is growing more slowly. Retailers also seem to be reaching the limits of their economic viability because of sharp rises in retail rents in the past. The perceptible slowdown in rent rises since 2015 certainly points to this. » Ultimately, demand is still strong for top quality retail space in shopping malls and city centre shopping centres, which have also expanded in recent years through new developments. Tenants are, however, no longer prepared to pay higher rents. This has brought the upward trend in a prime rent of just under EUR 300 per sqm to a halt. There is likely to be scarcely any change here over the period covered by the forecast up to 2018. We could even see rents fall slightly. Demand for space has also shifted slightly from traditional sales space towards restaurants and cafés. Ultimately, a city centre shopping trip is still an important part of people’s leisure time. FORECAST FOR RETAIL SPACE Prime rent Change in prime rents in EUR/sqm yoy (%) 2016 2017e 2018e 2016 2017e 2018e Berlin 310 310 3103.3 0.0 0.0 Cologne 250 255 2550.0 2.0 0.0 Dusseldorf 275 280 2801.9 1.8 0.0 Frankfurt 300 300 3000.0 0.0 0.0 Hamburg 285 285 2850.0 0.0 0.0 Munich 345 345 3451.5 0.0 0.0 Stuttgart 250 250 2502.0 0.0 0.0 Top location average 297.5 298.4 298.5 1.8 0.3 0.0 Source: BulwienGesa, Feri, forecast DZ BANK Research The prime rent represents an average of the top 3 to 5 per cent of market lettings, meaning that the figure quoted does not equate to the absolute prime rent. » The top locations have key functions in keeping the economic engine purring: Office: the top locations are outstanding connections at home and abroad plus their large employment and surfing the wave of success but the office markets make them attractive locations for companies, especially as office shortage of offices and housing rents are average by European standards despite the strength of the German could curb the upturn economy. Office space is therefore highly sought after. » The upturn from which cities have benefited for many years has, however, left its mark on the real estate market, which could put these locations at a disadvantage in the long run. In addition to housing, too little office space has been constructed. This scarcity is driving rents through the roof. Finding suitable office space is also more and more difficult. This is particularly true of Berlin, Munich and Stuttgart where vacancy rates are less than 3 per cent. Decision-makers in cities, who have been spoilt by the growth they have enjoyed in recent years, should be aware that urban space is needed for this growth to continue – both for housing and for commerce. » We expect demand for office space to remain buoyant in the period covered by the forecast up to 2018. As a result, there could be a further fall in the vacancy 4 Real Estate