MAIN REGIONAL REAL ESTATE MARKETS IN GERMANY 2015 A RESEARCH PuBLICATION BY DG HYP MARCH 2015 OFFICE AND RETAIL: CONTINuED STRONG DEMAND FOR FLOORSPACE, WITH MODERATE RENT INCREASES Main regional real estate markets in Germany | 2015 1 Main regional real estate markets in Germany | 2015 Table of ConTenTs Preface ____________________________________________________________________ 2 Office and retail: The pace is slackening somewhat ___________________________ 3 Office rents – although weaker, 2014 was not a bad year Retail – consumer climate close to optimum Augsburg __________________________________________________________________ 14 Berlin _____________________________________________________________________ 17 Bremen ____________________________________________________________________ 19 Cologne ____________________________________________________________________ 22 Darmstadt _________________________________________________________________ 24 Dresden ___________________________________________________________________ 27 Dusseldorf _________________________________________________________________ 30 Essen ______________________________________________________________________ 32 Frankfurt __________________________________________________________________ 35 Hamburg __________________________________________________________________ 37 Hannover __________________________________________________________________ 39 Karlsruhe __________________________________________________________________ 42 Leipzig ____________________________________________________________________ 45 Mainz _____________________________________________________________________ 48 Mannheim _________________________________________________________________ 51 Munich ____________________________________________________________________ 54 Munster ___________________________________________________________________ 56 Nuremberg ________________________________________________________________ 59 Stuttgart __________________________________________________________________ 62 Overviews _________________________________________________________________ 64 Imprint ___________________________________________________________________ 67 Disclaimer DG HYP Offices ____________________________________________________________ 68 1 Main regional real estate markets in Germany | 2015 Main regional real estate markets in Germany | 2015 PREFACe As the commercial real estate bank within the Volksbanken Raiffeisenbanken cooperative financial network, we regularly analyse the markets we actively cover, in order to better assess opportunities and risks. We publish the results of this analysis in real estate market reports, targeting investors as well as our partners within the network: these are German cooperative banks, with whom we successfully originate financings in the various regions. Given our decentralised market coverage – DG HYP has a nationwide presence in six of Germany‘s major cities, plus three regional offices – and our close cooperation with the German cooperative banks, we introduced a regional focus to our market reports five years ago. For this purpose, we publish a study analysing the main regional real estate markets for office and retail properties in Augsburg, Bremen, Darmstadt, Dresden, Essen, Hannover, Karlsruhe, Leipzig, Mannheim, Mainz, Münster and Nuremberg, comparing developments there with the seven top locations in Germany. Covering these 19 markets, with a broad regional diversification, the report thus provides a comprehensive analysis of the German commercial property market. During 2014, we saw slower market performance at the locations covered, compared to the previous year, for both office and retail properties. Amongst other factors, those looking for floorspace were generally adopting a more cautious stance, as a result of heightened geopolitical risks. Nevertheless, investor sentiment is positive at the beginning of this year. The market was looking for an upturn: lower oil prices and a weaker euro (amongst other factors) duly delivered better performance in the fourth quarter. Looking ahead to 2015, we are optimistic regarding market developments for office properties: given a moderate level of completed projects, attractive office space is likely to remain scarce, supporting rent levels. The main regional markets for retail properties are expected to see a somewhat reduced performance, due to various reasons; nevertheless, top rents are still likely to rise slightly. This sixth market report on „Regional Real Estate Markets“ supplements „The German Real Estate Market“ – our series of specialist publications published in the autumn of each year. Moreover, we analyse the commercial real estate markets in individual German federal states. The results are published in the spring and autumn of each year; this year‘s issues will cover Berlin and the eastern German states (due in June), and Bavaria (November). An overview of DG HYP‘s real estate market reports is available on our website: http://www.dghyp.de/en/unternehmen/markt-research/ Deutsche Genossenschafts-Hypothekenbank AG March 2015 2 3 Main regional real estate markets in Germany | 2015 Main regional real estate markets in Germany | 2015 OFFICE AND RETAIL: THE PACE IS SLACKENING SOMEWHAT The two most important segments of the commercial property market are office and retail. The main focus here is on the major cities, with their considerable economic power and the importance and liquidity of their property markets. Globally, half of in- vestment in commercial properties is focused on only 30 cities. And the market trend in these locations is often used as a bellwether for the property market as a whole. Applied to Germany, this role is assumed by the top locations - the seven most densely populated cities. However, the strong growth in demand for German com- mercial properties here in recent years is increasingly outpacing supply. The group of locations is therefore being extended to include "second tier" cities. This also means that more information and market data is required for these cities, in order to evaluate the risks and opportunities. We address this issue in the sixth edition of our market report on regional property centres. As before, we focus on the 12 regional centres throughout the whole of Germany. The top locations are also included as points of reference. OVERVIEW OF LOCATIONS 7 Top locations 12 main regional centres (Index: Regional 12) (Index: Top 7) City German Land City German Land City German Land Augsburg Bavaria Leipzig Saxony Berlin Berlin North Rhine- Bremen Bremen Dresden Saxony Cologne Westphalia North Rhine- Darmstadt Hesse Mainz Rhineland-Pal. Dusseldorf Westphalia North Rhine- Essen Mannheim Baden-Württemb. Frankfurt Hesse Westphalia North Rhine- Hannover Lower Saxony Munster Hamburg Hamburg Westphalia Karlsruhe Baden-Württemb. Nuremberg Bavaria Munich Bavaria Stuttgart Baden-Württemb. The section of the report summarising the office and retail market segments is fol- Office and retail: 12 regional centres lowed by sections on the individual locations, starting from page 14, in alphabetical and 7 top locations order. From page 64 we provide an overview of market data in table form. Office rents – although weaker, 2014 was not a bad year At the beginning of last year it looked as if the economy would pick up again strongly Geopolitical risks hampered the after zero growth in two weak previous years. Macroeconomic growth was expected strong upturn expected in 2014 to clearly exceed 2 per cent. Accordingly, there were high hopes that 2014 would be a good year for the German office market. However, that's not how it turned out. Prospects deteriorated steadily as the year progressed. Geopolitical flashpoints, par- ticularly connected with the sanctions imposed on Russia in response to the crisis in Ukraine, had a negative impact on our heavily export-driven economy. And after a dynamic first quarter, the forecast for German GDP had to be revised down sharply. However, conditions improved again at year-end. The oil price also helped here, having more than halved within a few months. And important trend indicators such as the ZEW and ifo-Institute indices showed upward movement again. Below the line, German GDP grew by 1.6 per cent in 2014. This was lower than expected, but better than had been feared. 2 3 Main regional real estate markets in Germany | 2015 Main regional real estate markets in Germany | 2015 ECONOMY: CLEAR DETERIORATION IN 2014 AFTER PROMISING LABOUR MARKET: STILL ON A GROWTH COURSE DESPITE MUTED START ECONOMIC GROWTH 10 GDP qoq in % (annualised) 44 13 GDP yoy in % 8 43 12 42 11 6 41 10 4 40 9 39 8 2 38 7 0 37 6 1994 1998 2002 2006 2010 2014 -2 employees in million (lhs) 2010 2011 2012 2013 2014 unemployment rate in % (rhs) Source: DZ BANK Source: BA, Destatis It is not therefore surprising that companies have adopted a slightly more cautious Labour market remains on a steady approach when concluding new rental contracts for office space. However, the con- growth course tinuing robust labour market and the ongoing demand for labour has supported the office market. Despite the generally negative economic growth of the last three years, employment still increased to its highest level so far of 43 million at the end of last year. The unemployment rate fell to 6.7 per cent in 2014, its lowest level since 1991. The growing regional centres and major cities benefited particularly here. Population growth due to immigration from within Germany and