Main regional real estate markets in Germany 17 Office vacancies falling, thanks to steady demand rents for retail properties stabilise at a high level A Research Publication by DG HYP March 17
Main regional real estate markets in Germany 17 Table of Contents Preface Widespread growth in office and retail rents is over 3 Office properties: Modest rent growth and vacancy rates down sharply Retail properties: prime rents have virtually stopped rising Augsburg 1 Berlin 1 Bremen 3 Cologne Darmstadt Dresden 31 Düsseldorf 3 Essen 3 Frankfurt 39 Hamburg 1 Hannover 3 Karlsruhe Leipzig 9 Mainz 5 Mannheim 55 Munich 5 Münster Nuremberg 3 Stuttgart Locations at a glance Imprint 71 Disclaimer 71 DG HYP Offices 7 1
Main regional real estate markets in Germany 17 PREFACE As the commercial real estate bank within the Volksbanken Raiffeisenbanken cooperative financial network, we have regularly analysed the markets we actively cover for several years, publishing the results in real estate market reports. Thanks to strong demand for commercial real estate in Germany, the popularity of regional locations amongst investors has grown significantly over recent years. For this reason, we regularly publish a study ana lysing the main regional real estate markets for office and retail properties in Augsburg, Bremen, Darmstadt, Dresden, Essen, Hanover, Karlsruhe, Leipzig, Mannheim, Mainz, Mün ster and Nuremberg, comparing developments there with the top German metropolitan areas. Covering a total of 19 markets, with a broad regional diversification, the report thus provides a comprehensive analysis of the German commercial real estate market. In the prosperous market environment that has characterised the past year, rents for office and retail properties continued to advance on average in the cities covered by the analysis. Even though in percentage terms the increase in top rents at the regional locations for the two segments under review fell short of growth rates observed in metro politan areas, the main regional markets often hold better opportunities for real estate investments when compared to the larger conurbations. This is due to the fact that rent developments are often more stable in the regional centres moreover, yields are higher compared to the top locations. The outlook for the current year is also generally positive. As strong demand for office space meets a rather short supply, vacancies at all locations analysed keep falling strongly, with top office rents rising. The retail real estate market, in contrast, is showing signs of saturation, with rent increases beyond one per cent only possible at around half the regional locations. In this context, main regional centres offer stronger potential compared to metropolitan areas. Retail rents in the country s largest cities, particularly at the best locations, have now reached a level where there is hardly any scope for further growth. This eighth 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. In addition, we analyse the commercial real estate markets in individual German federal states: the regional report for Hesse, Rhineland-Palatinate, and the Saarland is scheduled for June 17, with the report for Baden-Württemberg set to follow in Novem ber 17. An overview of DG HYP s real estate market reports is available on our website: http:www.dghyp.deenunternehmenmarkt-research DG HYP March 17
Main regional real estate markets in Germany 17 WIDESPREAD GROWTH IN OFFICE AND RETAIL RENTS IS OVER In the commercial real estate market, generally high demand from investors has significantly raised the level of interest in housing portfolios or logistics properties, as well as niche markets such as micro apartments and hotels in recent years. However, office and retail properties remain by far the most important market segments, and these are the areas we focus on in this report. The further sharp decline in rental yields last year is a signal of the consistently high demand for attractive properties in these two asset classes. The focus here is on large cities with high financial power and large and liquid property markets. As in most international property markets, the lion s share of investment here is in commercial real estate. In Germany, these top locations which are often regarded as a benchmark for the market as a whole include the seven most densely populated cities. However, secondary locations also offer considerable potential. Rents here are usually more stable and yields are higher. In this eighth edition of our market report on Regional property centres, we address the growing need for information and market data on these locations, in order to better assess the risks and opportunities and compare them with those of the top locations. As previously, in addition to regional centres throughout Germany, the market report also includes the 7 top locations as a reference point. Eighth edition of the Regional property centres report OVERVIEW OF LOCATIONS regional centres (Index: Regional ) 7 top locations (Index: Top 7) City Federal state City Federal state City Federal State Augsburg Bavaria Leipzig Saxony Berlin Berlin Bremen Bremen Dresden Saxony Düsseldorf North RhineWestphalia Darmstadt Hesse Mainz Rhineland- Palatinate Frankfurt Hesse Essen North RhineWestphalia Mannheim Baden-Württemb. Hamburg Hamburg Hannover Lower Saxony Münster North RhineWestphalia Cologne North RhineWestphalia Karlsruhe Baden-Württemb. Nuremberg Bavaria Munich Bavaria Stuttgart Baden-Württemb. In the following chapter we analyse the office market in the 19 locations included. A market overview of the retail sector starts on page 1, followed by individual analysis of all locations in alphabetical order from page 1. Pages to 7 consist of tables showing the most important market data. Office and retail: regional centres and 7 top locations Office properties: Modest rent growth and vacancy rates down sharply Impact of economic environment on demand for office space The solid performance by the German economy continued last year. Macroeconomic growth reached its highest level since 11, up by 1.9 per cent on the previous year, after a slightly slower pace of 1. and 1.7 per cent in the two previous years. Private and public consumption once again created the basis for the continuing upturn. While the former was also boosted by the low oil price, the latter expanded as a result of expenditure on accommodation and subsistence for migrants who arrived in 15. Capital expenditure provided only weak growth impetus in, while foreign trade made a slightly negative contribution. 3 In, economic growth in Germany reached its highest level for five years at 1.9 per cent
Main regional real estate markets in Germany 17 The pace of growth is likely to be slightly weaker this year. We expect macroeconomic growth to be down by about a third on at 1. per cent. However, a good half of the growth divergence compared to the previous year is due to a smaller number of working days. Adjusted for this factor the gap narrows to.3 percentage points. Continuing subdued export business and a rising inflation rate - which is likely to curb consumer spending slightly - militate against any stronger growth this year. Growth weaker in 17, partly due to fewer working days LABOUR MARKET REMAINS POSITIVE: NUMBER OF PEOPLE IN WORK HAS RISEN UNTIL RECENTLY 13 3 11 1 1 9 39 3 7 37 3 5 forecast 1, -,7 - -5, 1 17 15 13 GDP yoy in % 11 1 9 7 5 3 unemployment rate in % labour force in million (lhs) Source: DZ BANK AG Demand for labour should therefore continue, ensuring further growth in employment; however, the almost linear growth could flatten. On the one hand, the increase of more than million in ten years has already taken numbers to a record level. On the other hand, the regional shortage of skilled workers is growing. There is consequently virtually full employment in Bavaria and Baden-Württemberg with unemployment rates of less than per cent. However, unemployment is also low in the federal states of Hesse and Rhineland-Palatinate at around 5 per cent. The national rate was calculated as 5. per cent in December. The slight increase in the unemployment rate shown in the forecast graph on the left is mainly due to growing numbers of migrants who have arrived in Germany since 15 seeking employment. AT THE BEGINNING OF 17 THE IFO BUSINESS CLIMATE INDEX FELL SLIGHTLY TO A HIGH LEVEL DUE TO WEAKER EXPECTATIONS 1 indices 5 = 1, seasonally adjusted 115 15-95 - - 5 business climate economic sentiment business conditions Source: Ifo Institute Source: ZEW economic situation 17 15 13 11 1 9 3 17 15 13 11 1 9 7 5 3 1 expectations 1 - -1 75 Demand for labour continues THE ZEW ECONOMIC INDEX STARTED THE YEAR WELL IN TERMS OF BOTH CURRENT CONDITIONS AND EXPECTATIONS 5 unemployment rate in % (rhs) Source: Federal Employment Agency 7 -,5,5 1, 1,7 1,9 1, 1, -,1 3,7 1,1 5 3,7 3,3 1,,7 199 1993 199 1995 199 1997 199 1999 1 3 5 7 9 1 11 13 15 ECONOMIC FORECAST: MACROECONOMIC GROWTH RATE LIKELY TO SLOW IN 17
Main regional real estate markets in Germany 17 Conditions in office markets remain solid Based on macroeconomic expectations and prospects for the labour market, the signs are that the German office market will continue to perform well again in 17. However, there are also a number of risk factors this year which could have a negative impact on economic performance. For example, the still uncertain course of the Brexit negotiations, negative factors for export business due to protectionist decisions by the Trump administration, and forthcoming parliamentary elections in Germany, France and the Netherlands in 17, when populist parties will exert a stronger influence than in the past. The potential uncertainty this may cause could prompt companies to adopt a wait-and-see stance, leading to weaker demand for office space than would otherwise have been expected based purely on the forecasting data. However, in some cities the office markets are scarcely able to absorb stronger growth in office jobs. High growth in office employment in recent years, accompanied by fairly modest levels of new office construction, has resulted in more office space being rented than built each year in virtually all the locations reviewed. This is evident from the 19 office markets analysed in this report which jointly account for approximately 11 million square metres of office space. The range extends from Augsburg, with around 1. million square metres, to the Berlin office market with 19 million square metres. The twelve regional centres jointly account for 3 million square metres, while the figure for the top seven locations is nearly three times as high at million square metres.,5 new office space in % of the total office space,, 1,1 Supply shortage in the 19 locations reviewed has increased further IN THE LAST 1 YEARS ONLY A RELATIVELY LOW VOLUME OF NEW OFFICE SPACE HAS BEEN DEVELOPED, 5, 1,1 5,3 7,7 7,,5 -,9, 11,9 -, 11,, 1,9,7, 9, REGIONAL OFFICE MARKETS AND TOP LOCATIONS BY SIZE From an economic perspective, the outlook for the office markets is good, but there are many risks 3,5,5 1,9 13, 13,7 1,3 7, 7, 7,, 3, 3,,7,,,,, 1, 1, 1, 3,, 1,5 1,,5, office space in million sqm change from to in % 199 199 Source: BulwienGesa Source: BulwienGesa The situation looked very different after the millennium. Much of the office space developed during the dot-com boom was difficult to let after the number of office jobs fell sharply when the bubble burst in the Neuer Markt and due to the economic turbulence triggered by 911. The volume of vacant office space surged correspondingly. This trend was much more pronounced in the more volatile top locations than in the regional centres where office markets are usually subject to less fluctuation. Since roughly the middle of the last decade, the trend has however reversed; since then, the vacancy rate has declined almost continuously. Levels are clearly falling faster in the top locations in an inversion of the previous sharp increase than in the regional centres. The average vacancy rate of 5.1 per cent in the top locations has consequently slipped below the level of 5. per cent in the regional centres. The trend for the conversion of no longer marketable office space to living accommodation has accelerated in the top 5 The serious vacancy problem in the middle of the last decade has been resolved
Main regional real estate markets in Germany 17 locations. These relatively expensive conversions have become increasingly attractive as residential rents in large cities have risen sharply. OFFICE VACANCY RATES CONTINUED TO FALL STEADILY IN OFFICE EMPLOYMENT GROWING FASTER THAN OFFICE SPACE IN THE 19 LOCATIONS FOR 1 YEARS 3, 3,3 115 3, 11 3,1 15 3, 1,9 95, 9,7 5,,5 199 199 office workers in million vacancy rate in % 1 75 1997 1 5 9 13 office space in milion sqm Source: BulwienGesa, Feri Source: BulwienGesa The fact that vacancy rates are being reduced in all locations is good news, although in some cases the changes since shown below have been fairly modest. Conversely, the proportion of vacant properties has declined significantly in some locations. In Munich and Stuttgart, vacancy rates have contracted to a very small proportion of less than 3 per cent. However, there is also very little vacant office space in Berlin, Karlsruhe and Münster where the figure is around 3 per cent; it is therefore increasingly difficult to find suitable office accommodation, since any remaining vacant properties are located in a variety of office buildings in the metropolitan area. As vacancy rates decline steadily, so does the likelihood of finding large-scale, interconnecting office space in a sought-after city area. Vacancy rate falls to below 3 per cent in Munich and Stuttgart VACANCY RATES FOR OFFICE SPACE HAVE FALLEN IN ALL THE LOCATIONS REVIEWED Top 7 Regional 9,9 Source: BulwienGesa The decline in vacant office space may become a locational disadvantage if companies are unable to find suitable space, if constructing a new office building is not a feasible option. Companies, public authorities and educational establishments may also be unable to relocate or realise expansion plans. Because the vacancy rate is likely to continue to decline this year, it is conceivable that office take-up will be lower The shortage of available office space could lead to lower space take-up in 17 5,1,,9 7,,7 5,3 1,,3 1, 5, 9,1 3,,9 5,,,1, 3, 7,7,9, 5,5 11, 5,9 3,,3,5,7 5,,9,,9,5,,3, 11,,5 1, 1 1,7 vacancy rate in % 7,
Main regional real estate markets in Germany 17 than in. However, the top locations of Berlin and Munich, where space is in short supply, generated high revenues last year from office space. Stuttgart - where office take-up represents 5. per cent of total space - reported the highest levels of the 19 locations. Bremen and Leipzig - where the corresponding figure was 3. per cent respectively - are the regional centres with the relatively highest levels of office market activity. Mainz and Augsburg bring up the rear with 1.3 and 1.5 per cent respectively. REGIONAL CENTRES UNAFFECTED BY GROWTH IN OFFICE SPACE TAKE-UP IN TOP LOCATIONS office space take-up in % of the total office space office space take-up in % of the total office space,,,,5,5,,9 5, 5, REGIONAL CENTRES SHOW A WIDE RANGE OF OFFICE MARKET ACTIVITY,5, 1,9,,,5,,7, 3, 3,3 3, 3, 3,5 3,,5 1,3 1,5, 1,5 1,,5, 199 199 Source: BulwienGesa Source: BulwienGesa It is not surprising that prime office rents are increasing under prosperous market conditions and as vacancy rates continue to fall: on average among the top locations, prime rents have risen notably by.9 per cent to EUR per square metre. However, the rate of increase for the regional centres is much weaker at one per cent. Average prime rents here are approximately half the level of the major cities at EUR 13.. The longstanding positive trend in rents is thus continuing. This was the sixth annual increase in succession in the top locations, and the eleventh consecutive rise in the regional centres. The cumulative increase of 3 per cent in prime rents over ten years in the regional centres is thus slightly stronger than the 1 per cent rent growth in top locations. Prime rents increase further under prosperous market conditions However, the higher average rents in the top locations last year are relative to the very strong rent growth in Berlin. High demand for office space in the German capital has led to double-digit growth rates there; given that Berlin accounts for a large proportion of total office space, this has resulted in a sharp increase in the weighted average. If prime rents in Berlin had remained stable, rent growth in regional centres and top locations would have been broadly on a par at around 1 per cent. Higher rents in Berlin drive growth in top locations 7
Main regional real estate markets in Germany 17 PRIME RENTS IN TOP LOCATIONS ROUGHLY TWICE AS HIGH AS IN REGIONAL CENTRES 35 AVERAGE PRIME RENTS HAVE RISEN CONSISTENTLY IN REGIONAL CENTRES SINCE prime rent in Euro per sqm 9 3 5 3 15-3 - 1-9 5 prime rent yoy in % - -15 1997 1 5 9 13 1997 1 5 9 Source: BulwienGesa 13 Source: BulwienGesa The diagram below shows prime rents in the 19 locations last year and also the rent growth realised compared to the previous year. Apart from the outlier Berlin, no other market achieved well above-average rent growth. Prime rents stagnated in five locations. Apart from Berlin, four locations reported growth of more than per cent. The other nine office markets showed moderate increases of.7 to 1. per cent. Apart from Berlin, prime rents have risen fairly moderately The range of prime rents in the regional centres extends from EUR.5 per square metre in Augsburg to EUR 15. in Mannheim. The top locations range from nearly EUR per square metre in Stuttgart to around EUR 35 in the two most expensive German office markets of Frankfurt and Munich. The gap between rents in Munich and Frankfurt has thus narrowed significantly: prime rents in Munich have risen from year to year, while the banking centre of Frankfurt has experienced some periods of zero increases. Prime rents range from EUR.5 to EUR 35.5 per sqm PRIME OFFICE RENTS : MODEST RENT INCREASE EXCEPT FROM BERLIN AND HAMBURG 1,7,5,,,5,,, Reg- Nurem- Essen Mün- Hann- Mann- Stutt- Cologne Düs- Ham berg ster over heim gart selburg dorf prime rent in Euro per sqm prime rent yoy in % Berlin Top- Munich Frank7 furt,,,,3 1,,,7 13, 13,1 13,3 13, 13,,5,5, Augsburg Bremen Dres- Mainz den,9,1,,,7, 1,3,1 1, 1, 1, 15, 19,7 Leip- Darm- Karlszig stadt ruhe, 1, 1,, 3,7 35,5 Source: BulwienGesa Premium office accommodation is a perennial favourite for commercial property investors. Last year was no exception: despite average growth in office rents, initial rental yields for office space clearly weakened again as a result of further increases in purchase prices. Consequently, average initial rental yields in top locations fell below per cent for the first time; the exact figure is 3. per cent. As a result of this decline, Investor demand for prime office properties remains steady
Main regional real estate markets in Germany 17 the yield divergence compared to the regional centres widened to its greatest extent ever of 1.3 percentage points. Yields in the regional centres did also fall in, but not to the same extent. As in the retail sector, Munich is also the most expensive location for investors in terms of office space. Augsburg which is not far from the Bavarian capital came in at the other end of the range for the locations reviewed, with rental yields of more than percentage points higher. office: net initial yield (central locations) in %,,5 5,5, 5, 5,5,5 5,,,5 3,5, 3, 3,5,5 1995 199 1997 199 1999 1 3 5 7 9 1 11 13 15 3, office: net initial yield (central locations) in % 3, 3,3 3, 3, 3,9,1,1,1 7, YIELD RANGE OF AROUND PERCENTAGE POINTS,7, 5, 5, 5, 5, 5, 5, 5, 5,3 5,3 5,3 5, OFFICE YIELDS FELL AGAIN IN Source: BulwienGesa Source: BulwienGesa Office market summary and forecast Apart from Berlin, the clear shortage of available office space has not been reflected in a more significant rise in prime rents. This is indicative of the cautious approach being adopted by prospective tenants. For expensive rented office space drives up material costs, but does not lead to any improvement in business performance. Particularly in times of uncertainty when there are various economic risks, high rental commitments could in hindsight prove to have been a mistake. Partly for this reason, we do not expect rent growth to accelerate, despite the likelihood of a further shortage of available space. We expect rents in the top locations to grow by almost per cent. In addition to the supply shortage accompanied by likely buoyant demand, a certain amount of growth could be achieved in the large Frankfurt office market as a result of the Brexit effect. We expect rents in the regional centres to grow by roughly half this level; partly because average vacancy rates here are also higher. OFFICE FORECAST FOR PRIME RENTS AND VACANCY RATES 15 regional centres Prime rents in EURsqm (y-o-y in %) 13.5 (+.) 13. (+1.) 13. (+1.3) Vacancy rate in % (y-o-y in % points).1 (-.) 5. (-.3) 5. (-.) 7 top locations Prime rents in EURsqm (y-o-y in %).7 (+1.9). (+.9).5 (+1.) Vacancy rate in % (y-o-y in % points) 5.7 (-1.1) 5.1 (-.). (-.3) all averages are space-weighted Prime rents represent the average of the top 3 to 5 per cent of market rentals, and the stated figure does not therefore correspond to the absolute prime rent. 9 17 forecast: vacancy rate cut again and moderate rise in prime rents
Main regional real estate markets in Germany 17 Retail properties: prime rents have virtually stopped rising Last year was a turning point for retail properties. For while the retail sector reported good results again with positive sales growth, the upward trend in prime rents evident for more than ten years largely came to a halt. Only a few cities mainly among the top locations were still reporting growth in prime rents in. The halt in rent growth among the regional centres is therefore more widespread: in most cases prime rents have stagnated, and in individual cases they have even fallen. Has the upturn in retail properties in prime locations and in shopping centres close to city centres thus also come to an end? Or is this merely a blip in an ongoing upward trend? General economic climate for retail The solid economic conditions in Germany described in the section on office property on page 3 form the basis of the positive trend in the retail sector. Record employment levels and a halving of the number of people out of work from a peak of more than 5 million recorded in 5 mean not only more cash in the pockets of private households, but also an easing of concerns about social decline and unemployment. Other factors are also boosting private consumption. Low inflation rates since mainly due to the decline in the oil price together with strong wage growth and pension adjustments, have led to high growth in real disposable incomes. Low interest rates have also made saving a less attractive option. LOW INFLATION RATES SINCE 3,5 1,9,,1 1, 1,5 1, 1,3 1, 1, 1,5,5 1, 1,1,,,5, -,5-1,,1, 1 17 15 13 11 1 9 7 5 3 199 1993 199 1995 199 1997 199 1999 1 3 5 7 9 1 11 13 15 1, 1,5,5,5,3, 3, forecast,,5, General economic climate creates favourable conditions for private consumption LEAD TO HIGH REAL INCOME GROWTH 3, 1, While retail sales are growing strongly, rents continue to rise in only a few locations real disposable income of private households yoy in % average since 199 inflation rate (HICP) Source: DZ BANK AG Source: DG ECFIN AMECO All of these factors combined are responsible for the currently buoyant consumer climate. The index compiled by GfK climbed to around 1 points in spring 15 and has since maintained this level - its highest since 1. A high propensity to buy, together with greater financial scope for private households are the main factors driving retail sales growth. Another contributory factor is flourishing tourism, reflected in the steady growth in the number of visitors and overnight stays. City breaks are particularly popular, benefiting mainly cities such as Dresden which have excellent tourist attractions. Demand is also being boosted by demographic growth due to the relatively high numbers of immigrants. 1 In addition to higher incomes, the positive consumer climate, flourishing tourism and demographic growth are boosting the retail sector
Main regional real estate markets in Germany 17 TOURISM IN GERMANY GROWING STEADILY 1 1 5 1 17 75 1 1 5 15 5 1 13 375 35 11 35 1 3 9 75 5 1 17 15 13 11 1 9 7 5 3 visitor arrivals in million, annualised overnight stays in million, annualised GfK consumer climate Source: GfK Source: Federal Statistical Office The German Retail Federation (HDE) expects retail sales - excluding vehicle trade, fuel and pharmacies as well as VAT - to grow by.5 per cent to around EUR bn in. At first glance this is positive growth; however, given the many factors providing stimulus it is certainly not outstanding. Conversely, it follows that retail results will show virtually no growth under less favourable conditions. Such trends are not unusual in the German retail sector, as evident from the prolonged phase of stagnation in the first decade of this millennium. yoy in % (lhs) 15 3 p 13 11 1 9 p 15 13 11 1 9 7 5 3 1-3,1-1, 7 1,7 1, 1-1,, 1,1,5 -,1,9, 1, 3, 1,5,9,5 5 3, 5 9 7 5 3 1 1 retail sales excl. VAT, vehicle sales, service station sales, fuel and pharmacy sales 5 3 1-1 - -3 - -5 BUT: A SUBSTANTIAL PROPORTION OF RETAIL SALES GROWTH IS ATTRIBUTABLE TO ONLINE ORDERS RELATIVELY STRONG GROWTH IN GERMAN RETAIL SECTOR AGAIN IN Sales growth of.5 per cent in is solid but not outstanding 5-1 - 1993 199 1995 199 1997 199 1999 1 3 5 7 9 1 11 13 15 CONSUMER CLIMATE REMAINS STABLE AT A HIGH LEVEL E-commerce sales in EUR bn (lhs) retail sales excl. E-commerce sales in EUR bn (lhs) E-commerce sales in % of total retail sales (rhs) in EUR bn (rhs) Source: HDE Source: HDE Is the boom in prime locations coming to an end? If rates of retail sales growth weaken significantly in future, this would be bad news for in-store retail. For a substantial proportion of growth has come from online business in recent years. Although this segment is still relatively small with total sales of EUR bn, it nevertheless continues to show high growth rates. In the last decade E-commerce has grown by an annual average of 11 per cent. Based on this growth rate, retail sales would have to increase by more than one per cent overall for in-store sales to show any growth at all. In other words, relatively strong growth in total retail sales would be necessary for in-store retail to benefit. 11 Strong growth in E-commerce curbing in-store sales growth
Main regional real estate markets in Germany 17 This is particularly true given that inflation already looks set to pick up again this year and this will clearly reduce sales growth in real terms. High growth rates in the retail sector will also be more difficult to achieve because higher inflation will also limit growth in the real incomes of private households. Inflation is back The steady growth in sales space until a few years ago on the back of more or less stagnating retail sales led to a sharp contraction of sales per square metre of sales space or space productivity. Whereas, in, sales per square metre still averaged EUR 3,9, by 9 the figure had fallen to only EUR 3,3 a decline of around 15 per cent. The situation has changed again since 1: there has been virtually no growth in sales space, while in-store retail sales have increased again. Space productivity has thus increased again to more than EUR 3,5 per square metre. Although this is positive growth compared to the low of 9, it is still much lower than at the beginning of the new millennium. These are also nominal figures. If account is also taken of inflation - which has raised the price level by more than a quarter since - the figure looks even more unfavourable. Space productivity improves, but not sufficient to regain previously higher levels 15 p 15 p 13 11 1 9 7 5 3 1 German retail space in millon sqm 3. 1 13 3.1 3 3. 37 15 11 3.3 3 1 3. 39 11 9 3.5 115 3. 1 7 3.7 3. 3 5 3.9 5. 5 3 13 1 SPACE PRODUCTIVITY RISING AGAIN SINCE 1 VIRTUALLY NO MORE EXPANSION OF SALES SPACE retail sales excl. E-commerce in EUR bn (lhs) retail sales in EUR per sqm retail space (rhs) Source: HDE, DZ BANK AG forecasts Source: HDE, DZ BANK AG forecasts Sales space has also been expanded considerably in the major cities. Population growth in the cities - which has been substantial in some cases - has to some extent slowed, but not halted the growth in per capita sales space. Demographic growth was significant between and, averaging 9 per cent in the regional centres and per cent in the top locations. However, growth in sales space far exceeds population growth: in both categories of cities, sales space increased by an average of nearly 5 per cent during this period. Today the top locations have sales space per capita of about 1.7 square metres compared to 1.3 square metres in. The regional centres have.1 square metres, compared to only 1. at the beginning of the millennium. Retail space has been expanded considerably
Main regional real estate markets in Germany 17 RELATIVE SALES SPACE HAS INCREASED VISIBLY DESPITE STRONG POPULATION GROWTH retail space per capita in sqm 3,,5 retail sales in EUR per sqm. Regional Top 7,.. 3. 3. 3. 1,5 3. 1, 3. Source: Feri 15 13 11 1 9 7 5 3. 1.,5 3,5 SPACE PRODUCTIVITY IN TOP LOCATIONS HAS GROWN FASTER THAN IN REGIONAL CENTRES Source: Feri Space productivity in the top locations is also significantly higher than in the regional centres as a result of relatively smaller sales space. It has also improved faster in the major cities over time. For the average levels recorded in are clearly being exceeded here today, but have not yet been regained in the regional centres. This is likely to be one of the reasons why prime rents in top locations have increased much more strongly in recent years than in the regional centres. Space productivity in top locations outperforms regional centres The more favourable trend in the top locations is associated with much higher purchasing power there. Half of the regional centres reviewed do not even reach the average level of purchasing power throughout Germany, which corresponds to a figure of 1. Conversely, apart from Berlin, levels in some top locations are much higher than this. Germany s leading shopping location Munich - attains this peak level, followed at some distance by Düsseldorf. Among the regional centres, the two cities situated in the economically strong RhineMain area Darmstadt and Mainz show the highest levels. Top locations benefit from higher purchasing power IN TERMS OF PURCHASING POWER, TOP LOCATIONS OUTPERFORM REGIONAL CENTRES purchasing power index in points 133 federal average = 1 Leipzig 9 93 95 Dres- Berlin Augsden burg 9 97 9 99 11 13 1 1 17 17 1 11 Bre- Mann- Essen Reg- Hann- Karls- Nurem- Mün- Co- Darm- Mainz Hammen heim over ruhe berg ster logne stadt burg Source: BulwienGesa 13 113 Top7 113 115 11 Stutt- Frank- Düssel- Mugart furt dorf nich
Main regional real estate markets in Germany 17 The major challenges faced by the retail sector in recent years have been most successfully overcome by top locations in major cities and city centre shopping centres. This applies particularly to the top locations. However, many city centre locations in regional centres are also successfully holding their own as popular shopping destinations, and are also therefore a focus for retailers opening new branches. The success of the city centres is due to a combination of an attractive retail and food offer and a high quality environment. True, popular online shopping is reducing the sales potential. However, the shortfall can often be made up because products can be purchased both in-store during a shopping trip and also via the stores own internet platforms. If these shopping experiences can be successfully linked, positive sales can be achieved and savings can be made on the cost of premises by using smaller storage space and local shops. PRIME RENTS FOR PREMIUM SITES IN TOP LOCATIONS HAVE CLEARLY RISEN FASTER THAN IN REGIONAL CENTRES Prime sites in top locations have performed best SECONDARY LOCATIONS HAVE FAILED TO BENEFIT FROM THE RETAIL UPTURN EITHER IN THE TOP 7 OR IN THE REGIONAL CENTRES prime rent in EUR per sqm retail rent for side locations in EUR per sqm 3 1 1 3 15 3 17 1 1 15 13 1 13 11 1 1 11 1 9 1 1 1 1 (lhs) (rhs) (lhs) Source: BulwienGesa 3 199 1993 199 1995 199 1997 199 1999 1 3 5 7 9 1 11 13 15 199 1993 199 1995 199 1997 199 1999 1 3 5 7 9 1 11 13 15 19 (rhs) Source: BulwienGesa This formula has proved successful so far, as evident from the continuing high demand for sales space in prime locations and downtown shopping centres. Even retailers who initially operated purely on an online basis, now have branches in city centres. Prime rents have increased considerably as a result of high demand albeit with distinct differences between locations: the growth in prime rents in the top locations has been twice as high at an average of per cent in the last ten years as Prime rents in top locations have grown twice as fast as in the regional centres in 1 years PRIME RENTS IN REGIONAL CENTRES DIVERGE 3 1 1 1 3 33 1 5 11 11 11 115 Darm- Essen Dres- Karls- Mainz Augsstadt den ruhe burg 15 153 175 3 59 3 5 75 5 97 3 13 135 Bremen Leipzig Reg- Nurem- Mann- Mün- Hann- Co berg heim ster over logne Düs- Ham- Top- Frankselburg 7 furt dorf growth of the prime rent from to in % Source: BulwienGesa 1 31 35 13 prime rent in EUR per sqm 35 3-9 9 3 Stuttgart Berlin Munich
Main regional real estate markets in Germany 17 in the regional centres, where they have increased by 3 per cent. This is the reason for the current wide divergence in rents between EUR 135 per square metre in the regional centres, and an average of close to EUR 3 in the top locations. While prime rents in all the top locations have increased strongly to very strongly, the trend in the regional centres is more heterogeneous: prime rents in Essen have even fallen slightly, while they have maintained their level in Karlsruhe. The marked divergence in rent growth is due to various factors. These include the higher levels of space productivity and purchasing power in the top locations already discussed, but also their considerably larger numbers of customers with many visitors from abroad. They therefore act as test markets for new retail concepts which will then be launched into the German market on a broader basis. Demand for sales space in prime locations is therefore correspondingly high. Conversely, regional centres tend to be more suitable locations for the subsequent expansion of these new concepts in the German market. However, the fact that they are more interchangeable also militates against stronger rent growth in the regional centres. For, only seven of approximately large German cities with populations of more than 1, are designated as top locations. While they are often selected as locations for branches, chain stores have more alternatives in other major cities. Regional centres are more interchangeable and the potential for rent growth is therefore more limited However, the steady upward trend in prime rents may have come to an end, or at least have weakened considerably for the time being in both the top locations and regional centres. As discussed at the beginning of this chapter, prime rents have increased in only a small number of locations as shown in the diagram below despite the fact that the economic climate and the positive trend in the retail sector would have tended to support continuing rent growth. Why has this happened? Is the upward trend in prime rents in top locations over? AN UNUSUAL PICTURE FOR RETAIL PROPERTIES: PRIME RENTS IN MANY LOCATIONS DID NOT INCREASE IN IN 17 WE EXPECT ON AVERAGE ONLY MINIMAL GROWTH IN PRIME RENTS prime rent yoy in % 1 prime rent yoy in % 3,3, - - 1997 199 1999 1 3 5 7 9 1 11 13 15, 1,9 1, 1,5,,,,,,,,,,, -1, -,,,9 Source: BulwienGesa The weaker rent growth is primarily due to a general decline in demand for sales space. According to a report by property consultants Jones Lang LaSalle, the volume of rented space last year was down by 7 per cent on 15. Rental demand has also been more strongly focused on medium-sized premises. The shift between the various sectors is also interesting. Although textiles remains by far the largest segment, the proportion has nevertheless declined - possibly as a result of successful online clothing sales. Conversely, food outlets - the second largest demand group - are becoming more important. Demand for city centre premises for fitness centres is also increasing. 15 Demand for sales space fell in
Main regional real estate markets in Germany 17 However, neither the slight decline in demand for space nor the slower growth in rents has weakened the high level of investor interest in city centre retail properties. Consequently, initial rental yields for properties in both top locations and regional centres have risen again sharply. Last year, the yield divergence between the two categories of location also narrowed slightly to 1.1 percentage points. The divergence reached its widest point of 1.35 percentage points in 11. Across all locations, the range is just shy of percentage points. The lowest level where retail properties are most expensive was in Munich with 3.3 per cent; the highest initial rental yields of 5. per cent were achieved in Essen and Mainz in. DECLINE IN RETAIL YIELDS HALTED AGAIN IN FROM THE INVESTOR S PERSPECTIVE, MUNICH IS THE MOST EXPENSIVE AND MAINZ THE CHEAPEST retail: net initial yield (central locations) in % 5,5,5,,,7,7,7,,,9 5,1 5, 5, 5,,,,5 3,5, 3, 3,5 3, 3, 3, 3, 3,7 3,7 3,7 5,,,,5 5,5,5 1995 199 1997 199 1999 1 3 5 7 9 1 11 13 15 3, retail: net initial yield (central locations) in % 3,3 7, Initial retail rental yields falling again Source: BulwienGesa Source: BulwienGesa Summary retail properties and forecast The already high level of rents was one of the factors responsible for the deceleration of growth in prime rents last year. Rents ranging from nearly EUR 1 per square metre in Darmstadt to almost EUR 35 in Munich have to be earned first. However, this seems to be becoming more difficult due to the growing impact of online trading on city centres. As a result of on-line sales, retailers also tend to need fewer and smaller shop premises. This is reflected in generally lower, as well as changing demand for space. To some extent the decline has been offset by demand for space from supermarkets and drugstore chains, which are increasingly present in city centres. The proportion of food outlets is also growing. And there is also demand from fitness chains, which were rarely situated in the best locations in the past. The trend we have described is part of a longer-term development: growing digitalisation will permanently alter shopping patterns in future. In our view therefore, was not simply a weaker year, soon to be followed by an acceleration of rent growth again. We believe that prime rents are in fact more likely to remain stable in many locations this year. Online shopping is likely to continue to gain ground, and less sales space and smaller shops will consequently be needed for traditional retail activity in cities. Conversely, city-centre food outlet concepts could become even more important. However, the macroeconomic climate is not providing any stimulus for the retail sector either. True, both the economic outlook and the labour market remain solid. However, the likely rise in inflation will also offset growth in the incomes of private households again to a greater extent. The number of international crisis points will also increase, possibly prompting retailers to adopt a more cautious approach. 1 Online retail makes it more difficult to cover costs of already high store rents Rent growth likely in only individual cases in the retail sector again in 17
Main regional real estate markets in Germany 17 RETAIL FORECASTS FOR PRIME RENTS 15 13. (+.) 13.9 (+.) 135. (+.) 9.3 (+3.) 97. (+1.) 9.5 (+.) regional centres Prime rents in EURsqm (y-o-y in %) 7 top locations Prime rents in EURsqm (y-o-y in %) all averages are space-weighted Prime rents represent the average of the top 3 to 5 per cent of market rentals, and the stated figure does not therefore correspond to the absolute prime rent. 17
Main regional real estate markets in Germany 17 AUGSBURG POPULATION GROWTH UNEMPLOYMENT RATE (%) 11 1 1 1 1 1 1 1 9 Augsburg 1 Source: Feri Augsburg Index = 1 1 Source: BulwienGesa, DZ BANK AG Augsburg, which was founded by the Romans, is a popular travel destination with its town hall, Golden Room and Fuggerei (social housing complex). With a population of nearly 9,, it is the third largest city in Bavaria. As a result of extensive structural changes the population grew more slowly in the past than in other regional centres in Bavaria. The process of change was driven by the decline of the textile industry, the withdrawal of the American armed forces, and large insolvencies such as Manroland and Walter Bau. However, Augsburg is now experiencing strong demographic growth again, boosted by economic momentum in the city. Important sectors are environmental technology and aerospace, which benefit from the university established in 197 and other research institutions. The unemployment rate of 5.3 per cent (December ) is low for a regional centre, but considerably higher than the overall level in Bavaria. Augsburg s proximity to the state capital is also an advantage: with its excellent transport links, it provides a good alternative to the expensive location of Munich. After a lengthy process of structural change, things are looking up for Augsburg Office space in Augsburg Together with Darmstadt and Mainz, Augsburg which has around 1. million square metres of office space is one of the small office locations covered in this report, all of which have office space of considerably less than million square metres. PRIME RENTS FOR OFFICE SPACE IN EUR PER SQM VACANCY RATE (%) 3 7 1 1 1 15 9 3 Office: smallest location included in market report 5 Augsburg 11 5 Augsburg 11 1
Main regional real estate markets in Germany 17 OFFICE TAKE-UP AS PERCENTAGE OF OFFICE SPACE TREND IN OFFICE SPACE AND EMPLOYMENT 5 115 11 3 15 1 1 95 Augsburg 1 9 Source: BulwienGesa office space 1 office workers Source: Feri, BulwienGesa For a long time it was difficult to let office space in Augsburg due to the ongoing structural changes. Ten years ago prime rents were still EUR 9 per square metre. However, thanks to the economic recovery in recent years, the situation has now changed permanently. Demand for office space and prime rents have increased sharply. Prime rents have shown the strongest growth of all the locations reviewed, increasing by almost per cent within ten years, although prime rents of EUR.5 per square metre are still comparatively cheap also given the city s proximity to Munich. One possible reason for this is that the vacancy rate is not particularly low at more than per cent. Together with the manageable level of rents, this could also be attributable to the modest volume of new office space created to date. New developments are generally used by the owners. They are mainly situated outside the fairly small city centre, e.g. the new development and technology centre for robotics company Kuka; this rental agreement increased office space take-up at one stroke from the usual figure of around, to 3, square metres in. Thanks to growing demand as a result of the city s expansion as a science and technology centre, the development of office projects has however gained pace particularly at the Augsburg Innovation Centre and Sheridan Park. The latter is an example of how former military premises can be successfully converted. The outdated Lechhausen Nord commercial area is to be expanded and upgraded in future. We expect the upward trend in the Augsburg office market to continue, and this is likely to be reflected in further growth in prime rents. Index = 1 Expansion as science and technology location has positive impact on office market OFFICE FORECASTS 15 Demand GDP 3. 3.3..3 Per capita GDP in EUR 9,91 5,73 51, 5,17 No. of office workers in ' 5.9 51.9 5. 53. No. of office workers.. 1.7 1.5 Supply Total office space in sqm ' 1,357 1,37 1,37 1,3 Total office space. 1...5 Vacancy rate % 7...3. Primesecondary location EURsqm. 5.1. 5.1.5 5.1.7 5.1 Primesecondary location 1.7 1.7.5 1. Office rents Source: Feri, BulwienGesa, DZ BANK AG forecast s yoy= year-on-year 19
Main regional real estate markets in Germany 17 Retail space in Augsburg PRIME RETAIL RENTS IN EUR PER SQM RETAIL SALES IN EUR PER SQM 3 5.. 3. 1. 1. 5 Augsburg 11 Source: BulwienGesa, DZ BANK AG forecast 5 Augsburg 11 Source: Feri Augsburg has more than 3 square metres of retail space per capita - the highest level in this market report. The reason for the large volume of space is its supply function for a large catchment area of more than, people. There are no alternative large shopping destinations to Augsburg which is situated between Munich and Ulm, resulting in a relatively high centrality value of 5. Conversely, below-average purchasing power in the Fuggerstadt area is a minus point. This is balanced out to some extent by a relatively large number of visitors. There are around, overnight stays in the city each year. The major building site for the Augsburg City urban development project, which will probably not be finished until, is detrimental for the retail sector, since it involves various local transport projects, as well as the complete renovation of the pedestrian zone. The restrained trend in prime rents is therefore unsurprising. Levels in the prime locations of Annastraße and BürgermeisterFischer-Straße have recently increased by EUR 5 to EUR 115 per square metre, having remained unchanged for four years. There have been some changes in the Augsburg retail sector in recent years: while Peek & Cloppenburg has invested in the former Woolworth building, Galeria Kaufhof has vacated its building which is now being used by Schuh-Schmid. The Fuggerstadt centre is being renovated after being sold to Activum Capital Management in 15. It will reopen this year as Helio. The outdated Schwabencenter is also to be revitalised by 1, when it will reopen as the Forum. We do not expect prime rents to increase in 17. Retail: large building sites have detrimental impact on attractive shopping destination RETAIL FORECASTS 15 Demand Per cap. disposable income EURmonth 1,73 1,79 1,75.7.5. 1,7 Unemployment rate % Retail sales EUR m 1,77 Retail sales EURsqm sales space 1,959 1,993,,5 3. 1,3 3. 1,1.3.5 1,913 1.7 Supply Retail space in sqm ' 9 91 935 95 Retail space 1.7 1.5 1.1 Primesecondary location EURsqm 11. 115. 115. 115. Primesecondary location.5 Retail rent Source: Feri, BulwienGesa, DZ BANK AG forecasts yoy = year-on-year
Main regional real estate markets in Germany 17 BERLIN Office space in Berlin PRIME RENTS FOR OFFICE SPACE IN EUR PER SQM VACANCY RATE (%) 3 7 1 1 1 15 9 3 5 Berlin 11 5 Berlin 11 Only ten years ago Berlin was still regarded as a problem child in economic terms. This has now altered fundamentally; today the capital city is a sought-after location for E-commerce providers and fintechs, as well as established companies. Berlin s attractions as a residential location have supported this trend, making it easier to find skilled workers. Now that its economy has gained momentum with the steepest decline in unemployment among the top locations for five years Berlin is likely to attract migration, with its wide range of cultural activities and favourable cost of living for a major city still adding to its attractions as a location. Until recently the city s relatively low office rents were also a plus point. However, prime rents have risen much faster than in the other six top locations, increasing by more than 1 per cent last year and by 3 per cent in the last five years. At EUR per square metre, Berlin is now by far the third most expensive office market after Munich and Frankfurt. Space takeup was very high in, as in the previous year, at around 5, square metres more than per cent above the ten-year average. However, it is likely to be difficult to achieve similar rental returns this year. The reduction in the vacancy rate to 3 per cent means that there is a corresponding supply shortage. Prime rents could grow again as a result. Full steam ahead for the Berlin office market Prime rents up by more than 1 per cent in Supply shortage could raise prime rents further OFFICE FORECASTS 15 Demand GDP.5 5. 3.. Per capita GDP in EUR 3,1 39,7,7 1,5 No. of office workers in ' 5. 5. 55. 57 No. of office workers 3. 3...5 Supply Total office space in sqm ' 1,737 1,99 1,97 19,5 Total office space. 1..1.5 Vacancy rate % 5. 3. 3.. Primesecondary location EURsqm 3..5. 9.5. 11..5 11. Primesecondary location. 7..3 11. 1.7 15. 1. 1. Office rents Source: Feri, BulwienGesa, DZ BANK AG forecasts yoy = year-on-year 1
Main regional real estate markets in Germany 17 Retail space in Berlin PRIME RETAIL RENTS IN EUR PER SQM RETAIL RENTS IN EUR PER SQM 3 5.. 3. 1. 1. 5 Berlin 11 5 Berlin 11 Source: Feri Berlin has performed extremely well as a shopping destination. Interest from investors and retailers is correspondingly high, as reflected in the sharp rise in prime rents. Within five years, Berlin has joined the group of pre-eminent shopping destinations among the top locations with rent growth of more than per cent. Only Munich where current prime rents are EUR 31 per square metre is more expensive. There are several reasons for this: Germany s economic power has led to a stronger international focus on its capital city. Other factors are its size, and the importance and internationality of the market in what is by far the most densely populated German city. Berlin therefore acts as a good test market for new retail concepts and is the destination of choice in the German market for top foreign retailers. The handicap of economic weakness is gradually diminishing as a result of the city s positive economic performance, although the purchasing power of Berliners is still well below that of other top locations. This is balanced out to some extent by the high volume of visitors: among German cities, Berlin - with more than 3 million overnight stays - therefore occupies first place well ahead of Munich. Although retailers still have a high level of interest in Berlin, the upward trend in prime rents is likely to be over for the time being. We expect a stable trend this year. Hackescher Markt - which is well positioned with its range of food outlets and cultural activities, and which may develop further to become a prime location continues to attract considerable interest. However, the highest rents are in the consumer district of Tauentzienstraße off Ku damm. Retail: Berlin now one of the pre-eminent shopping destinations among the top locations Rally in rents also likely to be over in Berlin for the time being RETAIL FORECASTS 15 Demand Per cap. disposable income EURmonth 1,737 1,771 1, Unemployment rate % 11.1 1.7 1.3 Retail sales EUR m 17, Retail sales EURsqm sales space,75,5,7,5 Retail space in sqm ',,9,375,79 Retail space.7 1.1 1.3 1. Primesecondary location EURsqm 9 1. 3 1.5 31 1.5 Primesecondary location 7. 3. 3. 3.3.7 17,75 3.9 1,7 1,9 1.. 1,9.3 31 1.5 Supply Retail rent Source: Feri, BulwienGesa, DZ BANK AG forecasts yoy = year-on-year