REAL ESTATE MARKET GERMANY 217 21 TIGHT SUPPLY DRIVES RENTS FOR OFFICES AND RESIDENTIAL REAL ESTATE RETAIL RENTS STABLE, AT A HIGH LEVEL A RESEARCH PUBLICATION BY DG HYP OCTOBER 217
Real Estate Market Germany 217 21 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 1 Retail properties Office properties 27 Residential properties Overview of forecasts 5 Imprint 6 Disclaimer 6 DG HYP offices 7 1
Real Estate Market Germany 217 21 PREFACE Dear Readers, As the commercial real estate bank within the Volksbanken Raiffeisenbanken cooperative financial 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, office and residential real estate in Germany s seven largest metropolitan areas. The German real estate market continues to benefit from the positive macroeconomic development. The benign labour market situation in Germany has triggered marked growth in the number of office workers, together with increased need for floorspace which cannot be sufficiently met. Hence, it is fair to expect rising office 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 217 2
Real Estate Market Germany 217 21 SUMMARY» The German real estate market is still running at top speed. There are many reasons for this: the continued expansion in the German economy is a factor just as much as the employment market. With employment repeatedly reaching new highs, combating unemployment has taken a back seat. The focus is instead increasingly 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 present issue is the tenth edition of our market report on the commercial real estate market in the seven top locations» 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 and there are signs of a slight slowdown. Although the trend in both employment and incomes remains positive, the increase in consumer prices leaves scarcely 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. Retail sector: the upward trend is over for the moment; however, there are no signs of a market slump TOP LOCATIONS: RENTS FOR OFFICES AND HOUSING ARE STILL RISING HOWEVER, THEY ARE STAGNANT IN THE RETAIL SECTOR 15 9 6 3-3 -6-9 - -15 top locations: rent yoy in % 199 1996 199 2 22 2 26 2 21 2 21 216 21e retail prime rent office prime rent residential average rent first letting average Source: BulwienGesa, DZ BANK Research forecast 3
Real Estate Market Germany 217 21 The retail sector is also benefiting from population growth in all top locations and flourishing tourism. In 217, 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 215 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 3 per sqm to a halt. There is likely to be scarcely any change here over the period covered by the forecast up to 21. 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 in EUR/sqm Change in prime rents yoy (%) 216 217e 21e 216 217e 21e Berlin 31 31 31 3.3.. Cologne 25 255 255. 2.. Dusseldorf 275 2 2 1.9 1.. Frankfurt 3 3 3... Hamburg 25 25 25... Munich 35 35 35 1.5.. Stuttgart 25 25 25 2... Top location average 297.5 29. 29.5 1..3. 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: outstanding connections at home and abroad plus their large employment and office markets make them attractive locations for companies, especially as office rents are average by European standards despite the strength of the German 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 21. As a result, there could be a further fall in the vacancy Office: the top locations are surfing the wave of success but the shortage of offices and housing could curb the upturn
Real Estate Market Germany 217 21 rate, which has halved since 21, while prime rents averaging a little more than EUR 2 per sqm in top locations pick up again. Despite the lack of supply, increases are likely to remain moderate given the prudent approach adopted by those looking for office space. FORECAST FOR OFFICE SPACE Prime rent in EUR/sqm Change in prime rents yoy (%) 216 217e 21e 216 217e 21e Berlin 2. 29. 3.5 16.7 5. 3.7 Cologne 21. 21.2 21.5. 1. 1. Dusseldorf 2.5 2.9 25.3 2.1 1.6 1.6 Frankfurt 35.5 36. 37.. 1. 2. Hamburg 26. 26. 27.. 1.5 2.3 Munich 3.7 35. 36. 1. 3.2 2. Stuttgart 19.7 2. 2.2 2.1 1.5 1. Top location average 2. 2.7 29.5.9 2.6 2.6 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.» Residential construction has lagged behind the sharp rise in the number of inhabitants for years. Because the reserves from vacancies have long been exhausted and the perceptible increase in completion figures is not keeping pace with demand for housing, the demand gap on housing markets in top locations has increased rather than decreased from year to year. The ongoing problems with supply are likely to ensure that residential rents, which have already risen sharply, will continue their upward trend.» The current rent for newly-built flats averages between EUR and 1 per sqm. EUR 16 to 2 is demanded in the prime segment. As always, Munich is by far the most expensive location. By contrast, Berlin and Cologne are the most reasonable top locations from a tenant s perspective. On average, just over EUR 13 and EUR 19 respectively must be paid per sqm for residential space in the seven cities. This figure is likely to increase by 2-3 per cent per annum in the period covered by the forecast up to 21. The fact that rents are already so high is, however, likely to have a dampening effect, because the number of households that can still pay the current rents or are prepared to do so is diminishing. Residential: even the increase in new build figures is not sufficient; consequently, the market situation at the top locations is still fraught FORECAST FOR RESIDENTIAL REAL ESTATE First occupancy average rents in EUR/sqm First occupancy average rents vs previous year (%) 216 217e 21e 216 217e 21e Berlin 11.6..3.9 3. 2.5 Cologne..2.5.3 1.7 2.5 Dusseldorf.6.9 13.2 1.6 2. 2.3 Frankfurt 1. 15.3 15. 9.6 3. 2.9 Hamburg 13. 13.7 1. 1.5 2.2 2.2 Munich 17. 1. 1.5 7.6 5.9 2. Stuttgart 13. 13.5 1..3 3. 3.7 Top location average 13.2 13.6 1. 3. 3.5 2.6 Source: BulwienGesa, Feri, DZ BANK Research forecast 5
Real Estate Market Germany 217 21 CURRENT ECONOMIC SITUATION IN GERMANY Macroeconomic growth in Germany has so far provided a sound foundation for the real estate market. This situation will remain unchanged for the moment, as the German economy is still expanding: in the second quarter of 217, gross domestic product after adjustment for price, seasonal and calendar effects was.6 per cent up on the previous quarter. GDP grew even more strongly, by.7 per cent, in the first quarter of 217. Growth is still primarily driven by domestic demand. Consumer expenditure by private households increased significantly and even public-sector spending grew. Investment had already expanded quite strongly in the previous quarter: investment in equipment and buildings was 1.2 per cent and.9 per cent higher than in the first quarter of 217. In contrast, the trade balance i.e. the difference from exports and imports depressed economic growth by -.3 percentage points approximately. In view of the very positive sentiment indicators, we assume that economic development in Germany will remain favourable. This is reflected in our growth forecast for the current year of 2. per cent. We expect growth in the coming year to be much the same. The unemployment rate is likely to average just under 6 per cent over the year in both 217 and 21. Strong growth is likely to continue over the rest of the year The inflation rate in Germany measured by the national consumer price index stood at 1.7 per cent in July 217 (HCPI: +1.5 per cent) somewhat higher than in the two previous months (May +1.5 per cent, June +1.6 per cent). Food prices continued to increase disproportionately (July: +2.6 per cent year on year), as did residential rents (+1. per cent). For 217 as a whole, we expect inflation to rise by 1.7 per cent. Consumer prices are likely to rise at a largely unchanged rate over the coming year. Inflation rate is finally edging higher ECONOMIC FORECAST GERMANY % yoy 215 216 217e 21e GDP 1.7 1.9 2. 1. Private consumption 1.7 2.1 1. 1.6 Public consumption 3. 3.9 1. 1.6 Investment 1. 3.1 3.5 3.2 Exports 5.2 2.6 3.7.3 Imports 5.6 3.9.3 5.2 Unemployment rate (%) 6. 6.1 5. 5.9 Inflation rate (HCPI).1. 1.7 1.6 Public budget balance (% of GDP).7...2 MACROECONOMIC GROWTH AND UNEMPLOYMENT TREND IN CONSUMER PRICES (HCPI) 1 6 2-2 - -6 forecast 1,2,7 3,7,1 3,3 3,7 1,1,5,5 1,6 1,7 1,9 2, 1,, -,7-5,6 21 217 216 215 21 213 2 211 21 29 2 27 26 25 2 23 22 3, 2,5 2, 1,5 1,,5, forecast 2, 2,5 2,3 2,1 1, 1,9 1, 1,7 1,6 1,6 1,3 1,1 1,2,,2,1, 21 217 216 215 21 213 2 211 21 29 2 27 26 25 2 23 22 GDP yoy in % unemployment rate in % inflation rate (HICP) Source: DZ BANK Research HCPI = harmonised consumer price index 6
Real Estate Market Germany 217 21 UPTURN ON THE GERMAN HOTEL MARKET IS CONTINUING Tourism in Germany has been buzzing for some time. This is true of the typical holiday destinations such as the islands in the North Sea and the Baltic or the Bavarian Forest. However, visitor numbers are soaring in attractive large cities, in particular. Besides the general desire for travel, cities are also benefiting from the trend towards making several short trips instead of taking a longer holiday. Foreign interest in visiting Germany has also grown. Consequently, there has been an appreciable expansion in the proportion of foreigners staying overnight in German hotels. It amounted to less than a fifth before the millennium and is now a good quarter. Tourism in Germany is also benefiting from increased interest from abroad TOURISM IS ALSO BOOMING IN GERMANY THANKS TO SUBSTANTIAL NUMBERS OF VISITORS FROM ABROAD MANY NEW HOTELS WILL BE BUILT AT THE TOP LOCATIONS OVER THE NEXT FEW YEARS 2 1 16 1 1 6 2 1992 1993 199 1995 1996 1997 199 1999 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 216 hotels: overnight stays in million (lhs) share of foreigners in % (rhs) 27 26 25 2 23 22 21 2 19 1 17 5 5 35 3 25 2 15 1 5 Munich hotels under construction Berlin Cologne Dusseldorf hotels planned Frankfurt Hamburg Stuttgart Source: Federal Statistical Office Source: BulwienGesa Growth in the number of overnight stays at the top locations has been highly disproportionate. The number of visitors staying in hotels overnight here has almost tripled within twenty years, while growth in this period across Germany has been only per cent or so. Strong growth in Berlin, where the number has more or less quadrupled since the middle of the 199s, has helped here to a particular degree. The German capital contributes more than a third of the total of approximately 5 million overnight stays in traditional hotels at the seven top locations excluding bed and breakfast hotels. There has been a disproportionate increase in the number of overnight stays at top locations TOP LOCATIONS: THE NUMBER OF HOTEL VISITORS HAS RISEN CON- TINUOUSLY TOP LOCATIONS: DESPITE A SHARP RISE IN THE NUMBER OF BEDS, HOTEL OCCUPANCY IS IMPROVING 5 2 5 5 22 56 2 5 35 1 52 3 16 5 25 1 2 6 15 1 1 2 5 6 1992 1993 199 1995 1996 1997 199 1999 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 1992 1993 199 1995 1996 1997 199 1999 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 hotels without B&B: arrivals in million hotels without B&B: overnight stays in million hotel beds withoug B&B in ', (lhs) occupancy rate of hotel beds without B&B in % (rhs) Source: BulwienGesa Source: BulwienGesa 7
Real Estate Market Germany 217 21 Hotel capacity has also been expanded in recent years in response to the sharp increase in leisure and business travellers. Twenty years ago, there were some 1, hotel beds to be found in the top locations altogether; today, there are more than twice as many to be found, at approximately 22,. However, there has been a perceptible improvement in occupancy despite the sharp growth in overnight accommodation. Having averaged something over per cent in the mid-199s, hotel bed occupancy is gradually heading towards 6 per cent. Occupancy has increased despite a significant expansion in the number of hotel beds Measured against the range in the major segments of the real estate market residential, office and retail the market data for regional hotel markets at the seven top locations are far more uniform. Accordingly, the average room rate ranges from EUR 9 in Berlin to EUR 115 in Dusseldorf and Munich; it averages EUR 1 across the locations. The room occupancy rate ranges from just under 7 per cent in Dusseldorf and Frankfurt to something over per cent in Hamburg, averaging a good 75 per cent. The reason for higher values for the occupancy rate compared to the lower occupancy of hotel beds is the single use of double rooms single rooms has become a rarity. The combination of the occupancy rate and the average room rate results in revenue per available hotel room ranging from EUR 66 in Frankfurt to EUR in Munich. On average across the locations, each hotel room generates revenue of EUR 75 per day. The indicators for regional hotel markets are comparatively uniform REVENUE PER ROOM IS HIGHEST IN MUNICH AND LOWEST IN FRANKFURT 77,1 73, 69,5 6,,9 76,5 73,3 7,2 9 96 115 96 97 115 99 11 7 7 66 7 73 75 Berlin Cologne Dusseldorf Frankfurt Hamburg Munich Stuttgart average of top locations average room rate in Euro (ARR) revenue per available room in Euro (RevPAR) occupancy rate in % (OR) Source: Colliers, data for 216 ARR = average room rate, RevPAR = revenue per available room, OR = occupancy rate It is impressive that the three indicators have gradually improved in recent years. This implies that room occupancy has increased despite higher room rates, meaning that average daily revenue per room has also increased. The significant interest in the German hotel market as well as the substantial work done in expanding existing hotel capacity can be explained by burgeoning tourism and positive business development of hotels at the seven top locations. There are currently many hotel projects under construction in all top locations as well as in many other large cities; many more are in the planning phase. New hotel brands are also venturing onto the German market. The established international chains are also expanding the range of brands in their portfolios to cater for the requirements of Generation Y those born after 19 and Generation Z those born after around 1995. Examples of the new hotel brands in Germany include Jo&Joe, LOGINN, NinetyNine Hotels, NYX, Soulmade and Urban Loft. The fact that both room rates and occupancy could be increased is impressive
Real Estate Market Germany 217 21 It remains to be seen whether the indicators will continue their previous upward trend given the expansion in capacity. However, the fundamental preconditions for tourism in Germany are favourable. In addition to the sustained positive economic situation in Germany, the economy in the Eurozone is increasingly buoyant meaning that demand for holidays in Germany and hotel rooms is likely to pick up once more. High levels of construction activity in the hotel sector are likely to increase competitive pressures Investors have not been blind to the gratifying trend on the German hotel market in their search for attractive investment opportunities. This is evident not just from the sharp rise in annual investment volume but also in the significant expansion in the percentage share of hotel investments in the market as a whole. While, at something over EUR 5bn, the total amount invested in German commercial real estate in the last two years roughly matches the boom year of 27 just before the international financial market crisis, hotel investments in Germany have more than doubled. At over EUR 5bn in 216, German hotel investments reached the previous record figure. The proportion of total investment in commercial real estate was around per cent from 25 to 211. The figure has risen continuously since then to almost 1 per cent now. Hotels have therefore caught up with the previous climbers on the commercial real estate market logistics companies. Investment has increased perceptibly, not just in absolute but also in relative terms HOTEL INVESTMENTS RECORD A SHARP INCREASE THE INITIAL YIELD FOR HOTEL INVESTMENTS IS STILL COMPARATIVELY HIGH 6 5 3 1 6 5,2 5, 5,,,6 5, 2 1 2,3 25 26 27 2 29 21 211 2 213 21 215 216 transaction volume for hotels in EUR bn (lhs) share of hotels in % of the total CRE transaction volume (rhs) initial gross yield for hotels in % (Q1/217) Munich Berlin Cologne Dusseldorf Frankfurt Hamburg Stuttgart Source: Colliers, JLL, Ernst&Young Source: Colliers Another aspect by which lively investor interest in hotels can be explained is the comparatively high initial yield that can be obtained. To be sure, yields have also been falling in this category for years in response to strong buyer demand but they are still relatively high. The range starts at just over per cent in Munich and extends to more than 5 per cent in Cologne. Compared with the yield prospects for office or retail properties, which are struggling to reach 3 per cent (see the following section), yields of 1 to 2 percentage points more can be achieved with hotels. Hotel investments still allow relatively high initial yields 9
Real Estate Market Germany 217 21 SOME OF THE SHINE HAS COME OFF THE ENVIRONMENT FOR INVESTMENTS IN COMMERCIAL REAL ESTATE The difficulty facing many security-focused investors in achieving adequate yields with bonds ensures that demand for commercial real estate and residential portfolios is still vast. This is clear solely from the relatively substantial number of bids when soughtafter properties come onto the market, which is, however, not an all-too frequent occurrence. On the one hand, the pressure to sell facing many owners is contained in a good economic environment where demand for commercial space is correspondingly strong. On the other hand, willingness to sell is diminished despite the substantial sales proceeds that may be obtained as a result, because the problem of how to invest the funds will be transferred when the property changes hands. In this respect, firstly a relatively substantial investment volume above the EUR 5bn marker is also likely to be achieved in 217 as in the two preceding years. And secondly, as in previous years, a more substantial volume would probably be achievable if the supply was more extensive. Because of strong demand, the initial yields that can be achieved are continuing to decline. Consequently, a four before the yield decimal point has become a rarity for the office and retail sectors in top locations at the end of the first half of 217. Demand for commercial real estate is consistently high DEMAND FOR COMMERCIAL REAL ESTATE AND RESIDENTIAL PORTFOLIOS REMAINS STRONG AMONG INVESTORS IN 217 TOO OFFICE PROPERTIES ARE STILL THE DOMINANT ASSET CATEGORY IN COMMERCIAL REAL ESTATE 6 5 3 2 1 transaction volume in EUR bn 2 25 26 27 2 29 21 commercial real estate 211 2 213 21 215 216 residential portfolios 217e 1% 9% % 7% 6% 5% % 3% 2% 1% % 6% 3% 6% 5% 11% 1% 11% 6% % 6% % 1% 7% 7% % 7% 9% 9% 22% 27% 22% 31% 2% 6% % 1% 5% 19% 39% % 213 21 215 216 217 H1 other mixed use hotel logistics retail office Source: Ernst & Young, DZ BANK Research forecast Source: JLL, Colliers (Hotels) So, is everything as it was on the commercial real estate market? Yes and no: yes, because demand is likely to remain at a high level for the time being and is continuing to exert pressure on yields given the shortage of properties. And no, because conditions on the commercial real estate market are pointing to a turning point. Accordingly, while yields on bonds are still very low, they have, however, improved slightly from the low reached a year ago. In summer 216, the current yield on 9- to 1-year Bunds was still slightly in negative territory; at present, they are slightly positive, at.35 per cent as at August 217. And the future should bring higher rather than lower interest rates based on the economic recovery in the Eurozone and inflation gradually picking up once more. Bond yields have recovered from their low point The trend in rents is another change affecting the market environment. While investors have been able in recent years to rely on the fact that rents for good quality properties at least would rise in future, the headroom is shrinking, given that rents are already very high in some cases particularly in the case of retail properties. However, the investment market already reflects this. Accordingly, investments in retail properties have lost market share in the first half of 217 and have even been pushed from Investor interest has been dampened by the hiatus in retail rent rises 1
Real Estate Market Germany 217 21 second to third place by the perceptible increase in the share of logistics properties. Furthermore, yields are no longer falling or only falling marginally. Overall, the environment for commercial real estate is likely to remain benign. However, the trends described above should heighten investors awareness of the risk of changes of value in commercial real estate, which may be triggered by rising interest rates or a more difficult letting environment. However, with the exception of retail, strong demand is likely to affect the initial yields on commercial real estate, meaning that the yield advantage compared with bonds will be squeezed from above and below. By and large, the environment for commercial real estate is still benign but risk is gradually returning RETAIL: TREND IN YIELDS MOVEMENT IN YIELDS AT THE INDIVIDUAL TOP LOCATIONS 7, initial yield for retail properties in central locations in % 6, initial yield for retail properties in central locations in % 6,5 6, 5,5 5,5 5, 5,,5, 3,5 3, 1996 1997 199 1999 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 216 Top-7 Regional-,5, 3,5 3, 1997 21 25 29 213 217 -H1 Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart OFFICE: TREND IN YIELDS MOVEMENT IN YIELDS AT THE INDIVIDUAL TOP LOCATIONS 7, 6,5 6, 5,5 5,,5, 3,5 3, initial yield für office properties in central locatioins in % 1996 1997 199 1999 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 216 Top-7 Regional- RESIDENTIAL: MULTIPLIER FOR APARTMENT BLOCKS 7, 6,5 6, 5,5 5,,5, 3,5 3, initial yield for office properties in central locations in % 2,5 1997 21 25 29 213 217 -H1 MULTIPLIER AT THE INDIVIDUAL TOP LOCATIONS Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart 2 22 2 1 16 gross rent multiplier for multi-family properties 2 26 2 22 2 gross rent multiplier for multi-family properties Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart 1 1 16 1 1 1996 1997 199 1999 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 216 Top-7 Regional- 1997 21 25 29 213 217 -H1 Source: BulwienGesa Source: BulwienGesa Explanation: the net initial yield office/retail is determined from the annual net rent and the total purchase price, taking ancillary costs into account. For the apartment block multiplier, the purchase price is divided by the basic rent in the first year and consequently equates to the reciprocal value of the gross initial yield. 11
Real Estate Market Germany 217 21 RETAIL PROPERTIES Are things going rapidly downhill in the retail sector? The about 3, hits received with the search term Retail Apocalypse do not bode well. The term refers to a current trend in the U.S. retail sector, where significant numbers of shops are closing in shopping malls. And the trend is continuing, as the major anchor tenants in many malls, such as Macy's, Sears or JC Penney, alone will each close more than 1 shops in the current year. This is surprising since sound macroeconomic growth and the rising number of people in employment in the United States might be expected to generate an upturn in consumer spending. Are we seeing the first signs of the decline of high-street shopping here? If the shopping-loving Americans are worried about their retail sector, the situation does seem to be rather grim. "Retail Apocalypse" in the U.S. retail sector However, there are negative reports from the German retail sector too, despite good economic conditions. The Nuremberg-based fashion chain Wöhrl was forced to file for insolvency a few months ago, for instance. And only a few weeks ago, the Colognebased department store group Galeria Kaufhof surprised the financial world by announcing that the credit insurer Hermes had cut its credit limit because of a deterioration in its creditworthiness. The German retail sector also has to cope with setbacks However, it is too early to bid the retail sector farewell. This is clear from the number of people going shopping on Saturday. Instead of yawning emptiness, it is difficult to find space to park or grab a cup of coffee. And, of course, there are malls with high footfall in the United States too. The problems in the U.S. retail sector are largely attributable to the oversupply of retail space. For many years, retailers wanted to be close to their customers and, with this in mind, expanded their branch networks continuously. This is also why the retail space per inhabitant in U.S. shopping centres is roughly ten times what it is in Germany. The thinning out of branch networks is therefore likely to be what the market needs. The U.S. retail sector is suffering from having far too much retail space However, shopping malls are also exposed to increasing competition from successful online shopping. Here, the Americans are well ahead of the Germans both in terms of ordering behaviour and the products ordered. Amazon provides an example of how online shopping is becoming ever easier. The U.S. giant introduced both the Dash Button and the Echo in the United States to start with. Both are now available in Germany. After installing the Dash Button in the kitchen, bathroom or utility room, customers can reorder products used there by simply pressing the button. And the Echo, which answers to the name Alexa, has become established in a string of American households. It plays music on request, provides information about the news and the weather, controls smart home functions, such as lighting and heating, and, of course, takes orders for products. Amazon is making online shopping more appealing with new functions The development of online shopping is also likely to make further progress in Germany. The retail industry is already testing new sales channels. For instance, Rossmann in Berlin has entered into a cooperative venture with Amazon to test the delivery of health and beauty products: customers in the capital can have 5, products from the Rossmann range delivered to their homes. Aldi is another example. The discount store is also exploring online business, although for the moment only customers in three conurbations in the United States can order groceries online. Should the test be successful, it is likely to be only a matter of time until the service is extended to German consumers. Ultimately, e-commerce is likely to benefit from an increase in providers, simplified order processes and reduced delivery times. However, as a result, customers are likely to be less willing to travel longer distances, depending on where they live, to a shopping centre or into town. The development of online retail is also making progress in Germany
Real Estate Market Germany 217 21 Market development, trends and outlook What impact may this have on retailers in A1 locations? If the switch from high-street shopping to ordering online and having goods delivered to one s front door or a pick-up point continues as expected in the next few years, it is likely to be accompanied by falling demand for retail space. However, the extent is likely to differ depending on the product category. Accordingly, groceries and luxury goods will certainly still be largely bought in shops. Firstly, because it is usually a short distance to the nearest groceries store or discount store in Germany. And secondly, because people also like to experience exclusive products when buying them. However, online competition is likely to intensify even more in the broad segment between. This would also include large parts of the consumer-oriented offer in A1 locations. Competition from factory outlet centres, abbreviated to FOC, could also intensify over the coming years. The number of FOCs, which currently stands at 16, the majority of which were opened in the last ten years, is likely to increase further; twelve more are under construction or planned, including The Styles Outlet in Duisburg, which could become the largest FOC in Germany. Groceries and luxury goods are likely to suffer less from online competition However, factory outlets may also take sales from city centres This development already seems to be taking place at the leading city centre retail locations in Germany, which were previously so accustomed to success. Since 215, the rise in rents albeit having trended upwards over many years has initially slowed and has now come to a halt. This halt in rent rises has taken place in an extraordinarily favourable economic environment. To be sure, the retail sector posted a respectable increase in sales but this did not boost demand for sales space. This raises the question as to what the impact would be if there was a deterioration in the current favourable economic environment. Prime rents are no longer increasing even in the best shopping locations in Germany THE POSITIVE TREND IN THE GERMAN EMPLOYMENT MARKET CONTINUES THE CONSUMER CLIMATE IS STILL BENIGN 5 3 2 1 39 3 37 36 1992 1993 199 1995 1996 1997 199 1999 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 216 217 labour force in million (lhs) unemployment rate in % (rhs) 13 11 1 9 7 6 5 1 16 1 1 6 2-2 - 21 22 23 2 25 26 27 2 29 21 211 2 213 GfK consumer climate 21 215 216 217 Source: Federal Employment Agency, Bundesbank Source: GfK However, there is no sign of this at present: the macroeconomic conditions for the retail sector remain positive, although some relevant factors affecting it are weakening. Positive retail demand is supported by the still robust employment market, in particular. The growth in employment that has been apparent since 26 is continuing. The number of people in gainful employment has increased by 5 million since then to the current record figure of over million. The number of unemployed has halved at the same time; the unemployment rate has fallen below 6 per cent. The unemployment rate harmonised by Eurostat has even fallen below per cent. The impact of the fall is positive in two respects: firstly, strong demand for staff has a positive effect on private households incomes; secondly, confidence in their own economic future The employment market is heading towards full employment 13
Real Estate Market Germany 217 21 increases. This is reflected in the buoyant consumption climate, which reached the highest level since the end of 21 in August. TOURISM IN GERMANY IS GROWING YEAR BY YEAR 1 17 16 15 1 13 11 1 9 1993 199 1995 1996 1997 199 1999 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 216 217 Source: Federal Statistical Office visitor arrivals in million, annualised (lhs) overnight stays in million, annualised (rhs) 5 75 5 25 375 35 325 3 275 25 THE PICKUP IN INFLATION IS CURBING GROWTH IN REAL DISPOSA- BLE INCOMES 3, 2,5 2, 1,5 1,,5, -,5-1, 199 1995 1996 1997 199 1999 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 216 217e real disposable income of private households yoy in % consumer price index yoy in % Source: Federal Statistical Office, Oxford Economics At the same time, other factors are also encouraging consumption. These include persistently low interest rates, which make loans cheap and saving unattractive, but also flourishing tourism, which is also boosting purchasing power. The numbers of visitors arriving and staying overnight have been growing for many years. Cities are also benefiting from the trend towards several shorter trips such as city breaks instead of a longer continuous holiday. Another positive aspect is the sharp increase in the number of inhabitants in the seven largest cities, who have correspondingly expanded the potential customer base for these locations see charts on page 15 and. However, things look less positive concerning the trend in disposable income adjusted for inflation. Due to the inflation rate increasing in 217, private households receive less in real terms of the still very positive increases in nominal salaries and pensions than was the case from 21 to 216. Flourishing tourism and population growth are expanding the potential customer base The increase in the inflation rate is increasingly eating into growth in incomes Ultimately, retail sales are likely to grow comparatively strongly in 217. The retail association HDE is assuming growth excluding the vehicle trade, fuel and pharmacies and excluding value added tax of 2 per cent to around EUR 92bn. Consequently, the anticipated growth is weaker than in 215 and 216, when it came in at 2.9 per cent and 2.3 per cent respectively. The gap is even larger in real terms, as the anticipated limited nominal growth in 217 will be reduced by an inflation rate which is more than one percentage point higher than expected, at 1.7 per cent. As a result, growth in retail sales adjusted for inflation would be only just above zero. HDE expects nominal growth in sales of 2 per cent in 217 The growth in high-street shopping is also put into perspective by the continuing success of e-commerce, which will achieve a growth rate of just under double-digits. With annual sales of close to EUR 5bn, this now accounts for some 1 per cent of total retail sales. However, it is not the share but strong growth in e-commerce that is curbing high-street trade. Should HDE s forecasts for 217 prove to be correct, sales in high-street shopping would only expand by just over 1 per cent in nominal terms in the current year. Given an inflation rate of just under 2 per cent now, this would imply a fall in sales in real terms. If growth in sales in high-street shopping cannot exceed the inflation rate despite the economy and employment market being in good shape, this makes the future look rather bleak. In the event of less positive economic data, this could rapidly lead to sales falling in nominal terms as well. Sluggish periods are E-commerce and inflation eating into sales growth in high-street shopping 1
Real Estate Market Germany 217 21 not unknown in the German retail sector; nominal retail sales stagnated in the first decade after the millennium but e-commerce was virtually immaterial at the time. The developments described above are affecting the whole retail sector. However, individual retail segments are affected to a greater or lesser extent. Accordingly, A1 locations in city centres have performed better than most in recent years, as has been reflected by the sharp rise in prime rents. Retailers with a presence in city centres have also been successful in including e-commerce in their sales strategies with hybrid concepts. Online shopping is also making life (more) difficult for A1 locations STRONG GROWTH IN THE GERMAN RETAIL SEGMENT IS GRADUALLY WEAKENING E-COMMERCE CONTINUES TO GAIN GROUND: SALES ARE LIKELY TO ACCOUNT FOR A TENTH OF THE TOTAL MARKET IN 217 5 3 2 1-1 -2-3 - -5 retail sales excl. VAT, vehicle sales, service station sales, fuel 1,5,9-2,1-1, 2,2,9,6-1,2 1,1-3,1 2,9 2, 2,5 1,6 2,3 1,7 1,2 2, 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 216 217e yoy in % (lhs) in EUR bn (rhs) 5 9 7 6 5 3 2 1 5 6 2 3 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 216 217p retail e-commerce sales in EUR bn (lhs) retail sales excl. e-commerce sales in EUR bn (lhs) retail e-commerce sales in % of total retail sales (rhs) 1 6 2 Source: HDE Source: HDE Retail: comparison of top locations The top locations are not just benefiting from generally favourable economic conditions in Germany. They are also helped, in particular, by continuing strong population growth and the sharp increase in visitor numbers. The increase in the number of inhabitants in cities since around the millennium has two causes above all. Firstly, the major cities act as supra-regional growth engines, which create large numbers of jobs. Secondly, more people are opting to live in cities despite higher living costs. Due to this influx, the population in the seven cities has grown by around 5, people within ten years up to 216 which equates to growth of almost 1 per cent. In addition to positive economic conditions, top locations are also benefiting from rising resident and visitor numbers WITHIN 2 YEARS, THE NUMBER OF PURCHASERS HAS ALSO RISEN SHARPLY IN LINE WITH POPULATION GROWTH THE TOP LOCATIONS ARE BENEFITING GREATLY FROM BOOMING CITY TOURISM 115 11 population 1992 = 1 32 2 2 2 overnight stays in million 32% growth from 1996 to 216 15 1 95 16 11% 175% 215% 116% 6% 13% 9 Berlin Cologne Munich Stuttgart 1992 1996 2 2 2 2 216 Berlin Dusseldorf Frankfurt Hamburg Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart 1996 2 2 2 2 216 Source: Feri Source: BulwienGesa, statistical offices of the cities (215, 216) 15
Real Estate Market Germany 217 21 The increase has been particularly dramatic in the last five years. However, this growth is not only driving demand on the housing market sky-high. It is also boosting consumer numbers and retail sales. Since there is no sign of growth in the major cities weakening so far, the retail sector is also likely to continue benefiting from this. Thanks to flourishing city tourism, the potential customer base is being expanded by rising numbers of visitors and overnight stays, which have risen especially sharply in the capital and in Hamburg. However, even in Dusseldorf, the city that has seen the least growth, the number of overnight stays has more than doubled in 2 years. Major differences emerge in the number of overnight stays in relation to the number of inhabitants. Translated into thousand inhabitants, Cologne and Stuttgart have 6, or so overnight stays, while this is 7,5 in Dusseldorf and Hamburg, Berlin gets to just under 9,, Munich is heading towards 1, and Frankfurt is well ahead with, overnight stays. This substantial figure is, however, also likely to be attributable to the large airport and the many travellers who are obliged to stay in Frankfurt overnight because night flights are prohibited. Growth in tourism: the figures for overnight stays have increased sharply Thanks to the growing potential customer base, retailers in the top locations are likely to take a more relaxed approach to the expansion in e-commerce than those in other locations. What is more, shops in A1 locations also offer committed online shoppers the opportunity to experience the brands and products only high-street shopping provides the opportunity to try, feel and smell the merchandise. This is why even original online providers are opening shops. Ultimately, it is incidental where the purchase of a product actually takes place in the retailer s high-street store or online. These aspects are likely to help stabilise demand for retail space in the top locations. Only high-street shopping offers the chance to try, feel and smell products RETAIL: PRIME RENTS IN THE TOP LOCATIONS HAVE ALMOST DOU- BLED WITHIN 2 YEARS HOWEVER, THE UPWARD TREND IN PRIME RENTS HAS SLACKENED 19 1 17 16 15 1 13 11 1 9 prime rent 199 = 1 199 1999 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 216 217e 21e Top-7 Regional- 1 6 2-2 - prime rent yoy in % 199 1999 2 21 22 23 2 25 26 27 2 29 21 211 2 213 21 215 216 217e 21e Regional- Top-7 Source: BulwienGesa, DZ BANK Research forecast Source: BulwienGesa, DZ BANK Research forecast Top-7: Index of top locations Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart Regional-: Index of regional centres Augsburg, Bremen, Darmstadt, Dresden, Essen, Hanover, Karlsruhe, Leipzig, Mainz, Mannheim, Münster and Nuremberg The continuing appeal of A1 sites in the top locations has driven prime rents to a high level. Accordingly, the average prime rent in top locations has risen from slightly more than EUR 2 per sqm in 26 to almost EUR 3 in 216 an increase of some 6 per cent. That is a far sharper increase than in the second-tier large cities, the B locations, which are also appealing to retailers. Here, the prime rent has only risen half as much with growth of just under 25 per cent. A trump card for the top locations are their catchment areas, which in some cases comprise several million people. In addition to market size, they also benefit apart from Berlin from inhabitants substantial purchasing power and visitors international character. This means that The average prime rent in top locations has risen to around EUR 3 per sqm 16
Real Estate Market Germany 217 21 top locations provide an excellent launch pad for international retailers wishing to enter the German retail market and for experiments with new retail concepts. There are discernible differences in the way rents in the seven top locations have evolved over the past decade. In contrast to Cologne and Stuttgart, where growth of 3% was achieved in ten years, prime rents in Berlin grew almost twice as fast, at almost 6%. In Munich, growth was also somewhat weaker, at 35 per cent, but this may be because the starting level was already very high. Average rent increases of % to 5% were observed in Dusseldorf, Frankfurt and Hamburg. There were marked differences in the rate of rental increases over the past decade IS THE UPWARD TREND IN PRIME RENTS COMING TO AN END? IN BERLIN, PRIME RENTS HAVE RISEN TWICE AS FAST AS IN COLOGNE AND STUTTGART SINCE 26 retail prime rent in Euro per sqm 36 3 32 3 2 26 2 22 2 1 16 1 199 22 26 21 21 21e Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart Top-7 growth of the retail prime rent iin % from 26 to 216 2 Cologne 32 35 Munich 3 3 Stuttgart Hamburg 6 9 Frankfurt Top-7 Dusseldorf 59 Berlin Source: BulwienGesa Source: BulwienGesa The market is largely unchanged compared with 215 due to the surge in rents largely coming to a halt. As previously, a presence in A1 sites at a top location will cost upwards of EUR 25 per sqm. First class retail space in Cologne or Stuttgart is available at this price. It is some EUR 3 more expensive in Dusseldorf and Hamburg. Berlin and Frankfurt are around EUR 3. And, yet again, Munich is almost EUR 5 more expensive. But while the average prime rent increased by just under 2 per cent in 216 thanks to growth in Berlin, Dusseldorf and Cologne it looks as though there will be no increase in 217. Even small falls are conceivable. However, rents in the top locations have been largely unchanged since 215 It is intriguing that prime rents have risen over a long period although sales per sqm sales floor sales floor productivity have been falling or at best stable. Since the low reached in 2, the average sales floor productivity, not just in A1 locations but across all retail space, has risen again. This is caused by a slowdown in the expansion in total retail space, but especially in relation to the number of inhabitants. Accordingly, the average retail space per inhabitant at top locations has not grown since 21. Previously, this had expanded from 1 sqm to 1.7 sqm per inhabitant from 1992 to 21 but has been stable since then. The fact that the current increase in shop floor productivity is not leading to higher rents is likely to be linked to the fact that the previous rent increases have anticipated much of this development. Consequently, scope for further rent increases would first have to be created by future sales increases. Retail space per inhabitant has stagnated since 21 17
Real Estate Market Germany 217 21 RETAIL SPACE PER INHABITANT IS SCARCELY GROWING SALES FLOOR PRODUCTIVITY IS INCREASING AGAIN IN THE TOP LOCATIONS 2,2 2, 1, 1,6 1, 1,2 1,,,6 retail space per capita in sqm Berlin Cologne Munich Dusseldorf Frankfurt Hamburg Stuttgart Top-7 1992 1996 2 2 2 2 216 1. 16. 1.. 1...2. 3. 3.6 3. 3.2 6. 3. 1992 1996 2 2 2 2 216 top locations: retail space in sqm ' (lhs) top locations: average retail sales in Euro per sqm (rhs) Source: Feri Source: Feri N.B.: Sales and retail space for top locations as a whole The high rents in the best city centre positions in the top locations are also reflected in the letting statistics of the leading real estate firms. These indicate that the major cities share of total rented retail space is declining, while large cities below the top locations are attracting shares with their far lower prime rents. The increasing significance of online shopping is also apparent in a shift in demand for space. People still enjoy a stroll through the city centre but their focus is no longer concentrated so completely on shopping. The aspect of leisure time is gaining ground. The percentage of exclusively retail space is decreasing somewhat, while cafés and restaurants, in particular, are gaining ground. Shifts in space rental in the retail sector The purchasing power and centrality indicators show the usual picture. The top locations except Berlin are characterised by substantial purchasing power compared with the rest of Germany. Yet again, Dusseldorf and Munich stand out in this respect. While purchasing power in the capital of North Rhine-Westphalia is almost 2 per cent above the German average, the Bavarian city enjoys 15 percentage points more purchasing power, which underlines Munich s exceptional position in the German retail sector. In terms of centrality, the second key retail characteristic, the figures are far closer together and are not especially high either. This is because customers from the surrounding area come to the city centres of the top locations to browse the shops, while they buy the things they need on a daily basis locally. Top locations score well in terms of purchasing power APART FROM BERLIN, THE TOP LOCATIONS BENEFIT FROM HIGH PURCHASING POWER 1 13 IN TERMS OF CENTRALITY, THE DIFFERENCES BETWEEN THE SEVEN TOP LOCATIONS ARE SMALL 1 13 11 1 9 Munich 11 1 9 Berlin Cologne Hamburg Stuttgart Frankfurt Dusseldorf Frankfurt Berlin Cologne Hamburg centrality Munich Dusseldorf average for Germany Stuttgart purchasing power average for Germany Source: BulwienGesa Source: BulwienGesa 1