tight supply drives rents for offices and residential … · 2018-07-05 · dg hyp ofﬁ ces _____...

REAL ESTATE MARKET GERMANY 2017 | 2018TIGHT SUPPLY DRIVES RENTS FOR OFFICES AND RESIDENTIAL REAL ESTATE – RETAIL RENTS STABLE, AT A HIGH LEVEL

A RESEARCH PUBLICATION BY DG HYP | OCTOBER 2017

1

TABLE OF CONTENTS

Preface ____________________________________________________________________ 2

Summary __________________________________________________________________ 3

Current economic situation in Germany ______________________________________ 6

Upturn on the German hotel market is continuing ____________________________ 7

Some of the shine has come off the environment for investments in commercial real estate ___________________________________________________ 10

Retail properties ___________________________________________________________ 12

Offi ce properties ___________________________________________________________ 27

Residential properties ______________________________________________________ 40

Overview of forecasts ______________________________________________________ 45

Imprint ____________________________________________________________________ 46

Disclaimer _________________________________________________________________ 46

DG HYP offi ces _____________________________________________________________ 47

Real Estate Market Germany 2017 | 2018

2


PREFACE

Dear Readers,

As the commercial real estate bank within the Volksbanken Raiffeisenbanken coop-

erative fi nancial network, we regularly analyse those markets we actively cover, in

order to better assess opportunities and risks. The present report – now in its tenth

year – continues our series of studies concerning the German real estate market. This

research study, which is regularly published in October, looks at market developments

for retail, offi ce and residential real estate in Germany’s seven largest metropolitan

areas.

The German real estate market continues to benefi t from the positive macroeconomic

development. The benign labour market situation in Germany has triggered marked

growth in the number of offi ce workers, together with increased need for fl oorspace

– which cannot be suffi ciently met. Hence, it is fair to expect rising offi ce rents during

the current year and next. Likewise, demand for residential real estate remains strong.

Completions in residential construction cannot keep up with the number of people

moving into the economic centres, thus constantly increasing the demand gap. This

development offers scope for further rent increases. Rents for retail properties are

reaching their limits, given the high levels reached and growing online commerce.

The latest market report presents a special feature covering developments on, and

prospects for the hotel market – a segment which increasingly attracts the attention of

investors as well as project developers, given the continued professionalisation of the

hotel real estate sector, a continuously increasing number of overnight stays, as well

as attractive potential returns.

The German real estate market report is of course also available in German. All

previously published DG HYP market reports can be downloaded from our website

(on www.dghyp.de/en/unternehmen/market-research).

Yours sincerely,

DG HYP

October 2017

3

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 in-creasingly concentrated on the growing shortage of workers. The indicators for the position of companies and consumer confidence are correspondingly positive. The population is also expanding through immigration and rising birth rates once more. And given low capital market returns, many investor billions are still on the hunt for property investments offering higher returns. But these are now just as difficult to find as commercial space and residential properties.

» The fact that rents and purchase prices are continuing to rise in this environment is just unsurprising as the continued slump in initial rental returns. However, there are signs that saturation point is gradually being reached. Following an upward trend in rents dating back many years, this is particularly true for the retail sector, as sales in pedestrian precincts and shopping centres are only seeing modest growth despite good consumer conditions. High-street sales are being curbed by the burgeoning online-shopping market. In contrast, there is no sign of an end to the boom in residential and office property. As previously occurred on the housing market, the supply of office property is becoming ever scarcer.

» In the present tenth edition of our market report, as in previous years, we analyse developments in the retail, office and residential segments of the market in the seven top locations in Germany, namely Berlin, Dusseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart. In addition, we look at the trend in yields in these segments in two short sections and subsequently examine the ongoing boom in the German hotel market.

» Conditions for retailers are still favourable even if they will not improve any further 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.

TOP LOCATIONS: RENTS FOR OFFICES AND HOUSING ARE STILL RISING – HOWEVER, THEY ARE STAGNANT IN THE RETAIL SECTOR

Source: BulwienGesa, DZ BANK Research forecast

-15-12

-9-6-30369

1215

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018eretail prime rent office prime rent residential average rent first letting average

top locations: rent yoy in %

The present issue is the tenth edition of our market report on the commercial real estate market in the seven top locations

Retail sector: the upward trend is over for the moment; however, there are no signs of a market slump


4

The retail sector is also benefiting from population growth in all top locations and flourishing tourism. In 2017, however, high-street sales will only receive half the increase in retail sales – estimated at plus 2 per cent by HDE. The rest will be absorbed by the rapidly expanding e-commerce sector.

» While retailers in areas close to city centres benefit from online shopping thanks to their hybrid sales concepts, demand for retail space is growing more slowly. Retailers also seem to be reaching the limits of their economic viability because of sharp rises in retail rents in the past. The perceptible slowdown in rent rises since 2015 certainly points to this.

» Ultimately, demand is still strong for top quality retail space in shopping malls and city centre shopping centres, which have also expanded in recent years through new developments. Tenants are, however, no longer prepared to pay higher rents. This has brought the upward trend in a prime rent of just under EUR 300 per sqm

to a halt. There is likely to be scarcely any change here over the period covered by the forecast up to 2018. We could even see rents fall slightly. Demand for space has also shifted slightly from traditional sales space towards restaurants and cafés. Ultimately, a city centre shopping trip is still an important part of people’s leisure time.

FORECAST FOR RETAIL SPACE

Prime rent in EUR/sqm

Change in prime rents yoy (%)

2016 2017e 2018e 2016 2017e 2018e

Berlin 310 310 310 3.3 0.0 0.0

Cologne 250 255 255 0.0 2.0 0.0

Dusseldorf 275 280 280 1.9 1.8 0.0

Frankfurt 300 300 300 0.0 0.0 0.0

Hamburg 285 285 285 0.0 0.0 0.0

Munich 345 345 345 1.5 0.0 0.0

Stuttgart 250 250 250 2.0 0.0 0.0

Top location average 297.5 298.4 298.5 1.8 0.3 0.0

Source: BulwienGesa, Feri, forecast DZ BANK Research The prime rent represents an average of the top 3 to 5 per cent of market lettings, meaning that the figure quoted does not equate to the absolute prime rent.

» The top locations have key functions in keeping the economic engine purring: 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 2018. 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


5

rate, which has halved since 2010, while prime rents – averaging a little more than EUR 28 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 (%)

2016 2017e 2018e 2016 2017e 2018e

Berlin 28.0 29.4 30.5 16.7 5.0 3.7

Cologne 21.0 21.2 21.5 0.0 1.0 1.4

Dusseldorf 24.5 24.9 25.3 2.1 1.6 1.6

Frankfurt 35.5 36.0 37.0 0.0 1.4 2.8

Hamburg 26.0 26.4 27.0 4.0 1.5 2.3

Munich 34.7 35.8 36.8 1.8 3.2 2.8

Stuttgart 19.7 20.0 20.2 2.1 1.5 1.0


Source: BulwienGesa, Feri, forecast DZ BANK Research The prime rent represents an average of the top 3 to 5 per cent of market lettings, meaning that the figure quoted does not equate to the absolute prime rent.

» Residential construction has lagged behind the sharp rise in the number of inhab-itants 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 12 and 18 per sqm. EUR 16 to 24 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 2018. 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.

FORECAST FOR RESIDENTIAL REAL ESTATE

First occupancy average rents in EUR/sqm

First occupancy average rents vs previous year (%)

2016 2017e 2018e 2016 2017e 2018e

Berlin 11.6 12.0 12.3 0.9 3.4 2.5

Cologne 12.0 12.2 12.5 4.3 1.7 2.5

Dusseldorf 12.6 12.9 13.2 1.6 2.4 2.3

Frankfurt 14.8 15.3 15.8 9.6 3.4 2.9

Hamburg 13.4 13.7 14.0 1.5 2.2 2.2

Munich 17.0 18.0 18.5 7.6 5.9 2.8

Stuttgart 13.0 13.5 14.0 8.3 3.8 3.7


Source: BulwienGesa, Feri, DZ BANK Research forecast

Residential: even the increase in new build figures is not sufficient; consequently, the market situation at the top locations is still fraught


6

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 2017, gross domestic product – after adjustment for price, seasonal and calendar effects – was 0.6 per cent up on the previous quarter. GDP grew even more strongly, by 0.7 per cent, in the first quarter of 2017. 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 0.9 per cent higher than in the first quarter of 2017. In contrast, the trade balance – i.e. the differ-ence from exports and imports – depressed economic growth by -0.3 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 2.0 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 2017 and 2018.

The inflation rate in Germany – measured by the national consumer price index – stood at 1.7 per cent in July 2017 (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 (+1.8 per cent). For 2017 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.

ECONOMIC FORECAST GERMANY

% yoy 2015 2016 2017e 2018e

GDP 1.7 1.9 2.0 1.8

Private consumption 1.7 2.1 1.8 1.6

Public consumption 3.0 3.9 1.4 1.6

Investment 1.8 3.1 3.5 3.2

Exports 5.2 2.6 3.7 4.3

Imports 5.6 3.9 4.3 5.2

Unemployment rate (%) 6.4 6.1 5.8 5.9

Inflation rate (HCPI) 0.1 0.4 1.7 1.6

Public budget balance (% of GDP) 0.7 0.8 0.4 0.2

MACROECONOMIC GROWTH AND UNEMPLOYMENT TREND IN CONSUMER PRICES (HCPI)

Source: DZ BANK Research HCPI = harmonised consumer price index

0,0 -0,7

1,2 0,73,7 3,3 1,1

-5,6

4,1 3,7 0,5 0,5 1,6 1,7 1,9 2,0 1,8

-6

-4

-2

0

2

4

6

8

10

12

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

GDP yoy in % unemployment rate in %

forecast

1,31,1

1,8 1,9 1,8

2,3

2,8

0,2

1,2

2,5

2,1

1,6

0,80,1 0,4

1,7 1,6

0,0

0,5

1,0

1,5

2,0

2,5

3,0

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

inflation rate (HICP)

forecast

Strong growth is likely to continue over the rest of the year

Inflation rate is finally edging higher


7

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 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

Source: Federal Statistical Office Source: BulwienGesa

Growth in the number of overnight stays at the top locations has been highly dispro-portionate. 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” 80 per cent or so. Strong growth in Berlin, where the number has more or less quad-rupled since the middle of the 1990s, has helped here to a particular degree. The German capital contributes more than a third of the total of approximately 45 million overnight stays in traditional hotels at the seven top locations – excluding bed and breakfast hotels.

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

Source: BulwienGesa Source: BulwienGesa

1718192021222324252627

020406080

100120140160180200

1992

1993

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2010

2011

2012

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2016

hotels: overnight stays in million (lhs)share of foreigners in % (rhs)

05

101520253035404550

Berlin Cologne Dussel-dorf

Frank-furt

Ham-burg

Munich Stutt-gart

hotels planned hotels under construction

5101520253035404550

1992

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hotels without B&B: arrivals in millionhotels without B&B: overnight stays in million

40424446485052545658

6080

100120140160180200220240

1992

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hotel beds withoug B&B in '000, (lhs)occupancy rate of hotel beds without B&B in % (rhs)

Tourism in Germany is also benefiting from increased interest from abroad

There has been a disproportionate increase in the number of overnight stays at top locations


8

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 100,000 hotel beds to be found in the top locations altogether; today, there are more than twice as many to be found, at approximately 220,000. However, there has been a perceptible improvement in occupancy despite the sharp growth in overnight accom-modation. Having averaged something over 40 per cent in the mid-1990s, hotel bed occupancy is gradually heading towards 60 per cent.

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 90 in Berlin to EUR 115 in Dusseldorf and Munich; it averages EUR 100 across the locations. The room occupancy rate ranges from just under 70 per cent in Dusseldorf and Frankfurt to something over 80 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 88 in Munich. On average across the locations, each hotel room generates revenue of EUR 75 per day.

REVENUE PER ROOM IS HIGHEST IN MUNICH AND LOWEST IN FRANKFURT

Source: Colliers, data for 2016 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 1980 – 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.

90 96115

96 97115

99 101

70 70 80 66 78 88 73 75

77,173,4

69,5 68,8

80,976,5

73,3 74,2

Berlin Cologne Dusseldorf Frankfurt Hamburg Munich Stuttgart average of toplocations

average room rate in Euro (ARR) revenue per available room in Euro (RevPAR) occupancy rate in % (OR)

Occupancy has increased despite a significant expansion in the number of hotel beds

The indicators for regional hotel markets are comparatively uniform

The fact that both room rates and occupancy could be increased is impressive


9

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.

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 50bn, the total amount invested in German commercial real estate in the last two years roughly matches the boom year of 2007 just before the international financial market crisis, hotel investments in Germany have more than doubled. At over EUR 5bn in 2016, German hotel investments reached the previous record figure. The proportion of total investment in commercial real estate was around 4 per cent from 2005 to 2011. The figure has risen continuously since then to almost 10 per cent now. Hotels have therefore caught up with the previous climbers on the commercial real estate market – logistics companies.

HOTEL INVESTMENTS RECORD A SHARP INCREASE THE INITIAL YIELD FOR HOTEL INVESTMENTS IS STILL COMPARATIVELY HIGH

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 4 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.

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5

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016transaction volume for hotels in EUR bn (lhs)share of hotels in % of the total CRE transaction volume (rhs)

5,25,4

5,04,8

4,6

4,3

5,0

Berlin Cologne Dussel-dorf

Frank-furt

Ham-burg

Munich Stutt-gart

initial gross yield for hotels in % (Q1/2017)

High levels of construction activity in the hotel sector are likely to increase competitive pressures

Investment has increased perceptibly, not just in absolute but also in relative terms

Hotel investments still allow relatively high initial yields


10

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 sought-after 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 correspond-ingly 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 50bn marker is also likely to be achieved in 2017 – 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 con-tinuing 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 2017.

DEMAND FOR COMMERCIAL REAL ESTATE AND RESIDENTIAL PORTFOLIOS REMAINS STRONG AMONG INVESTORS IN 2017 TOO

OFFICE PROPERTIES ARE STILL THE DOMINANT ASSET CATEGORY IN COMMERCIAL REAL ESTATE

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 2016, the current yield on 9- to 10-year Bunds was still slightly in negative territory; at present, they are slightly posi-tive, at 0.35 per cent – as at August 2017. 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.

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 2017 and have even been pushed from

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30

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50

60

2004

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2011

2012

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2015

2016

2017

e

commercial real estate residential portfolios

transaction volume in EUR bn

46% 44% 41% 45% 39%

27%22% 31% 24%

19%

7%9%

7% 9%22%

6% 8% 8% 10% 7%11% 11% 10% 6% 8%4% 6% 3% 6% 5%

0%10%20%30%40%50%60%70%80%90%

100%

2013 2014 2015 2016 2017 H1other mixed use hotel logistics retail office

Demand for commercial real estate is consistently high

Bond yields have recovered from their low point

Investor interest has been dampened by the hiatus in retail rent rises


11

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. How-ever, 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.

RETAIL: TREND IN YIELDS MOVEMENT IN YIELDS AT THE INDIVIDUAL TOP LOCATIONS

OFFICE: TREND IN YIELDS MOVEMENT IN YIELDS AT THE INDIVIDUAL TOP LOCATIONS

RESIDENTIAL: MULTIPLIER FOR APARTMENT BLOCKS MULTIPLIER AT THE INDIVIDUAL TOP LOCATIONS


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.

3,0

3,5

4,0

4,5

5,0

5,5

6,0

6,5

7,0

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Top-7 Regional-12

initial yield for retail properties in central locations in %

3,0

3,5

4,0

4,5

5,0

5,5

6,0

1997 2001 2005 2009 2013 2017-H1

BerlinDusseldorfFrankfurtHamburgCologneMunichStuttgart

initial yield for retail properties in central locations in %

3,0

3,5

4,0

4,5

5,0

5,5

6,0

6,5

7,0

1996

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Top-7 Regional-12

initial yield für office properties in central locatioins in %

2,5

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3,5

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7,0

1997 2001 2005 2009 2013 2017-H1


initial yield for office properties in central locations in %

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24

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Top-7 Regional-12

gross rent multiplier for multi-family properties

12

14

16

18

20

22

24

26

28

1997 2001 2005 2009 2013 2017-H1


gross rent multiplier for multi-family properties

By and large, the environment for commercial real estate is still benign – but risk is gradually returning


12

RETAIL PROPERTIES

Are things going rapidly downhill in the retail sector? The about 300,000 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 100 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.

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 Cologne-based 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.

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.

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.

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 5,000 prod-ucts 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.

"Retail Apocalypse" in the U.S. retail sector

The German retail sector also has to cope with setbacks

The U.S. retail sector is suffering from having far too much retail space

Amazon is making online shopping more appealing with new functions

The development of online retail is also making progress in Germany


13

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.

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 2015, 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.

THE POSITIVE TREND IN THE GERMAN EMPLOYMENT MARKET CONTINUES

THE CONSUMER CLIMATE IS STILL BENIGN

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 2006 is continuing. The number of people in gainful employment has increased by 5 million since then to the current record figure of over 44 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 4 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

5

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45

1992

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1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

labour force in million (lhs) unemployment rate in % (rhs)

-4-202468

1012141618

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

GfK consumer climate

Groceries and luxury goods are likely to suffer less from online competition

However, factory outlets may also take sales from city centres

Prime rents are no longer increasing even in the best shopping locations in Germany

The employment market is heading towards full employment


14

increases. This is reflected in the buoyant consumption climate, which reached the highest level since the end of 2001 in August.

TOURISM IN GERMANY IS GROWING YEAR BY YEAR THE PICKUP IN INFLATION IS CURBING GROWTH IN REAL DISPOSA-BLE INCOMES

Source: Federal Statistical Office 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 40. However, things look less positive concerning the trend in disposable income adjusted for inflation. Due to the inflation rate increasing in 2017, private households receive less in real terms of the still very positive increases in nominal salaries and pensions than was the case from 2014 to 2016.

Ultimately, retail sales are likely to grow comparatively strongly in 2017. The retail as-sociation HDE is assuming growth – excluding the vehicle trade, fuel and pharmacies and excluding value added tax – of 2 per cent to around EUR 492bn. Consequently, the anticipated growth is weaker than in 2015 and 2016, 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 antici-pated limited nominal growth in 2017 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.

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 50bn, this now accounts for some 10 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 2017 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

250275300325350375400425450475500

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100110120130140150160170180

1993

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2002

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2007

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2010

2011

2012

2013

2014

2015

2016

2017

visitor arrivals in million, annualised (lhs)overnight stays in million, annualised (rhs)

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

1994

1995

1996

1997

1998

1999

2000

2001

2002

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2004

2005

2006

2007

2008

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2010

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e

real disposable income of private households yoy in %consumer price index yoy in %

Flourishing tourism and population growth are expanding the potential customer base

The increase in the inflation rate is increasingly eating into growth in in-comes

HDE expects nominal growth in sales of 2 per cent in 2017

E-commerce and inflation eating into sales growth in high-street shopping


15

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.

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 2017

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 850,000 people within ten years up to 2016 – which equates to growth of almost 10 per cent.

WITHIN 20 YEARS, THE NUMBER OF PURCHASERS HAS ALSO RISEN SHARPLY IN LINE WITH POPULATION GROWTH

THE TOP LOCATIONS ARE BENEFITING GREATLY FROM BOOMING CITY TOURISM

Source: Feri Source: BulwienGesa, statistical offices of the cities (2015, 2016)

1,5 0,9

-2,1-1,4

2,20,9 0,6

-1,2

1,1

-3,1

2,02,5

1,7 1,2

1,62,9

2,3 2,0

400410420430440450460470480490500

-5-4-3-2-1012345

2000

2001

2002

2003

2004

2005

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2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

e

yoy in % (lhs) in EUR bn (rhs)

retail sales excl. VAT, vehicle sales, service station sales, fuel

0

2

4

6

8

10

12

380

400

420

440

460

480

500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

p

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)

90

95

100

105

110

115

120

Berlin Dusseldorf Frank-furt

Ham-burg

Cologne Munich Stuttgart

1992 1996 2000 2004 2008 2012 2016

population 1992 = 100

0

4

8

12

16

20

24

28

32

Berlin Dussel-dorf

Frank-furt

Ham-burg

Cologne Munich Stutt-gart

1996 2000 2004 2008 2012 2016

overnight stays in million

growth from1996 to 2016

320%

118%175%

215%126%

130%116%

Online shopping is also making life (more) difficult for A1 locations

In addition to positive economic conditions, top locations are also benefiting from rising resident and visitor numbers


16

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 con-sumer 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 20 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 6,000 or so overnight stays, while this is 7,500 in Dusseldorf and Hamburg, Berlin gets to just under 9,000, Munich is heading towards 10,000 and Frankfurt is well ahead with 12,000 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.

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 pur-chase 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.

RETAIL: PRIME RENTS IN THE TOP LOCATIONS HAVE ALMOST DOU-BLED WITHIN 20 YEARS

HOWEVER, THE UPWARD TREND IN PRIME RENTS HAS SLACKENED

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-12: 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 200 per sqm in 2006 to almost EUR 300 in 2016 – an increase of some 46 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

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2012

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2016

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e20

18e

Top-7 Regional-12

prime rent 1998 = 100

-4

-2

0

2

4

6

8

10

1998

1999

2000

2001

2002

2003

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2005

2006

2007

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e20

18e

Regional-12 Top-7

prime rent yoy in %

Growth in tourism: the figures for overnight stays have increased sharply

Only high-street shopping offers the chance to try, feel and smell products

The average prime rent in top locations has risen to around EUR 300 per sqm


17

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 30% was achieved in ten years, prime rents in Berlin grew almost twice as fast, at almost 60%. 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 40% to 50% were observed in Dusseldorf, Frankfurt and Hamburg.

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 2006


The market is largely unchanged compared with 2015 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 250 per sqm. First class retail space in Cologne or Stuttgart is avail-able at this price. It is some EUR 30 more expensive in Dusseldorf and Hamburg. Berlin and Frankfurt are around EUR 300. And, yet again, Munich is almost EUR 50 more expensive. But while the average prime rent increased by just under 2 per cent in 2016 – thanks to growth in Berlin, Dusseldorf and Cologne – it looks as though there will be no increase in 2017. Even small falls are conceivable.

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 2008, 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 2010. Previously, this had expanded from 1 sqm to 1.7 sqm per inhabitant from 1992 to 2010 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.

120140160180200220240260280300320340360

1998 2002 2006 2010 2014 2018e

BerlinDusseldorfFrankfurtHamburgCologneMunichStuttgartTop-7

retail prime rent in Euro per sqm

2832

35

43 4346

49

59

Cologne Stutt-gart

Munich Ham-burg

Frankfurt Top-7 Dussel-dorf

Berlin

growth of the retail prime rent iin % from 2006 to 2016

There were marked differences in the rate of rental increases over the past decade

However, rents in the top locations have been largely unchanged since 2015

Retail space per inhabitant has stag-nated since 2010


18

RETAIL SPACE PER INHABITANT IS SCARCELY GROWING SALES FLOOR PRODUCTIVITY IS INCREASING AGAIN IN THE TOP LOCATIONS

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.

The purchasing power and centrality indicators show the usual picture. The top locations – except Berlin – are characterised by substantial purchasing power com-pared 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 20 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.

APART FROM BERLIN, THE TOP LOCATIONS BENEFIT FROM HIGH PURCHASING POWER

IN TERMS OF CENTRALITY, THE DIFFERENCES BETWEEN THE SEVEN TOP LOCATIONS ARE SMALL


0,6

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2,2

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Frank-furt

Ham-burg


Top-7

1992 1996 2000 2004 2008 2012 2016

retail space per capita in sqm

3.000

3.200

3.400

3.600

3.800

4.000

4.200

6.000

8.000

10.000

12.000

14.000

16.000

18.000

1992 1996 2000 2004 2008 2012 2016

top locations: retail space in sqm '000 (lhs)top locations: average retail sales in Euro per sqm (rhs)

80

90

100

110

120

130

140

Berlin Cologne Ham-burg

Stutt-gart

Frank-furt

Dussel-dorf

Munich

purchasing power average for Germany

80

90

100

110

120

130

140

Frank-furt

Berlin Cologne Ham-burg

Munich Dussel-dorf

Stutt-gart

centrality average for Germany

Shifts in space rental in the retail sector

Top locations score well in terms of purchasing power


19

European retail sector Compared with other European cities, prime rents in Germany’s top locations are round about the average level – despite the positive economic conditions in Germany and the sharp rise in retail rents over many years. However, any comparison with other European cities must take account of the fact that in many countries one city operates as the outstanding shopping location, such as Paris in France or Vienna in Austria. Consequently, retailer demand is concentrated on these locations. Ultimately, there is no alternative location that comes even close in terms of quality. The German retail sector is different because no city among the top locations occupies such a dominant position in the retail sector.

PRIME RETAIL RENTS IN EUROPE: FIGURES FOR GERMAN CITIES ARE AVERAGE

Source: BNP Real Estate, DZ BANK As at: Q4 2016

0250500750

1.0001.2501.5001.7502.0002.2502.500

retail prime rent in Euro per sqm per month

In terms of prime rents, Germany’s top locations are average by European standards


20

Berlin: Retail properties

PRIME RETAIL RENTS IN EURO PER M2 PER CAPITA RETAIL SPACE IN M2

Source: BulwienGesa, Feri, DZ BANK Research forecast Source: Feri

Berlin has evolved into an outstanding shopping location. With a large catchment area of 5 million people, Berlin has long scored highly with investors and retailers as a trendsetter and a magnet for visitors with over 30 million overnight stays per year but was adversely affected by persistent economic weakness. But Berlin’s economy is now clearly on the up, although the purchasing power indicator of below 100 is still far below the substantial figures enjoyed by the other top locations. The positive develop-ment overall is apparent from the sharp increase in prime rents, which have risen by almost 40 per cent to the current level of EUR 310 per sqm within five years. As with office space, this is by far the most dramatic increase in rents among the seven top locations. However, demand for retail space also benefits from having the right condi-tions for market-testing new retail concepts. Consequently, Berlin is predestined as the first location for market entry by foreign retailers on the German market. The retail sector is also distinguished by having different types of A1 locations in separate areas of the city. Examples of this include Ku’damm/Tauentzienstraße, Alexanderplatz, Friedrichstraße or even the up-and-coming Hackescher Markt. There are also many shopping centres, including the huge Mall of Berlin, which only opened in 2014. Having risen so rapidly, Berlin’s development as a retail location is now likely to be more measured, although the pipeline still contains some shopping centre developments. We expect prime rents to remain stable until 2018.

RETAIL SPACE IN BERLIN

2015 2016 2017e 2018e

Demand

Per capita disp. income EUR per month 1,585 1,609 1,631 1,631

Unemployment rate (BA) (%) 10.7 9.8 9.2 9.3

Retail sales EUR m / % yoy 15,959 / 3.9 16,422 / 2.9 16,824 / 2.4 17,266 / 2.6

Retail sales EUR/sqm 2,535 2,576 2,597 2,597

Supply

Total retail space In million sqm 6,296 6,375 6,479 6,587

Total retail space % yoy 1.1 1.3 1.6 1.7

Retail rents

Prime rents/location EUR/sqm 300 / 14.5 310 / 14.5 310 / 14.5 310 / 14.5

Prime rents/location % yoy 3.4 / 3.6 3.3 / 0.0 0.0 / 0.0 0.0 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

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2002 2004 2006 2008 2010 2012 2014 2016 2018eBerlin Top-7 Regional-12

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2,4


Berlin is also a top retail location across Europe

A further increase in prime rents is not likely to be achievable even in Berlin at present


21

Cologne: Retail properties

PRIME RETAIL RENTS IN EURO PER SQM PER CAPITA RETAIL SPACE IN SQM


Besides Dusseldorf, Cologne, with its population of one million, is the second top shop-ping location in western Germany. However, its focus is concentrated more on the mainstream consumer. This is particularly true of Schildergasse, where 90 per cent of the stores are chain stores, which attract substantial footfall. However, Cologne also has hip locations which stand out from the typical mix of retailers in A1 locations. A smaller luxury segment has established itself in the Domkloster/ Wallraffplatz area, which is likely to expand in future following the redevelopment of the former Dom-Hotel. Cologne remains highly attractive to retailers due in part to its three-million strong conurbation, many shoppers from the nearby Benelux countries and a large number of tourists and trade fair visitors, who make up for the fact that Cologne residents do not enjoy quite as much purchasing power as the other top locations. The city centre’s advantages include a shopping trail of more than three kilometres in A1 locations and the fact that it is an attractive place to stay. In contrast to many other large shopping locations, there have been few large city centre project developments – and there is no sign of any either. The sole more significant exception is the redevelopment of the DuMont Carré. The building of the Cologne-based fashion house Jacobi, which has filed for insolvency, on Hohe Straße is to be completely modernised before Saturn opens a flagship store there covering all five storeys. Contrary to the stagnant trend in retail rents in the first quarter, prime rents firmed slightly to EUR 255 per sqm. However, we do not expect a further increase in rents in the period covered by the forecast up to 2018.

RETAIL SPACE IN COLOGNE

2015 2016 2017e 2018e

Demand





Supply



Retail rents




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2002 2004 2006 2008 2010 2012 2014 2016 2018eCologne Top-7 Regional-12

0,0

0,3

0,6

0,9

1,2

1,5

1,8

2,1

2,4


Top “mainstream-consumer oriented” shopping location in the west

Prime rents likely to stay stable until 2018


22

Dusseldorf: Retail properties

PRIME RETAIL RENTS IN EURO PER M2 PER CAPITA RETAIL SPACE IN M2


Dusseldorf ranks among the leading German shopping locations. Demand for space from retailers is correspondingly strong. Its strengths as a location are based on the large catchment area of two million people and substantial purchasing power, where only Munich fares better among the top 7. And the “Kö” has an international reputation as a luxury shopping street. The city is also being significantly upgraded through a large number of urban development projects which are accompanied by the develop-ment of new retail properties or the renovation of existing ones, such as the Kö-Galerie, Sevens or Kö-Karree. Kaufhof in Dusseldorf is also the first in Germany to be redesigned by the new owner Hudson’s Bay Company. The group, which is appar-ently in financial difficulties, also opened the first German branch of the fashion outlet Saks Off 5th in the immediate vicinity in the Carsch-Haus in June. A new development is the Kö-Bogen designed by Daniel Libeskind, which opened at the end of 2013. The shopping offer is still to be extended by Kö-Bogen II. Work on the major project, which is not expected to be completed until 2020, restarted in the middle of 2017 after some delays. Progress is also being made in the transformation of the A1 location Schadowstraße into a pedestrianised area. After more than ten years of building work, traffic calming measures in the city would then be completed by the demolition of the elevated road and the construction of the Hofgarten-Tunnel and the U-Bahn connection to Schadowstraße. It remains to be seen whether upgrading the shopping location will result in higher prime rents. We do not expect any further increase in the level of EUR 280 per sqm reached in the middle of the year up to 2018.

RETAIL SPACE IN DUSSELDORF

2015 2016 2017e 2018e

Demand





Supply


Total retail space % yoy -0.1 0.9 0.3 0.4

Retail rents




0

40

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160

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2002 2004 2006 2008 2010 2012 2014 2016 2018eDüsseldorf Top-7 Regional-12

1,0

1,2

1,4

1,6

1,8

2,0

2,2

2,4


The comprehensive upgrading of Dusseldorf’s urban fabric is continuing


23

Frankfurt: Retail properties



Frankfurt is one of the strongest German shopping locations. The catchment area comprising 2.3 million people living in the wealthy Rhine-Main area plays a significant role here. Another factor is the rising number of inhabitants, people in gainful employ-ment and visitors. Interest in city centre retail space is correspondingly strong. New developments, such as the Skyline Plaza opened in 2013 close to the exhibition centre, have been easily absorbed by the market. Following a few initial difficulties, visitor numbers are now increasing despite the surrounding building sites. However, there is also a great deal of building in the Zeil shopping area to satisfy consumers’ increasing demands: The new “UpperZeil” will have been completed on the site of the demolished Zeilgalerie by 2018, which will allow the neighbouring Kaufhof to increase its sales floor from the first storey upwards by almost 11,000 sqm. Construction project number two is the redevelopment of the MyZeil shopping centre, which was only opened in 2009 but is to be upgraded with a new restaurant area and an exclusive art house cinema. However, the planned addition of 14,000 sqm of retail space to the Hesse Centre could fail because of objections from the neighbouring towns of Bad Vilbel and Hanau. There are also signs of change in the Nordwestzentrum, which was extended a few years ago: one of the three Frankfurt branches of Kaufhof will be closed here in autumn 2019. The hiatus in the upward trend in retail rents has also reached Frankfurt. Prime rents reached EUR 300 per sqm at the end of 2015 but are unchanged since then. We expect this to be the case until 2018.

RETAIL SPACE IN FRANKFURT

2015 2016 2017e 2018e

Demand





Supply



Retail rents


Prime rents/location % yoy 3.4 / 0.0 0.0 / -2.8 0.0 / 0.0 0.0 / 0.0


0

40

80

120

160

200

240

280

320

2002 2004 2006 2008 2010 2012 2014 2016 2018eFrankfurt Top-7 Regional-12

0,0

0,3

0,6

0,9

1,2

1,5

1,8

2,1

2,4


Frankfurt's shopping centres are being upgraded through construction measures

Growth in prime rents is exhausted for the moment

Frankfurt’s retail sector benefits from the large catchment area, substantial purchasing power and many visitors


24

Hamburg: Retail properties



Hamburg as the leading shopping location in the north is sustained by sound economic growth, population growth, substantial purchasing power and a large catchment area, which easily doubles the number of 1.8 million inhabitants in the city. Tourism is also growing strongly: the recently opened Elbphilharmonie concert hall gives Hamburg another magnet for tourists. In addition, the number of tourists whose cruise ships dock at the Hanseatic city’s three cruise terminals is also growing year by year. Another plus point is Hamburg’s broad retail offer, which ranges from classic shopping locations, such as Spitalerstra e, to the luxury end of the spectrum such as Neuer Wall. However, the sales space on offer in the city is tight; it makes up only a seventh of the entire retail space. It is, however, increasing through numerous project developments, with which the A1 locations on the borders will also be expanded. Construction measures in the shopping centres should also increase their appeal. The Alsterhaus is undergoing a comprehensive refurbishment, as is the former HSH Nordbankpas-sage, which is now known as Perle Hamburg. The Europa Passage is being upgraded with a food court. However, there will be no significant expansion in the space. In contrast, a major project is envisaged in the southern section of the Überseequartier in HafenCity. It comprises a shopping centre with 200 shops and 80,000 sqm of retail space and is to be completed by 2021. This may be too much of a good thing, as this island solution would then account for a quarter of the city centre retail space. Since the end of 2015, prime rents have stuck at EUR 285 per sqm, which, in view of the planned centre, is likely to represent the end of the road for the moment.

RETAIL SPACE IN HAMBURG

2015 2016 2017e 2018e

Demand





Supply



Retail rents




0

40

80

120

160

200

240

280

320

2002 2004 2006 2008 2010 2012 2014 2016 2018eHamburg Top-7 Regional-12

0,0

0,3

0,6

0,9

1,2

1,5

1,8

2,1

2,4


Top-class shopping location in the north which is increasingly boosted by tourism

There is no sign of further growth in prime rents for the moment


25

Munich: Retail properties



With its strengths as a location, Munich takes the leading position among the top German shopping locations. Kaufingerstraße regularly ranks as No.1 for footfall. It also wins in terms of sales floor productivity and purchasing power. With a purchasing power indicator of over 130, Munich has left the other top locations far behind. In addition to the 1.4 million people living in Munich, the catchment area includes a further 1.6 million living in the prosperous surrounding area. The number of buyers is also increasing year by year through rapid population growth. With over 14 million overnight stays by business travellers and city tourists, Munich ranks second after Berlin. However, as a shopping location, Munich is helped by the fact that it offers high quality accommodation and a very diverse range of goods. In addition to the usual retailers to be found in A1 locations, many local businesses are also based in the city. Accordingly, the percentage of chain stores in city centre locations is comparatively low, at between 50 per cent and 80 per cent. The sum of these factors justifies the highest, by some way, prime rent in the German retail sector of EUR 345 per sqm. This figure was reached at the end of 2016 and is unchanged since then. As a result, despite its strengths as a location, at this level, rents may have stopped rising even in Munich. However, the project pipeline is well-stocked in view of persistently strong demand for space. Examples include the old Hettlage/Alte Akademie or the redevelopment of Sattlerplatz following the demolition of the Hirmer multi-storey car park. The largest project of relevance to the retail sector is the construction of the new central railway station, which will not be completed for some time.

RETAIL SPACE IN MUNICH

2015 2016 2017e 2018e

Demand





Supply



Retail rents




0

40

80

120

160

200

240

280

320

360

2002 2004 2006 2008 2010 2012 2014 2016 2018eMunich Top-7 Regional-12

0,0

0,3

0,6

0,9

1,2

1,5

1,8

2,1

2,4


Munich is Germany’s leading shopping destination

The scope for higher prime rents is arguably exhausted


26

Stuttgart: Retail properties



Retail activity in Stuttgart, Germany’s sixth largest city, benefits from a population of 2.7 million and an economically strong hinterland, which ensures it scores well in purchasing power and centrality. Demand is also driven by visitors, as is clear from the 3.5 million overnight stays per year. Another advantage, like Munich and Cologne, is the presence of local specialist shops. Its strengths as a location have also kick-started the development of several large city centre retail projects, which has led to an increase in retail space of a good 20 per cent in one fell swoop: in autumn 2014, the two city centre shopping centres MILANEO and GERBER comprising a total of around 60,000 sqm of retail space opened almost simultaneously. Nevertheless, prime rents still increased somewhat from EUR 235 per sqm in the third quarter of 2014 to EUR 250 by mid-2016. They have remained stable since then. The Dorotheen Quartier providing another 10,000 sqm of shopping space opened in spring 2017. However, it could be that the concentrated centre developments have slightly overburdened the location despite its strengths. Accordingly, more people are arguing that the city centre has been weakened by the closure of individual shops and falling footfall in Königstraße. The recent opening of a Saks Off 5th fashion outlet and a large Primark branch in the former Karstadt building may boost customer numbers in Stuttgart’s A1 location. In this environment, any further increase in prime rents is unlikely in the period covered by the forecast until 2018.

RETAIL SPACE IN STUTTGART

2015 2016 2017e 2018e

Demand





Supply



Retail rents




0

40

80

120

160

200

240

280

320

2002 2004 2006 2008 2010 2012 2014 2016 2018eStuttgart Top-7 Regional-12

0,0

0,3

0,6

0,9

1,2

1,5

1,8

2,1

2,4


Attractive shopping location in economically strong region

Continued growth in space is limiting further rent rises


27

OFFICE PROPERTIES

Just over ten years ago, the top locations were characterised by surplus office space. Vacancy rates were generally around 10 per cent. In Frankfurt, there was almost twice as much vacant office space. Only Stuttgart fared much better. But this picture has changed fundamentally. Today, the difficulty is less in letting office space but far more in the problem of even finding suitable premises for the rising number of office workers. But why has the situation on the key German office markets changed so fundamentally since then? In essence, three factors are behind it.

Firstly, demand for office space has grown thanks to the positive economic situation and the increase in employment associated therewith. The expected macroeconomic slowdown caused by the lack of growth among key European trading partners, Brexit or the large number of international crises has, however, largely failed to materialise. Secondly, construction of new offices is modest compared with demand. To be sure, there is far more construction in the large cities but it is often housing or hotels. Frequently, developers are building exclusive housing blocks rather than offices in city centres. The third reason is also linked to the types of use mentioned. In recent years, many vacant and scarcely lettable office properties have been converted into residen-tial properties or hotels. The withdrawal of this space has reduced the vacancy rate but also decreased the amount of space actually available to rent. Finally, the unused office buildings no longer met the expectations of potential tenants.

Market development, trends and outlook But what is in store for the office market? Demand for space could weaken in the longer term. Possibly because of demographic change, which could result in a fall in the professionally active population over the years to come caused by the retirement of the baby boomer generation when birth rates were higher. Another reason could be the increasing digitisation of the world of work with people focusing more on working from home. But that is just as uncertain as demographic change, which can again and again throw up surprises such as waves of immigration or people taking retirement later. There are well-known examples of companies such as Yahoo a few years ago, or IBM this spring who initially set home working as standard practice for their employees but subsequently ordered them back into their offices. This makes clear the difficulties in forecasting demand for office space in the longer term. This might be a reason why construction of new offices is not more dynamic.

THE BUSINESS CLIMATE DETERMINED BY THE IFO INSTITUTE HAS IM-PROVED PERCEPTIBLY COMPARED WITH 2016

ECONOMIC EXPECTATIONS REMAIN AT A HIGH LEVEL

Source: ifo Institute Source: ZEW

707580859095

100105110115120125130

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

expectations ifo business climate business conditions

indices 2005 = 100, seasonally adjusted

-100-80-60-40-20

020406080

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

economic sentiment economic situation

The shift from surplus office space to a shortage of office space is based on...

…strong demand for space, limited construction of new offices and the conversion of vacant office properties

In the long-term, demand for office space may suffer from demographic change and digitisation – but that is not definite


28

In the short term, demand for space is, however, likely to increase. The economic outlook for Germany is, as our forecast on page 6 shows, still positive with growth rates of 2 per cent or just below until 2018. Surveys of companies (ifo) and economic experts (Centre for European Economic Research [ZEW]) reflect the good prospects for corporate business development and the economy. The increase in employment and consequently demand for office space is therefore likely to continue. Deserted desks in large cities are more likely to be attributable to a lack of staff than surplus office space.

TOP LOCATIONS: THE NUMBER OF OFFICE WORKERS IS INCREASING MORE RAPIDLY OFFICE SPACE

THERE HAS BEEN A SIGNIFICANT DECLINE IN THE SUPPLY OF OFFICE SPACE, WHICH WAS ABUNDANT A FEW YEARS AGO

Source: BulwienGesa, Feri Source: BulwienGesa, Feri

As the number of office workers has grown faster than office space in recent years, the ratio of the two variables has shrunk appreciably. Ten years ago, there was roughly 40 sqm for each employee on average in the top locations, today this figure has de-creased to only 35 sqm. The slowdown in the expansion in office space is very clear from the figures for new office space coming onto the market each year. In the ten years from 1997 to 2006, the cumulative annual space was around 1.4 million sqm. By contrast, it was only 0.8 million per year in the following decade up to 2016. In view of the increase in office space from 64 (1997) to 79 million sqm last year, the average amount of new space coming onto the market has halved from 2 to 1 per cent com-pared with the previous two decades. Based on the office space currently under construction, the growth this year and next will not be very different. As a result, space will remain scarce for the moment.

TOP LOCATIONS: NEW OFFICE SPACE COMING ONTO THE MARKET REMAINS COMPARATIVELY LIMITED

TOP LOCATIONS: SCARCE SUPPLY IS PREVENTING ANY INCREASE IN TAKE-UP OF OFFICE SPACE

Source: BulwienGesa Source: BulwienGesa, DZ BANK Research forecast

5558616467707376798285

1,41,51,61,71,81,92,02,12,22,32,4

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

office workers in million (lhs) office space in milion sqm (rhs)

32

33

34

35

36

37

38

39

40

41

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

office space per office worker in sqm

0

500

1.000

1.500

2.000

2.500

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

e20

18e

new office space 1997-2006 2007-2016

office space in thousand sqm

forecast

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

e20

18e

office space take-up 1997-2006 2007-2016

office space in thousand sqm forecast

There are no obstacles to growth in the period covered by the forecast up to 2018

There is not likely to much change to the scarcity of office space in the near future.


29

The fact that office space is virtually unobtainable might also be reflected in falling take-up despite persistent demand for space. The less obtainable space is available, the more difficult it will be to find large connected office space. Nevertheless, take-up up to 2018, at an estimated 3.4 to 3.5 million sqm, is likely to achieve a visibly higher level than the previous decade.

The reduction in vacancies described above has caused a sharp fall in the vacancy rate. It has halved from around 10 per cent in 2010 to the current figure of less than 5 per cent. It is not surprising that strong demand for space and an increasing shortage thereof is leading to higher rents. However, it is surprising that the trend in rents is more stable than in previous market phases and that rent rises are relatively moderate. Prime rents rose by 3 per cent on average per year from 2011 to 2016. There have been none of the excesses seen in the dot-com boom. Companies are evidently exercising a degree of caution on the market despite positive economic prospects: tenancy agreements are not concluded at any old price. Potential tenants’ conduct is consistent with the picture of a sound but not effervescent upturn in Germany.

TOP LOCATIONS: RISING EMPLOYMENT IS RESULTING IN A SUSTAINED FALL IN THE VACANCY RATE

TOP LOCATIONS: PRIME RENTS ARE RISING AT A MODERATE PACE

Source: BulwienGesa, DZ BANK Research forecast Source: BulwienGesa, DZ BANK Research forecast

Office: comparison of top locations The seven largest German cities are attractive for companies. While other large cities certainly fare well in terms of the relevant location factors, the sum of the characteris-tics elevates the top 7-cities. They gain plus points through first-class connections by road, rail and air. Thanks to international flight connections foreign destinations can also be reached reasonably rapidly. Cities also offer good access to specialist staff, both in the large employment market in the conurbations and from the ongoing influx. The large office markets, which mean that larger premises can be rented without companies having to develop these themselves previously, represent another advantage. The final aspect has, however, been diminished by the reduction in the vacancy rate. This is particularly true of Berlin, Munich and Stuttgart. With vacancy rates of 2 to 3 per cent, there is scarcely any office space still freely available.

1.550

1.700

1.850

2.000

2.150

2.300

2.450

0

2

4

6

8

10

12

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

e20

18e

vacancy rate in % (lhs) office workers in thousand (rhs)

16

18

20

22

24

26

28

30

32

-16

-12

-8

-4

0

4

8

12

1619

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

17e

2018

e

office prime rent yoy in % (lhs)office prime rent in Euro per sqm (rhs)

Despite strong demand, take-up of office space might fall because of the lack of supply

Rent rises remain moderate despite the increasing shortage of office space

The top 7 cities are attractive locations for companies


30

OFFICE EMPLOYMENT IS INCREASING FAR MORE RAPIDLY THAN OFFICE SPACE

VACANT OFFICE SPACE IS DISAPPEARING RAPIDLY

Source: BulwienGesa, Feri Source: BulwienGesa, DZ BANK Research forecast

This basic appeal of the top locations holds true without exception. Accordingly, all locations are united by a marked increase in employment in the last ten years. The fact that job engines, such as Munich or Stuttgart, fare less well in terms of percentage growth in the number of office employees is likely to be primarily due to the high starting level in these locations. The pleasing economic development is also apparent from rising economic output per inhabitant and the dramatic fall in unemployment ratios in all seven locations. However, there are considerable differences in the individual cities’ economic data. Accordingly, Berlin’s pro capita economic output is far lower than in the other six cities. The figure is more than twice as large in Frankfurt and Stuttgart.

POSITIVE TREND: GROSS DOMESTIC PRODUCT PER INHABITANT ... … IS INCREASING, WHILE UNEMPLOYMENT IS FALLING

Source: Feri Source: BulwienGesa

However, this is not to diminish the economic success which the capital has achieved in recent years. Berlin can boast considerable progress in reducing unemployment: the unemployment rate here has more than halved to below 9 per cent in July 2017 within ten years – and has consequently visibly reduced the gap between it and the other cities. The lowest figures are reported by Stuttgart with less than 5 per cent (July 2017) and Munich at just over 4 per cent. The low figure underlines the economic strength of the Bavarian capital, where employment continues to fall despite very high immigration – the number of inhabitants regularly grows by more than 1 per cent per year.

0

4

8

12

16

20

24

28

Berlin Dussel-dorf

Frank-furt

Ham-burg


Top-7

office space office workers

growth from 2006 to 2016 in %

02468

101214161820

Berlin Dussel-dorf

Frank-furt

Ham-burg


Top-7

vacancy rate in % (2006, 2008, 2010, 2012, 2014, 2016 and 2018e)

20062018e

20

30

40

50

60

70

80

90

100

1996 2000 2004 2008 2012 2016

Berlin

Dusseldorf

Frankfurt

Hamburg

Cologne

Munich

Stuttgart

gross domestic product per capita in thousand Euro

4

6

8

10

12

14

16

18

20

1996 2000 2004 2008 2012 2016

Berlin

Dusseldorf

Frankfurt

Hamburg

Cologne

Munich

Stuttgart

unemployment rate in %

The economic performance of the top locations is heartening

There has been a perceptible fall in unemployment in all locations


31

The development of new office space has lagged behind the rapid growth in office employment for years; accordingly, the percentage of vacant office space in all locations has fallen significantly. Halfway through 2017, Frankfurt had by far the highest figure with a vacancy rate just below double figures. Dusseldorf is already well below this at just under 8 per cent. The figures for Hamburg and Cologne are even more favourable at around 5 per cent. And the office markets in Berlin, Munich and Stuttgart are largely exhausted with vacancy rates of less than 3 per cent. These low figures could even prove to be locational disadvantage if potential tenants seeking larger connected space, in particular, cannot be offered suitable properties. In Munich, the situation is exacerbated by frighteningly high residential rents.

ALL IN ALL, OFFICE RENTS ARE ONLY RISING MODESTLY BERLIN ACHIEVES THE LARGEST INCREASE IN PRIME RENTS


Unlike the residential market, the ever-diminishing supply on the office market has, as explained above, not triggered any significant rent rises. The prime office rent rose by 20 to 24 per cent within ten years at four of the seven locations. In Frankfurt and Cologne, the increase in rent was only half as much. Only Berlin can demonstrate appreciably more dynamism with an increase of almost 40 per cent. Having been rel-atively cheap a few years ago, Berlin will rank alongside Frankfurt and Munich among the three most expensive German cities with this trend in rents, which – assuming it continues – is likely to achieve a prime rent of EUR 30 per sqm in the near future.

Because rents in Munich have risen far more rapidly than those in Frankfurt in recent years, the city has caught up with the rent level in the international financial centre. In mid-2017, they were level pegging with a prime rent of EUR 35.50. Overall, however, prime rents in the top locations over the year to date are largely unchanged compared with the end of 2016: only Berlin and Munich achieved a visible increase of around 1 EUR each in the first half of the year.

10

15

20

25

30

35

40

45

50

1998 2002 2006 2010 2014 2018e


office prime rent in Euro per sqm

11 11

2023 23 24 24

37

Cologne Frank-furt

Dussel-dorf

Top-7 Stutt-gart

Ham-burg

Munich Berlin

growth of the office prime rents in % from 2006 to 2016

Too low a vacancy rate can prove to be a disadvantage for a location

Office rents fail to rise by even a quarter within ten years

Munich's prime rent reaches Frankfurt’s level


32

Top locations in a European context

Just like retail rents, office rents in the top locations do not head the rankings compared with the rest of Europe. Given its economic strength, increasing employment and the scarcity of office space available, prime German office rents must be seen as relatively modest. As in the retail sector, this is also likely to be linked to the fact that Germany has a whole series of prosperous office locations. There is no concentration on a small number of cities, in some cases even on only one single dominant economic centre. Consequently, no German location achieves an exposed market position of the kind that would allow far higher rents than the Frankfurt or Munich level.

PRIME OFFICE RENTS IN EUROPE IN EUR PER SQM – TOP GERMAN LOCATIONS ARE AVERAGE

Source: BNP Real Estate, DZ BANK Research As at: Q4 2016

0

20

40

60

80

100

120

140office prime rent in Euro per sqm per month

Prime German office rents are average by European standards


33

Berlin: Office properties

PRIME RENTS IN % COMPARED WITH PREVIOUS YEAR VACANCY RATE (IN %)

Source: BulwienGesa, DZ BANK Research forecast Source: Feri, DZ BANK Research forecast

Having previously been viewed as a “problem child”, there has been a sustained im-provement in Berlin’s economic situation. This is clear from the continuous fall in the unemployment rate, which has fallen from almost 20 per cent in mid-2005 to 8.8 per cent in July of the current year, despite the rising number of inhabitants. Today, the capital is a sought-after location for e-commerce providers and fintechs but also for established companies. Berlin’s appeal as a place to live helps, making it easier to obtain specialist staff. The sustained upturn is, however, reflected just as much in the figures for office market. The prime rent, which was still at a reasonable level of around EUR 20 per sqm in 2010, rose to EUR 29 by mid-2017 and could exceed the EUR 30 mark in the coming year. However, the reason for the highest rise in rents among the top locations is not just strong demand but, in particular, the shortage of space. There has been a noticeable increase in the construction of new office space. However, new construction is not sufficient to overcome the shortage. This is why the vacancy rate is likely to fall further towards 2 per cent in the period covered by the forecast up to 2018. As a result, the Berlin office market has lost the previous locational advantage of having a good supply of reasonable office space without letting activity being harmed. On the contrary: despite the limited supply, the letting volume has reached a new record, at 415,000 sqm, in the first half of the year. However, given the lack of space, it is doubtful whether the previous peak of 875,000 sqm for 2016 as a whole will be exceeded in the current year.

OFFICE SPACE IN BERLIN

2015 2016 2017e 2018e

Demand

GDP % yoy 5.4 3.4 2.8 3.0

Per capita GDP EUR 35,602 36,507 37,323 38,265

Per capita GDP % yoy 516.4 523.9 531.1 531.1

No. of office workers % yoy 1.4 1.5 1.4 1.4

Supply

Total office space In thousand sqm 18,929 18,932 19,050 19,230

Total office space % yoy 1.0 0.0 0.6 0.9

Vacancy rate (%) 3.8 3.0 2.4 2.1

Office rents

Prime rent/secondary locations EUR/sqm 24.0 / 9.5 28.0 / 11.0 29.4 / 11.0 30.5 / 11.0

Prime rent/secondary locations % yoy 4.3 / 11.8 16.7 / 15.8 5.0 / 0.0 3.7 / 0.0


0

4

8

12

16

20

24

28

32


0

2

4

6

8

10

12


Berlin’s economy continues its successful path

Despite a limited supply, take-up is substantial

Prime rent likely to rise to EUR 30 per sqm by 2018


34

Cologne: Office properties



With take-up of 375,000 sqm in 2016, the Cologne office market not only exceeded the previous year’s reasonably good result but also the previous high of 300,000 sqm from 2006. Several major deals, which accounted for almost 40 per cent of the 2016 take-up, contributed to the record result. The list is headed by the new headquarters of Zurich Versicherung in MesseCity comprising almost 60,000 sqm. The other five major deals are all attributable to public administration, namely the University, the City of Cologne and the Bundesagentur für Arbeit (Federal Employment Agency) respectively. The current year has started well with take-up of 150,000 sqm halfway through the year but is likely to fall well short of the exceptional result achieved in 2016. Of the two major deals in the first half, the larger deal also involves the public administration. The smaller deal involves the construction of new headquarters for the road building group Strabag. The relocation of Lufthansa, which is leaving its previous headquarters in Cologne-Deutz, has set the office market in motion. The prime rent was determined at EUR 21 per sqm in the first half. This level is regarded as largely consistent since 2012, which is likely to be attributable to the major significance of the public administration for the Cologne office market. The vacancy rate has fallen to exactly 5 per cent halfway through the year. The decline is likely to continue because the amount of new space coming onto the market remains modest. The ongoing lack of space could at least pave the way for a slight increase in the prime rent.

OFFICE SPACE IN COLOGNE

2015 2016 2017e 2018e

Demand

GDP % yoy 2.3 3.0 2.9 3.0




Supply



Vacancy rate (%) 6.0 5.5 4.8 4.5

Office rents


Prime rent/secondary locations % yoy 0.0 / -1.2 0.0 / 3.8 1.0 / 0.0 1.4 / 0.0


0

4

8

12

16

20

24

28

32


0

2

4

6

8

10

12


Following a record year last year, the Cologne office market has also made a good start in 2017

The scarcity of freely available office space could help the prime rent rise slightly


35

Dusseldorf: Office properties



Although the Dusseldorf office market did not produce a bad result in terms of take-up in 2016, the market cannot match the predominantly excellent figures achieved by the other top locations. Compared with the figure from 2015, which was admittedly very high, take-up fell by around 0.25 per cent to 308,000 sqm and was therefore within the ten-year average. This is because no major tenancy agreements, of which there were still a fair number in 2015, were concluded. In contrast, the first half of 2017 has been promising with the highest take-up since 2010. This includes two major deals covering more than 10,000 sqm; the tenants are the Trinkaus & Burkhard and Lampe banks. Despite strong demand for the relatively limited supply of office space in new building projects, prime rents in Dusseldorf have ranged between EUR 24 to 25 per sqm since 2012. This may also be attributable to the still relatively high percentage of vacant office space, which fell below 8 per cent in the first half of 2017. Apart from demand for office space, conversion into housing and hotels has played a role here. The declining vacancy rate in conjunction with the reduction in vacancies is likely to ensure a modest increase in prime rents, which could, as a result, return to close to the previous maximum of EUR 25.50 per sqm over the coming year. However, a more marked rent rise is unlikely because companies moving to new buildings will free up corresponding amounts of space in existing buildings.

OFFICE SPACE IN DUSSELDORF

2015 2016 2017e 2018e

Demand

GDP % yoy 2.5 3.2 3.0 3.2




Supply



Vacancy rate (%) 8.8 8.3 7.6 7.4

Office rents




0

4

8

12

16

20

24

28

32


0

2

4

6

8

10

12


Following a relatively poor previous year, it looks as though things are picking up on the office market in Dusseldorf this year


36

Frankfurt: Office properties



After two relatively weak years, the hitherto most expensive German office market Frankfurt has gained momentum again. At 460,000 sqm, office take-up again reached an above-average level in 2016. There was also a promising start to 2017; office take-up in the first half of 2017, at just over 200,000 sqm, was exactly equal to the good level of the previous year. A major deal for 12,000 sqm by the law firm Clifford Chance contributed to this. It is apparent from the second largest tenancy agreement, covering 8,000 sqm, agreed with Morgan Stanley, that Frankfurt, as the location of the ECB, is, as expected, benefiting from Brexit. The high albeit declining vacancy rate of just below 10 per cent means that office space is available although a large proportion of this is unlikely to be suitable because of its location or the condition of the property. Besides Brexit, two trends are shaping the Frankfurt office market: the positive economic environment with rising employment is faced with problems in the financial sector – regulation, low interest rates and digitisation. In this environment, prime rents have been largely stable since 2013. Halfway through the year, it stood at EUR 35.50 per sqm. The sound economic situation and the demand for office space triggered by Brexit could push prime rents to EUR 36 per sqm in 2017 and EUR 37 in 2018. Assuming growth in space is manageable, the reduction in vacancies should continue. The Bundesbank is also generating demand on the office market, as it will need alternative premises for over 2,000 employees from 2019 until the end of the next decade while its building is being completely refurbished.

OFFICE SPACE IN FRANKFURT

2015 2016 2017e 2018e

Demand

GDP % yoy 4.5 3.2 3.0 3.2




Supply


Total office space % yoy -0.5 -0.4 0.3 0.5

Vacancy rate (%) 11.3 10.7 10.0 9.3

Office rents




0

5

10

15

20

25

30

35

40

45


0

24

6

810

1214

1618

20


Despite weakened banking sector, office market is on the up

Brexit as an opportunity: British bankers could push prime rents higher


37

Hamburg: Office properties



The upward trend on the Hamburg office market is continuing. Since 2014, annual office take-up has consistently exceeded 500,000 m2 – and this figure is trending upwards. Accordingly, the 550,000 sqm achieved last year is likely to be exceeded in 2017, as deals concluded in the first half contributed almost 300,000 sqm and consequently matched the previous record years of 2007 and 2008. However, major deals helped the good result: Olympus is adding the Olympus Campus to its European headquarters in Hamburg and has rented almost 35,000 sqm for this purpose. Ham-burg’s university is the tenant in the second major deal, which comprises 20,000 sqm. Despite these positive figures, prime rents did not increase in the first half and remain at EUR 26 per sqm for the moment. In return, the reduction in vacancies is continuing. The rate is likely to fall below 5 per cent over the year and consequently halve com-pared with the high of a good 10 per cent in 2010. The level of vacancies is likely to decline further because of strong demand for space from the broadly-based Hamburg economy. However, the decline is likely to slow somewhat because development of new office space has also picked up. Admittedly, only around three quarters of the ten-year average space, at 260,000 sqm, is likely to be added in 2017 and 2018 together. In this respect, the supply of attractive office space will still be too small rather than too large. Prime rents could therefore rise further. We are confident that they will rise to EUR 27 per sqm by 2018.

OFFICE SPACE IN HAMBURG

2015 2016 2017e 2018e

Demand

GDP % yoy 3.8 4.1 3.1 3.3




Supply



Vacancy rate (%) 5.5 5.3 4.9 4.7

Office rents




0

4

8

12

16

20

24

28

32


0

2

4

6

8

10

12


Even after three strong years, the Hamburg office market is not easing off


38

Munich: Office properties



It is astonishing that office space take-up in Munich year, at 580,000 sqm, exceeded the 10-year average by 10 per cent although there is scarcely any freely available space on offer. But, at almost 290,000 sqm, a good result was also achieved in the first half of 2017. The problem of there being scarcely any office space available is clear from the major deals of over 10,000 sqm, which - with one exception - have only materialised in newly constructed properties in both this year and last. With a vacancy rate that has fallen to just over 2 per cent halfway through the year, large connected office space, in particular, is virtually unobtainable. In this respect, a perceptible increase in letting figures would be conceivable in view of Munich’s dynamic economy. Because completion figures are only expected to be moderate in 2017 and 2018, the bottleneck will only get worse. In the long run, the lack of office space and housing combined with the highest residential rents in Germany is likely to have an adverse impact on the location’s development, which is already struggling to find specialist staff with an unemployment rate of 4 per cent. Halfway through the year, prime rents, at EUR 35.50 per sqm, caught up with Frankfurt - previously, Germany’s most expensive office location. Without the additional demand triggered by Brexit, Munich would be well placed to overtake Frankfurt in terms of prime rents by 2018. Both markets are likely to be level-pegging for the moment.

OFFICE SPACE IN MUNICH

2015 2016 2017e 2018e

Demand

GDP % yoy 4.1 3.4 3.3 3.5




Supply



Vacancy rate (%) 3.8 2.7 1.9 1.5

Office rents




0

5

10

15

20

25

30

35

40


0123456789

1011


Increasing scarcity of office space, housing and specialist staff is shaping Munich as a dynamic business location

At EUR 35.50 per m2, the prime rent has reached Frankfurt’s level


39

Stuttgart: Office properties



As in Berlin and Munich, there has been an ongoing fall in the amount of freely available office space in Stuttgart. Accordingly, in mid-2017, the vacancy rate fell to less than 3 per cent. And as in the Bavarian capital, the major deals in the last year involve new office properties, as it is very difficult to find larger connected space in the existing office stock. The market also achieved the record result of 2016 through a few major deals to an even greater extent than Cologne. The new Daimler Campus accounted for 77,000 sqm. Together with deals for more than 50,000 sqm for Bosch, they drove office space take-up to 400,000 sqm; almost twice the ten-year average. However, unlike Cologne, the six major deals did not involve public administration but the manufacturing industry. While the economies of the other top locations are domi-nated by services, the capital of Baden-Württemberg still has a substantial amount of industry. The office market made an average start to the current year, which is attributable to the absence so far of major deals in excess of 10,000 sqm. Thanks to strong demand for space combined with a lack of supply, the prime rent rose to EUR 20 per sqm for the first time up to June. However, the likelihood of more marked rent rises driven by the lack of space is reduced by the relatively substantial number of new properties coming onto the market this year and next.

OFFICE SPACE IN STUTTGART

2015 2016 2017e 2018e

Demand

GDP % yoy 4.9 3.1 2.9 3.1




Supply



Vacancy rate (%) 3.7 2.9 2.8 2.7

Office rents




0

4

8

12

16

20

24

28

32


0

2

4

6

8

10

12


Sound demand for space combined with an ever-diminishing supply has pushed Stuttgart's prime office rent to EUR 20 per sqm


40

RESIDENTIAL PROPERTIES

The top locations continue to attract large numbers of newcomers. Over the past five years, the cumulative number of inhabitants in the seven cities has increased by 114 thousand people on average per year – this equates to annual growth of 1.2 per cent. Even the perceptible increase in purchase prices and rents for apartments and houses has not been sufficient to have any noticeable impact on the rate of influx. As a rough estimate, some 60,000 apartments are needed per year simply to satisfy the demand for housing resulting from the influx. However, the annual number of comple-tions falls far short of this. Even the relatively substantial, compared with previous years, number of 40,000 new apartments (2016) is far too low, especially as the number between 2007 and 2010 was only half this figure.

This results in an ever-increasing demand gap on the housing market. The influx has boosted the number of inhabitants in the top locations by a good million in ten years to almost 10 million people today. Over 500,000 apartments would have to be built simply to cope with this. However, this figure is matched by a cumulative figure of only 260,000 completions since 2006. The gap is exacerbated by the fact that demand for housing is also increasing because of the trend towards fewer people per household. Through this reduction in household size, the number of private households increases, making it a key demand determinant even when the population is stagnant. Apartments are also being lost from the housing stock.

THE INFLUX INTO THE TOP LOCATIONS HAS GATHERED MOMENTUM IN THE RECENT PAST IN PARTICULAR

THE NUMBER OF NEW HOUSEHOLDS HAS EXCEEDED RESIDENTIAL CONSTRUCTION IN THE TOP LOCATIONS TWO TO THREE-FOLD SINCE 2006

Source: Feri Source: Feri

Even under optimistic assumptions, the demand gap in the housing market cannot be closed in the short term. To achieve this, figures for new construction would have to reach an entirely unrealistic level. But even growth beyond the current perceptible increase in the level of housing construction is a challenge for the seven large cities even though the figure of construction permits reached 60,000 units in 2016. However, it is doubtful whether this volume will be maintained over the coming years, as space for construction in the densely populated large cities is declining. And zoning new areas for construction and increasing the density of use in existing residential areas is a contentious project, which is often met with considerable resistance from residents and environmentalists. Their concerns relate to the character of the area in which they live, the frequent scarcity of school and day nursery places, heavily congested roads and, not least, the preservation of green spaces and areas of fresh air. But even if new space for construction in the amount required can be pushed through against all the resistance, this will take a great deal of time.

24 75 46 35

216

10766

3,9 4,2 4,4

5,66,2

7,3

9,0

Dussel-dorf

Ham-burg

Cologne Stuttgart Berlin Munich Frank-furt

population growth from 2011 to 2016 in thousand poeple in %

0

25.000

50.000

75.000

100.000

125.000

150.000

175.000

200.000

Berlin Dussel-dorf

Frank-furt

Ham-burg


growth of individual households (2006-2016)cumulative dwelling completions (2006-2016)

ratio of new individualhouseholds to completed dwellings2,8

2,2

2,0

2,0

1,7

2,3

2,3

The move into top locations has “emptied” the housing markets

Taken together, there is a shortfall of several 100,000 apartments in the top locations

Obstacle No. 1: a lack of land for construction limits residential construction in major cities


41

CONSTRUCTION PERMITS AT A 20-YEAR HIGH CAPACITY IN THE BUILDING TRADES IS UNDER CONSIDERABLE STRAIN

Source: Feri Source: ifo, Federal Statistical Office

And, however heartening the increase in the number of construction permits may be, only completed homes will ease the pressures on the housing market. But this is precisely what is lacking, as is apparent from the increasing gap between permits and completions. Over 240,000 homes were approved in the top locations between 2011 and 2016 but only around 166,000 were actually built. One reason for this is that capacity in the construction industry is already virtually fully utilised, especially in conurbations such as the top locations. Today, utilisation is even markedly greater than in the post-reunification boom. While high unemployment at the time meant that the number of construction workers could increase rapidly to deal with the flood in orders, it is far more difficult to employee new staff now because the pleasing upturn on the employment market offers job-seekers far better prospects today. Other factors behind the lagging completion figures may include rising construction costs, which may play havoc with the original budget for the construction project or deliberate delays in construction to take advantage of rising prices.

CONSTRUCTION ACTIVITIES HAVE STEPPED UP MOST NOTICEABLY IN BERLIN AND HAMBURG, WHILE...

...THE GREATEST NUMBER OF HOMES PER CAPITA HAS BEEN COMPLETED IN FRANKFURT AND MUNICH

Source: Feri Source: Feri

There are relatively substantial differences in construction activity between the individ-ual locations. Accordingly, the most housing is being built in relation to the number of inhabitants in Frankfurt and Munich with six and five homes per thousand inhabitants

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

dwelling completions building permits

2.000

2.250

2.500

2.750

3.000

3.250

3.500

50

55

60

65

70

75

80

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

construction sector capacity utilisation in %, 4Q average (lhs)construction sector employees in 000s, 4Q average (rhs)

0

4.000

8.000

12.000

16.000

20.000

24.000

28.000

Berlin Dussel-dorf

Frank-furt

Ham-burg


2010 2011 2012 2013 2014 2015 2016

residential building permits

0

1

2

3

4

5

6

7

Berlin Dussel-dorf

Frank-furt

Ham-burg


2010 2011 2012 2013 2014 2015 2016

dwelling completions per 000 inhabitants

Obstacle No. 2: capacity bottlenecks in the construction industry are limiting completions

The greatest number of homes is being built in Frankfurt and Munich ...


42

respectively. Above-average amounts of housing had, however, previously been built in these two cities, which are also experiencing the most rapid growth in population. While three to four homes per 1,000 inhabitants were being built here in 2010/2011, the figure in Berlin, Dusseldorf and Hamburg was only one to two residential units.

However, the gap has shrunk considerably in the meantime. In Berlin especially and, to a lesser extent, in Hamburg, there has been a marked expansion in both construction permits and completions. By contrast, residential construction activities in Cologne, Munich and Stuttgart have remained relatively stable over the years. And in Frankfurt, there has been a perceptible increase in the number of completions while construction permits have risen more slowly.

Ultimately, there is no sign of any general easing on housing markets in the top locations. Rather, given the conditions described above – a sustained influx, a significant existing demand gap and insufficient construction – the situation on the housing market is most likely to deteriorate further. This is why the pressure towards higher rents will also persist. However, the degree to which housing markets are under strain differs considerably. High levels of immigration in Frankfurt and Munich are putting the market under a great deal of pressure. The fact that rents are already so high is most likely to have a dampening effect here because the number of households that can still pay the current rents or are prepared to do so is diminishing. The chart below right shows that residential rents are rising in all top locations but at different rates. While rents in Berlin, Dusseldorf, Hamburg and Cologne are rising at a somewhat more moderate rate, they are rising more rapidly in Frankfurt and Munich despite already being higher. Residential rents are also rising relatively sharply in Stuttgart.

TOP LOCATIONS: RENTS FOR NEW HOMES HAVE RISEN CONTINUOUSLY SINCE 2006

NEW HOMES IN MUNICH ARE 50% MORE EXPENSIVE THAN IN BERLIN AND COLOGNE


The differences in the rate at which rents are rising mean that the range in residential rents between the seven locations has expanded in recent years. While the average first occupancy rent ranged from EUR 9 to 13 per sqm in 2011, the range has currently increased to EUR 12 to 18 per sqm. However, the relative gap between the cheapest and the most expensive location is astonishingly stable over time. Apart from smaller deviations, the average first occupancy rent at the most expensive top location – that is consistently Munich – is 50 per cent higher than initially in Stuttgart and subsequently in Berlin as the least expensive top location today.

7

8

9

10

11

12

13

14

15

-8

-6

-4

-2

0

2

4

6

8

1998 2002 2006 2010 2014 2018eaverage rent first letting yoy in % (lhs)average rent first letting in Euro per sqm (rhs)

6789

10111213141516171819

1998 2002 2006 2010 2014 2018e


average rent first letting in Euro per sqm

... while construction activities have increased most in Berlin and Hamburg

The fraught housing market situa-tion in top locations could intensify still further

The average first occupancy rent ranges from EUR 12 to 18 per sqm


43

THE RELATIVE GAP BETWEEN THE LEAST EXPENSIVE AND MOST EXPENSIVE TOP LOCATIONS IS LARGELY STABLE

RESIDENTIAL RENTS HAVE INCREASED VISIBLY LESS RAPIDLY IN COLOGNE AND STUTTGART

Source: BulwienGesa, DZ BANK Research Source: BulwienGesa

The ratio of 1.5 is equally true of the prime segment of the housing market. Here, the first occupancy rent ranges from just over EUR 16 per sqm in Cologne to EUR 24 in Munich. It is just over EUR 20 in Frankfurt and Hamburg. Berlin, Dusseldorf and Stuttgart are, in contrast, a good EUR 2 to 3 less expensive.

FORECAST "HOUSING" UP TO 2018

Source: Source: BA, BulwienGesa, Feri, DZ BANK Research forecast

024681012141618

0,00,20,40,60,81,01,21,41,61,8

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

ratio most expensive to most affordable city (lhs)average rent first letting in Euro per sqm - most expensive city (rhs)average rent first letting in Euro per sqm - most affordable city (rhs)

2933

4448 48

52 5257

Cologne Stutt-gart

Hamburg Top-7 Dussel-dorf

Munich Frank-furt

Berlin

residential: growth of the average rent first letting from 2006 to 2016 in %

Year Berlin CologneDussel-

dorfFrank-

furtHam-burg Munich

Stutt-gart Top-7

DemandPopulation in thoausand 2016 3.513 1.053 610 736 1.784 1.457 621 9.7755-year change in % 2011-2016 6,6 4,6 4,1 9,9 4,4 7,9 5,9 6,2Private households in thousand 2016 2.057 578 330 408 1.031 842 336 5.582Unemployment rate in % 2016 9,8 8,7 7,8 6,3 7,1 4,6 5,3 7,8Disposable income per capita in Euro 2016 17.025 22.295 25.965 21.898 21.645 25.189 24.756 21.069Supply 0Dwelling units in thousand 2016 1.940 542 334 381 927 784 307 5.216Annual completions 2005-2015 1,6 2,9 1,8 4,3 2,6 4,8 2,6 2,7per 1000 inhabitants 2016 3,9 3,5 2,8 5,8 4,3 5,1 3,4 4,1Residential rent 0First letting, average rent 2016 11,6 12,0 12,6 14,8 13,4 17,0 13,0 13,2in Euro/sqm 2017e 12,0 12,2 12,9 15,3 13,7 18,0 13,5 13,6

2018e 12,3 12,5 13,2 15,8 14,0 18,5 14,0 14,02016 0,9 4,3 1,6 9,6 1,5 7,6 8,3 3,8

YOY change in % 2017e 3,4 1,7 2,4 3,4 2,2 5,9 3,8 3,52018e 2,5 2,5 2,3 2,9 2,2 2,8 3,7 2,6

5-year change in % 2011-2016 27,5 14,3 16,7 28,7 7,2 27,8 34,0 21,7First letting, maximum rent 2016 17,0 16,0 16,5 21,0 20,2 24,0 17,5 18,8in Euro/sqm 2017e 17,5 16,2 16,9 21,0 20,5 24,0 17,7 19,1

2018e 17,9 16,5 17,3 21,5 20,8 24,5 18,0 19,52016 6,3 3,2 3,1 5,0 3,6 6,7 6,1 5,3

YOY change in % 2017e 2,9 1,3 2,4 0,0 1,5 0,0 1,1 1,62018e 2,3 1,9 2,4 2,4 1,5 2,1 1,7 2,0

5-year change in % 2011-2016 18,9 14,3 13,8 23,5 12,2 29,7 33,6 19,9

In the upper market segment, it costs between EUR 16 and 24 per sqm to rent a newly constructed apartment


44

Despite the differences between the rental levels of the individual housing markets, the percentage rent increase has been relatively similar in most locations. First occu-pancy rents in Dusseldorf, Frankfurt, Hamburg and Munich have risen by around 50 per cent within ten years. They have risen by a few percentage points more in Berlin because of the low starting level, among other factors. Residential rents in Cologne and Stuttgart have, in contrast, risen appreciably less quickly. Here, the increase over ten years is around 30 per cent.

The complaints frequently expressed recently that rents are prohibitive in Germany is put into perspective when rents are considered in a European context. Despite the sharp rent rises in recent years, even Munich as the most expensive place to live in Germany is not expensive compared with other large European cities.

DESPITE THE HIGH RENT INCREASES, IT IS POSSIBLE TO LIVE COMPARATIVELY CHEAPLY IN BIG GERMAN CITIES COMPARED WITH THE REST OF EUROPE

Source: www.numbeo.com

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000monthly rent for a 3 bedroom apartment in the city centre in Euro

First occupancy rents in the top locations have risen by around 50 per cent within ten years

Rental housing is often far more expensive in other European countries


45

OVERVIEW OF FORECASTS

Structural data (as at 2016) Population in thousands Population

2006-2016 (%)GDP

in EUR mP.c. GDP

in EURAnnual p.c. disposable

income in EUR Unemployment rate (%)

Berlin 3,513 9.0 128 36,507 17,025 9.8

Cologne 1,053 7.2 58 54,942 22,295 8.7

Dusseldorf 610 6.6 46 75,476 25,965 7.8

Frankfurt 736 16.0 69 93,766 21,898 6.3

Hamburg 1,784 7.0 114 63,728 21,645 7.1

Munich 1,457 14.9 105 72,181 25,189 4.6

Stuttgart 621 8.8 50 81,184 24,756 5.3

Top locations 9,775 9.6 570 58,361 21,069 7.8

Retail properties Retail space as at 2016 Prime rent in EUR/sqm

Change in prime rent vs previous year (%)

Retail sales vs previ-ous year (%)

in

1,000 sqm

2006-2016

(%)

Per inha-bitant

in sqm 2016 2017e 2018e 2016 2017e 2018e 2016 2017e 2018e

Berlin 6,339 55.0 1.8 310 310 310 3.3 0.0 0.0 2.9 2.4 2.6

Cologne 1,413 8.9 1.3 250 255 255 0.0 2.0 0.0 3.5 2.8 3.0

Dusseldorf 1,240 52.6 2.0 275 280 280 1.9 1.8 0.0 3.6 2.9 3.2

Frankfurt 1,536 53.0 2.1 300 300 300 0.0 0.0 0.0 3.5 2.9 2.9

Hamburg 2,985 42.5 1.7 285 285 285 0.0 0.0 0.0 4.0 3.6 3.6

Munich 2,084 39.9 1.4 345 345 345 1.5 0.0 0.0 3.9 3.5 3.5

Stuttgart 1,064 52.8 1.7 250 250 250 2.0 0.0 0.0 3.2 2.6 2.7

Top locations 16,661 45.1 1.7 297 298 298 1.8 0.3 0.0 3.5 3.0 3.1

Office properties Office space in 2016 Prime rent in EUR/m2 Change in prime rent

vs previous year (%) Vacancy rate (%)

in

1,000 sqm

Per in-habitant

in sqm

Per office worker in

sqm 2016 2017e 2018e 2016 2017e 2018e 2016 2017e 2018e

Berlin 18,932 5.4 33.3 28.0 29.4 30.5 16.7 5.0 3.7 3.0 2.4 2.1

Cologne 7,599 7.2 31.5 21.0 21.2 21.5 0.0 1.0 1.4 5.5 4.8 4.5

Dusseldorf 7,554 12.4 36.5 24.5 24.9 25.3 2.1 1.6 1.6 8.3 7.6 7.4

Frankfurt 10,250 13.9 35.5 35.5 36.0 37.0 0.0 1.4 2.8 10.7 10.0 9.3

Hamburg 13,718 7.7 32.2 26.0 26.4 27.0 4.0 1.5 2.3 5.3 4.9 4.7

Munich 13,728 9.4 32.8 34.7 35.8 36.8 1.8 3.2 2.8 2.7 1.9 1.5

Stuttgart 7,682 12.4 39.2 19.7 20.0 20.2 2.1 1.5 1.0 2.9 2.8 2.7

Top locations 79,463 8.1 33.9 28.0 28.7 29.5 4.9 2.6 2.6 5.1 4.5 4.2

Residential properties Development from 2011 to 2016 (%) First occupancy aver-

age rents in EUR/sqm First occupancy aver-age rents vs previous

year (%)

First occupancy rents in prime locations

EUR/sqm

Inhabi-tants

House-holds

Housing stock 2016 2017e 2018e 2016 2017e 2018e 2016 2017e 2018e

Berlin 6.6 6.5 2.1 11.6 12.0 12.3 0.9 3.4 2.5 17.0 17.5 17.9

Cologne 4.6 5.6 2.6 12.0 12.2 12.5 4.3 1.7 2.5 16.0 16.2 16.5

Dusseldorf 4.1 4.0 2.2 12.6 12.9 13.2 1.6 2.4 2.3 16.5 16.9 17.3

Frankfurt 9.9 10.1 4.8 14.8 15.3 15.8 9.6 3.4 2.9 21.0 21.0 21.5

Hamburg 4.4 5.9 3.5 13.4 13.7 14.0 1.5 2.2 2.2 20.2 20.5 20.8

Munich 7.9 9.1 3.9 17.0 18.0 18.5 7.6 5.9 2.8 24.0 24.0 24.5

Stuttgart 5.9 6.4 2.6 13.0 13.5 14.0 8.3 3.8 3.7 17.5 17.7 18.0

Top locations 6.2 6.8 2.9 13.2 13.6 14.0 3.8 3.5 2.6 18.8 19.1 19.5


Note on the prime rents used for retail and office properties: the values taken from BulwienGesa represent an average of the top 3%–5% of the market lettings, meaning that the figure quoted does not equate to the absolute highest rent. Higher specified rents for individual locations which are sometimes stated in alternative market reports are therefore not contradictory.


46

IMPRINTPublished by: DG HYP – Deutsche Genossenschafts-Hypothekenbank AG, Rosenstrasse 2, 20095 Hamburg

Management Board: Dr. Georg Reutter (Chairman of the Management Board), Manfred Salber

Authors:

Responsible: Stefan Bielmeier, Head of Research and Volkswirtschaft

Author: Thorsten Lange, CIIA/CEFA, Analyst

All DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main 2017

Reprinting and reproduction requires the approval of DG HYP

DISCLAIMERThis document has been published by DG HYP – Deutsche Genossenschafts-Hypothekenbank AG, Hamburg.

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47

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DG HYP Regional Office LeipzigSchillerstrasse 304109 Leipzig, Germany Phone +49 341 962822-92 Fax +49 341 962822-93

Institutional Clients

HamburgRosenstrasse 2 20095 Hamburg, Germany Phone +49 40 3334-2159Fax +49 40 3334-1260

DG HYP OFFICES

Deutsche Genossenschafts-Hypothekenbank AG

20095 Hamburg, Germany Rosenstrasse 2 PO Box 10 14 4620009 Hamburg Phone +49 40 33 34-0Fax +49 40 33 34-11 11www.dghyp.de

DG HYP Real Estate Centre Berlin Pariser Platz 3 10117 Berlin, Germany Phone +49 30 31993-5101 Fax +49 30 31993-5036

DG HYP Real Estate Centre Hamburg Rosenstrasse 2 20095 Hamburg, Germany Phone +49 40 3334-3778 Fax +49 40 3334-1102

DG HYP Real Estate Centre Dusseldorf Steinstrasse 1340212 Dusseldorf, Germany Phone +49 211 220499-10 Fax +49 211 220499-40

DG HYP Real Estate Centre Munich Türkenstrasse 16 80333 Munich, Germany Phone +49 89 512676-10 Fax +49 89 512676-30

DG HYP Real Estate Centre Frankfurt CITY-HAUS I, Platz der Republik 6 60325 Frankfurt/Main, Germany Phone +49 69 750676-21 Fax +49 69 750676-99

DG HYP Real Estate Centre Stuttgart Heilbronner Strasse 41 70191 Stuttgart, Germany Phone +49 711 120938-0 Fax +49 711 120938-30

Real Estate Centres

Regional Offices


DG HYPDeutsche Genossenschafts-Hypothekenbank AGRosenstrasse 2 | 20095 Hamburg | Germany

Phone: +49 40 33 34-0 | Fax: +49 40 33 34-11 11www.dghyp.de As

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tight supply drives rents for offices and residential … · 2018-07-05 · dg hyp ofﬁ ces _____...

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