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04.10.2016

DG HYP publishes study “The German Real Estate Market 2016/2017”

Continued high demand at the seven top Locations - New construction activity for offices and residential properties perceptibly below demand - Retail real estate rent increasing at a slower pace, due to already elevated levels

The favourable market environment for the German real estate market will continue in 2017. As such, the trend of rising rents in the retail, office and residential property segments will also last – albeit with declining momentum. Given the high prime rent levels, there are signs of saturation for retail real estate. Office and residential property rents offer more leeway as – despite picking up some pace – construction activity is still too low. In addition to residential construction, this also applies to office real estate markets in which the vacancy rate has declined significantly. These are the results of the latest research report published by DG HYP, covering developments in Germany’s seven largest cities: Hamburg, Berlin, Dusseldorf, Cologne, Frankfurt, Stuttgart and Munich.

Dr Georg Reutter, DG HYP’s Chairman of the Management Board, says: “For a few years now, Germany has been one of the markets with a fundamentally stable demand, with keen buying appetite from investors. Certainly, yields for real estate investments have sunk, but they continue to offer a yield pick-up over bonds, where yields tend towards zero. Real estate remains a focus of interest for investors and a sought-after asset class, even beyond 2016.”

Office space becoming scarce
The positive economic environment and good developments on the labour market produce a sustainable and stimulating effect on office markets in the seven top locations. Thus, the corresponding high demand for space and the repurposing of ageing office space into housing have together led to a noticeably declining vacancy ratio of office buildings in the past years. Despite the increased demand, however, momentum in new construction has not yet picked up sufficiently. Attractive office space is especially scarce in Berlin, Munich and Stuttgart, where vacancy rates in each case are below 4 per cent. The average vacancy rate for prime locations is now at a low 5.5 per cent. Amid the strong demand for floor space and decreasing supply, development of rents in economic centres will continue its upwards trend in 2017. The prime rent range is highly diversified. While rent amounts to just below or above EUR 20 per sqm in Stuttgart and Cologne, respectively, tenants in Frankfurt are paying record prices of EUR 35.50 per sqm, with Munich following suit. On average, we expect an increase in prime rents of approximately 3 per cent for both the current and the next year at the seven German top locations.

Residential construction only gradually gaining momentum
In Germany’s seven largest cities, population numbers have been continuously increasing for several years, thus leading to a near-continuous rise in housing demand. The decline in average number of persons per household is fuelling demand and intensifying the current situation, resulting in practically no vacant housing. Residential construction has gained momentum, but only with a time lag. As a consequence, the current completion rate is still too low to cover the housing demand. In addition, construction activities comprise mostly housing of a higher standard. However, the largest bottlenecks exist with inexpensive housing – of which there is too little. The first occupancy rent in superbly located residential real estate at the seven German top locations is expected to increase by just above or below 3 per cent in the current and next year. Despite the difficult market situation, a stronger increase is unlikely given that the first occupancy rents are already comparatively high, thus leaving only little leeway for further rent increases.

Retail rents: less dynamic increase expected for 2017
Thanks to positive consumer sentiment, German retail sales volumes are rising steadily. Retail locations near the city centre of the top locations also benefit from the increasing population in metropolitan areas and the rising numbers of tourists. The inexorable growth in e-commerce does not seem to burden inner-city retail yet. However, rent increases in top locations slowed considerably in the last three quarters. The reason is probably not a lack of demand, but the fact that rent levels are already distinctly elevated. As of mid-year 2016, prime rents range from EUR 250 per sqm in Cologne and Stuttgart up to EUR 340 per sqm in Munich. Dusseldorf and Hamburg are slightly below the average price for top locations of approximately EUR 300 per sqm. Frankfurt’s prime rents are more or less at market average, whilst those in Berlin are now a little higher. For the full year 2016, only partial growth is to be expected – and at some locations, prime rent might stagnate. The increases in Munich and Stuttgart will probably amount to 1.5 and 2 per cent, respectively. In Berlin, a growth rate of 5 per cent seems realistic. For 2017, an average increase of 1.2 per cent can be expected across the top locations.

Press release for Download in PDF Format

The German Real Estate Market report 2016/2017” for Download in PDF Format