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DG HYP publishes study “The German Real Estate Market 2017/2018”

Low supply boosts office and residential property rents - Retail rents stable, at a high level

The German real estate market continues to benefit from the positive macroeconomic situation. The completion rate remains on a lower level compared to the high demand for office and residential property space in German metropolitan areas; thus, further rent increases are to be expected for these segments in 2017 and 2018, whereas in the retail sector, near-term growth is unlikely in the seven top locations due to already high prime rents and increasing e-commerce. These are the results of the latest research report published by DG HYP, covering developments in Hamburg, Berlin, Dusseldorf, Cologne, Frankfurt, Stuttgart and Munich.

Dr Georg Reutter, Chairman of the Management Board at DG HYP, says: “Compared to other European countries, Germany is a sought-after investment location. The stable economic situation forms the basis for ongoing high real estate demand. Even though the interest rate environment is becoming less advantageous, we expect the positive real estate development to continue in 2018.”

Demand for office space remains unchanged
In view of the stable economic environment and rising employment, demand for office space remains high across the seven top locations. Yet construction activity for new office space is too low for the level of demand. In addition, many vacant and difficult-to-rent office properties have been converted into residential or hotel real estate, leading to continuously falling vacancy rates and higher rents. Vacancy rates are lowest (at just below 3 and slightly above 2 per cent, respectively) in Munich and Berlin, followed by Stuttgart. At 5 per cent, Hamburg and Cologne constitute the market average of the seven largest cities, whilst Frankfurt’s vacancy rate of 10 per cent is the highest. Although the number of office employees is growing faster than the development of new office space is advancing, the average growth of prime rents in the past ten years in all analysed locations was moderate, at just below 25 per cent. The only exception was Berlin, were the growth rate of nearly 40 per cent significantly exceeded the average. The reason for the largely moderate rise in rents is the prudent behaviour of companies not accepting exorbitant rent levels. Prime rents for all locations are expected to increase by an average of 2.6 per cent in 2017 and 2018.

Residential construction once again fails to keep up with demand
The cumulative population figure in the top locations has grown by an annual rate of 1.2 per cent over the past five years, resulting in an increasing supply gap on the housing market. The trend of fewer people per household is additionally fuelling housing demand; moreover, the lack of construction space in large cities as well as capacity constraints in the construction industry limit the much-needed residential construction. Significant differences in construction activity can be observed in the different locations. Whilst construction activities since 2010 have been highest in Frankfurt and Munich – with six and five properties, respectively, being built per one thousand inhabitants – construction growth rates are now highest in Berlin and Hamburg.

In the residential sector, rents have been consistently rising in all top locations in the last few years – but with varying momentum. In Berlin, Dusseldorf, Hamburg and Cologne, rents are increasing at a more moderate space; meanwhile, rents in Frankfurt and Munich are climbing faster – despite the already elevated level. Last but not least, the increase in rent levels in Stuttgart has been even more buoyant. The diverging rent momentum across the seven locations has widened the range of residential property rents in the past years. As of mid-year 2017, average first occupancy rents ranged from €12 per sqm in Berlin up to €18 per sqm in Munich. Due to the persistently high urban area influx, the existing high supply gap, and insufficient residential construction activities, rents in the residential sector will continue to increase in all seven top locations. As far as the current year is concerned, an average increase of first occupancy rents by 3.5 per cent is to be expected, whilst rent growth should slow to 2.6 per cent in 2018.

Retail rents remain at a high level
Overall macroeconomic conditions, high employment levels, continuous population growth, and a rise in visitor numbers have a positive effect on consumer sentiment – and thus on retail sales volumes in all seven top locations. Thanks to this increasing customer potential, the inexorable growth in e-commerce has not yet negatively impacted inner-city retail. In light of the high level of demand for superbly located real estate in the top locations, rent levels have increased noticeably in the last decade – however, with major differences. Whilst prime rents climbed by 30 per cent in Cologne and Stuttgart during this period of time, top rents in Berlin shot up nearly double the amount, by close to 60 per cent. The growth of 35 per cent in Munich was also more subdued – due most likely to the already high initial level of rents. Dusseldorf, Frankfurt and Hamburg showed an average rental growth of 40 to 50 per cent. As of mid-year 2017, rents ranged from €250 per sqm in Stuttgart, with slightly higher rents in Cologne, and up to €345 in Munich. At €285, Dusseldorf and Hamburg are slightly below the average price for top locations of nearly €300 per sqm. Frankfurt’s prime rents are more or less at the same level, whilst those in Berlin are a little higher. The average prime rents in 2016 for the top locations rose by just under 2 per cent, driven by increases in Berlin, Dusseldorf and Cologne; this year, they could still rise slightly in Dusseldorf and Cologne. Due to the very high levels, DG HYP now expects retail rents for superbly located real estate in all seven top locations to stagnate in 2018. ´

Press release for Download in PDF Format

The German Real Estate Market report 2017/2018” for Download in PDF Format