After a record year in 2006, the upturn of Germany's commercial property market is going into the next round, says the latest market report from DEGI Research for Germany in 2007, called 'New Perspectives'. With a volume of €46.1 billion, investments in German commercial properties rose by 12% in 2006 compared to the preceding year. The stable economic situation, falling levels of unemployment and low interest rates on an international comparison will make Germany an interesting market in 2007 as well, particularly for foreign property investors.
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Taking into account rental growth potential, inventory, volatility and interest rates, German office properties are even significantly undervalued on an international comparison, the analysts at DEGI Deutsche Gesellschaft für Immobilienfonds mbH have discovered. For this year, they accordingly anticipate further growth in investment volume of approximately 15 %. Rising demand and rising sales prices, however, have not been without an effect on the net initial return, which at German investment centres fell by around 40 basis points on average in 2006. "Thanks to the positive value change return at most locations, the total return, however, which constitutes the crucial factor for investors, was a welcome surprise", says Dr. Thomas Beyerle, Head of Research and Strategy at DEGI. German regional locations have not yet been affected so severely by yield compression.
Falling vacancies, rising rentals: now comes the upturn for 'bricks and mortar'
Letting turnovers on the German office market also gained momentum in 2006; while in 2005 the volume had already risen by 13%, the figure for 2006 was 17% to just under 3.2 million m² of space. The biggest turnovers were achieved in Munich, Berlin and Frankfurt. While in previous years letting statistics were dominated by pure relocation, 2006 was characterised by space expansion so that net absorption is rising and vacancies are falling again in almost all investment centers.
Development of transactions and letting volumes in German office centers¹
At the same time, a turning point has been passed in rental development: in the office centers, the peak rents showed a slight rise again in 2006. Vacancies, however, remain a topical issue for office properties, since in Beyerle's opinion full letting of all spaces cannot be anticipated in the long term, as about a third of the unlet space is not in line with the market's requirements. "It's precisely here that the upturn on the property market will take on a real economic dimension in terms of refurbishment, conversion and new construction projects at attractive locations. The investment market has raced ahead of this brickwork upturn," says Beyerle.
Impetus from REIT launches
The German investment market will receive fresh impetus from the introduction of REITs in 2007. Around a quarter of the DAX, MDAX and SDAX listed companies, in a survey conducted by DEGI Research, declared their readiness to contribute properties in particular office and retail properties - to a REIT or property fund. A total of 15 IPOs from property companies in 2006 underline the capital market capabilities of real estate in Germany. For the next twelve months, DEGI Research is predicting a still-larger number of property IPOs, with 20 candidates going public with the additional legal option of a REIT.
Demographic factors influence performance in location scoring
The market report contains extensive scoring for all 67 locations covered, against macro-economic and property
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-specific parameters. Weak scores for demographic criteria like population size and density, and for the predicted population trend up to 2020, constitute a definite risk factor among the macro-economic criteria in DEGI's location scoring. So it is unsurprising that a