Munich real estate market snapshot (DE)

Munich real estate market snapshot (DE) Friday 17 February 2012
Munich is one of Europe’s most prospering cities with a healthy economic structure, accommodating global players like BMW, Siemens and Allianz as well as numerous innovative small and medium sized companies. This favourable framework is also reflected in the regional real estate market: Office space take-up was higher than in any other German city last year, Kaufingerstrase is one of the most expensive high streets in Germany and the take-up of logistics space achieved a record high in 2011. These extraordinarily good results positively affected the real estate investment market and led to a doubling of transaction volume year-on-year.
Investment Market Regarding single assets the 2011 transaction volume amounted to approx. €1.6 billion which was the highest volume since 2007. Including portfolios, e.g. the acquisition of the famous Oberpollinger and a Karstadt sports store by Signa and Centrum, the volume even amounted to €2 billion. Only Frankfurt and Berlin were able to attract more money in 2011 but no German market achieved a higher increase year-on-year than Munich. Retail properties were the most favoured asset class as they accounted for half of the total transaction volume. This result is mainly due to a couple of large-scale acquisitions. Apart from the mentioned Karstadt portfolio, a US pension fund purchased the PEP shopping center for more than €400 million. Another three-digit million deal in the retail sector was the acquisition of a 49% share of the Pasing Arcaden shopping center by the center developer and manager mfi. Investments in office properties accounted for 40% in 2011, with the sale of the Altstadt-Palais for €85 million by UBS as one of the biggest transactions. Looking at the relevant parameters, the investors’ focus on retail properties is no surprise. The purchasing power is more than 30% above the German average and higher than in any other of the large German cities. Furthermore, the centrality index of approximately 120 indicates that the retailers in Munich are able to attract consumers from outside the city. This framework guarantees a long-term secure and stable cash-flow for the owners of retail properties. Another factor that facilitates this stability is the difficulty in obtaining permission for new retail schemes from the local planning authority. Hence the existing shopping centers, retail parks and other existing retail properties are rather well protected against the risk of tighter competition. These favorable conditions attract risk-averse investors in particular. Thus insurance companies and pension funds were the most active group of buyers, accounting for 30% of total transaction volume in 2011. Open-ended funds, which exhibit a similar risk-return profile, ranked second and acquired Munich properties worth about €260 million. Development companies were also amongst the top buyers, which show confidence in the future positive development of the Munich market. The city is not only a favoured destination for domestic real estate investors but also for foreign players. Last year’s transaction volume was equally distributed between German buyers and investors from abroad. US buyers were the most active group amongst foreign investors, followed by companies from Switzerland. Since office properties were also in demand, yields for both asset classes hardened during the past months. Currently, prime yields for prime high street buildings are at 3.6%, a decrease of 10 basis points compared to the end of 2010. Prime office yields decreased by 5 basis points to 4.25% year-on-year. As investors’ demand focuses almost exclusively on core assets the yield gap between prime and secondary properties widened. For example, the premium for Grade A offices in non-CBD locations compared to Grade A buildings within the CBD amounts to 215 basis points. Two years ago it was 170 basis points. Against the backdrop of the favourable economic environment it seems very likely that investors continue to focus on the Munich market. Thus prime yields are expected to harden slightly in 2012. Office Market The Munich office market proved to be the most dynamic of the top 5 German markets in 2011. A 44% increase year-on-year led to a take-up of almost 850,000 m² – the highest figure since 2001. A number of manufacturing companies including BMW, MAN and Osram, leased several thousand square metres each making the industrial sector the top demand group in 2011, accounting for almost one third of total take-up, followed by the consultancy and financial sectors at 11% each. Although these three sectors generated more than half of the total take-up the mix of industries in the office market is healthy. The market will continue to benefit from the broadly based Munich economy throughout the next five years which will provide stabilising impetus. Also in geographical terms office space take-up was rather well diversified with only two submarkets, periphery North (ca. 23%) and City West (16%) reaching double-digit shares in the total transaction volume. As in 2010, take-up in Munich’s urban fringe was also very high last year: almost a quarter of turnover was attributable to properties outside the city boundaries of Munich, with the regions East and North accounting for over 70,000 m² of take-up each being particularly sought by companies looking for office accommodation. In both submarkets take-up of circa 20,000 m² exceeded that of the city center which dropped from second place in 2010 to sixth place last year in the list of the best performing submarkets. This is not least a result of the limited available stock in this submarket where the vacancy rate stands below 3%. The overall vacancy rate on the Munich market stood at 7.8% at the end of the year which is equal to a 10 basis points decrease compared to 2010. The prime rent likewise saw a positive development and rose by almost 5% to €30.30/ m²/month. By contrast the average rent decreased slightly and dropped circa 1% to €14.33/ m²/month also due to the low share of the city center in the take-up result. Given the weaker economic climate, demand is likely to slow down and hence take-up figures are set to drop in 2012. Only a limited amount of new office space is scheduled for completion (approx. 120,000 m²) this year which will keep rents and vacancies relatively stable at least throughout the first half of the year. In addition Munich is the only market of the German Top 5 with shrinking completion levels in 2013 so the expected significant decline in demand is likely to hit the market at a relatively propitious time. Retail Market Munich is also one of the most favoured retail locations in Germany and even Europe. Not least due to the extraordinary high purchasing power of its inhabitants, prime high streets in Munich such as Kaufingerstrase, Neuhauser Strase and Maximilianstrase belong to the most expensive high streets in Germany with single lettings surpassing €300/ m²/month. The prime retail rent increased by some 40% over the past decade and still shows a clear upward trend. Contrary to most of the other large German cities, the retail landscape in Munich is not dominated by large retail chains to the same extent but traditional, independent retail shops have a significant market share. Another aspect distinguishes Munich from other cities: There are only a few shopping centers as planning restrictions for new retail schemes are tight. However, a couple of new centers were scheduled in the recent past. One of them, the Pasing Arcaden, opened last year. Two further centers in the districts Freiham and Obersendling are scheduled to open in 2013 and 2015 respectively. Compared to the shopping center and big box retail segment the development in the city’s high streets is more dynamic. Several development schemes, including Quartier Hofstatt, Palais an der Oper and Stachus-Passagen, are currently in progress. All of these developments will accommodate famous retailers in the future, for example Abercrombie & Fitch and Louis Vuitton. A further positive impulse for the inner city retail market is expected from the redevelopment of the former Karstadt store in Neuhauser Straße, which is to be completed in 2013. Amongst others Forever 21 let 7,000 m² retail space – it will be the company’s first store in Germany. This decision once again underlines Munich’s exceptional position in the German retail market. Logistics Market Reaching a logistics space take-up of approximately 350,000 m², the Munich market set a new record in 2011. Compared to the previous year, take-up increased by almost 8% and thus beat the 10-year average by more than 80%. The take-up figure has continuously risen in the past ten years. As demand by far exceeds available space, logistics rents in Munich are the highest in Germany. Prime rents are at €76/sq m/month and secondary rents reached €57/ m²/month in the recent past. Modern warehouses in particular are scarce which is also a consequence of the restrictive financing conditions and the scarcity of appropriate development sites. Prices for plots in favoured locations can go up to €1,000/ m², which is almost 10 times higher than in the Berlin region. Those values are reached in the area around Munich airport in particular. Being the fourth most important cargo airport in Germany, many logistics and industrial companies are on the lookout for warehouses in the area. Given the broad mix of sectors take-up is split equally between a number of industries. However, as companies like Siemens, BMW and Linde have their headquarters in Munich, the manufacturing sector are traditionally one of the most important sectors in absorbing warehousing space. Against the backdrop of a healthy regional economy it seems likely that the Munich logistics market will continue to grow over the next years. As there are hardly any speculative developments, warehousing space will remain short in supply hence rental values will maintain their high level. Source: Matthias Pink, Head of Research, Savills Germany