Real estate market: the success story continues

September 2019 – Germany’s market for office real estate is confidently robust, just in time for the leading EXPO REAL 2019 trade fair in Munich. Despite Brexit, the fear of worsening trade wars and a noticeable economic slowdown in Germany, the outlook remains positive. Nonetheless, the experts at Hamburg Commercial Bank recommend more caution and foresight.

The health of an economy can be clearly measured by its unemployment rate. For years, Germany’s has ranked at a low, almost record-breaking level, most recently just above the five-percent mark. Real estate industry representatives can hardly smile about figures like that. A vacancy rate that high – essentially the industry’s own statistical counterpart to the unemployment rate – would be a cause for panic given current levels.

Picture of a tower block from the frog's eyed view

Vacancies in German office real estate have only seen one trend for years: downward. According to ZIA, the German real estate industry’s umbrella organization, vacancy rates currently stand at just 4.2 percent in the largest 127 German office submarkets. The average of the top-seven cities of Berlin, Hamburg, Düsseldorf, Cologne, Frankfurt, Stuttgart and Munich is only 3.1 percent. The absolute leader is the booming capital: a vacancy rate of 1.4 percent is the best proof that Berlin is not only popular among hipsters and tourists, but also among employers with space requirements. The peak rents for office real estate in Germany rose for the eighth time in a row by mid-2019.

"For years now, have seen significantly more demand than supply in the office real estate markets in German cities."

Peter Axmann, Head of Real Estate Clients, Hamburg Commercial Bank

Modern office space is in short supply

“For years now, we have seen significantly more demand than supply in the office real estate markets of German cities. This is partly due to the good economy and high employment level. And it is also due in part to the lack of available space. New and modern space is particularly lacking,” says Peter Axmann, Head of Real Estate Clients at Hamburg Commercial Bank. The trend towards an urbanized service-based economy has picked up even further: nearly 15 million people now work in offices.

Klaus Dittrich, CEO of Messe München and host of EXPO REAL, does not yet see any change in sentiment: “The question about when the boom will be over has been with us for years. But at least when it comes to participation in the trade fair, we aren’t seeing any reversal of trends. On the contrary: we are even opening another hall, NOVA3. This is where we will bring innovative and tech companies together,” says Dittrich. Hamburg Commercial Bank will also be on site with a completely new stand in Bavaria’s state capital.

"The question about when the boom will be over has been with us for years. But at least when it comes to participation in the trade fair, we aren´t seeing any reversal of trends."

Klaus Dittrich, CEO of Messe München and host of EXPO REAL

With regard to Brexit, trade conflicts and the deteriorating economic situation in Germany, Axmann sees medium-term reactions, but no market slump: “With the current economic slowdown, in the medium term we expect a stagnation in rents and purchase prices as well as a delayed decline in demand in about two years. Because in our experience, companies first look to see if an economic development is sustainable. This applies equally to both recoveries and slowdowns.”

At this year’s EXPO REAL, from October 7 to 9, pessimism is not an issue. On the contrary: more and more international investors are discovering the German market. Interest is so great that a forum contribution at the Munich real estate fair even asks the question: “Destination Germany: Investor’s Darling Forever?”

Continuing investment pressure among investors

It would be well advised to seek an answer to this question in the golden mean, between short-sighted euphoria and premature anxiety in the face of a rougher economic environment. The megatrends of migration to cities and the growth of modern office jobs continue in Germany and will keep driving the market further forward. Added to this is the investment pressure on many investors who, given low and even negative interest rates, have few worthwhile alternatives to investing in real estate. Consequence of the flood of capital: falling returns. According to information from Hamburg Commercial Bank, even top locations in Hamburg ultimately only achieved a peak returns of just under three percent.

By mid-2019, Hamburg Commercial Bank had added 2.3 billion in new real estate business to its books. This is exactly what the bank had signed in new loans by mid-2018. By the end of 2018, this then increased to 4.6 billion euros. The figures show one thing in particular: business is stable and Hamburg Commercial Bank, with its high level of real estate expertise and its representative offices in the most important real estate locations of Hamburg, Berlin, Düsseldorf/Cologne, Frankfurt and Munich, is a valued partner for property purchasing, project developments and long-term portfolio financing for both individual properties and entire portfolios. At the same time, however, the figures prove that the bank is selective.

"In order to generate peak rents, you need state-of-the-art technologiy and, above all, contnuele funds for modernization."

Peter Axmann, Head of Real Estate Clients, Hamburg Commercial Bank

Especially in more mature markets – which is what the German office real estate market has unquestionably become after years of an unstoppable boom – it is important to finance the right projects. Aside from the classics of good infrastructure and location, location, location, the team around Peter Axmann considers a property’s versatility. “Are the spaces easily customizable? And attractive for follow-up tenants?” These are the questions he also asks project and investment developers in search of financing. “In order to generate peak rents, you need state-of-the-art technology and, above all, continual funds for modernization,” says Axmann.

In its financing, Hamburg Commercial Bank concentrates on the major German metropolitan regions, but also finances in so-called B cities, which stand out particularly well in terms of population and economic development. There are also good opportunities for mixed-use properties where, for example, offices are supplemented by a hotel or retail space.

pie chart on the various financing objectives of the HCOB

A balanced mix [Quelle/Source: Hamburg Commercial Bank]

Hamburg Commercial Bank’s real estate portfolio as of June 30, 2019, in percent

  • Office 33%
  • Retail 28%
  • Residential 22%
  • Operator/special real estate 15%
  • Working capital lines of credit, guarantees etc. 3%