HSH Nordbank Real Estate Risk Trend: Slight Increase in Investment Risks for Office Real Estate Worldwide

Hamburg/Kiel, March 6, 2008 - The investment risks on the world’s office real estate markets have perked up across the board, with few exceptions. The sustained global trend of declining risk rates that started in the summer of 2006 has thus been checked. This is the finding of the latest Real Estate Risk Trend report published by HSH Nordbank. While the pace of the risk increase remains moderate, the development already reflects the impact of the financial crisis as well as the expectation that the economy will slow down. The most notable risk increases are reported from submarkets in New York and London. Paris and Düsseldorf, by contrast, are the only cities to report a decline in investment risks.

“The increased risk figures in the United States and Europe demonstrate that the financial crisis has now reached the market for office real estate. Investment prices have already dropped in recent months, and are now subject to a – by all means beneficial – correction of the market. At the same time, the rate of the risk increases has remained rather low yet. Even as the investment market boom has peaked, we are expecting to see the lively investment demand for real estate to continue throughout this year because high capital volumes worldwide are poised for commitment in suitable investments,” elaborates Peter Axmann, Deputy Head of Real Estate at HSH Nordbank.

Slowing Economy in the United States

Most of the cities analysed show but a slight increase in risk rate. Only New York’s Midtown North submarket experienced a substantial risk hike, while even here the lowest risk level rating, “low risk,” remains in place. Overall, US markets were given an aggregate "low/medium risk" appraisal.

The risk factor on the US office markets will continue to rise through 2010. The initial effect of the aggravated financing conditions in the wake of the financial crisis is to make it much harder to negotiate large-volume deals. The decline in demand is putting additional pressure on prices. If, on top of that, the economy was to cool off seriously, the demand for office space might drop. Thus, the volatile US office market might drive vacancies from 12.6 percent today up to 17 percent by 2009.

Europe: Risk Increase to Remain Slight through 2010

Office real estate markets in European cities outside Germany have also been exposed to an elevated investment risk, the exception being Paris. HSH Nordbank has revised its previous “low risk” rating, and now rates the overall market “medium/low risk.” The City of London, while being the submarket with the steepest risk hike, nonetheless retained its “low risk” rating – the lowest there is – and thus continues to undercut the European average. The Dutch cities of Amsterdam and Rotterdam report the highest absolute risk figures (medium risk). This shift toward an upward, if moderately paced, trend in investment risks demonstrates the various influences the European office real estate market has been subjected to over the past six months. On the one hand, the economic upswing has translated into a growing number of jobs and an increasing demand for office real estate, which in turn stimulates rent increases. On the other hand, the economy is slowed by the soaring prices for raw materials, the strength of the Euro, and the turbulences on the financial markets. In many places, real estate markets reached their climax in summer of 2007, when prices hit record highs, whereas initial net yields remained very low at an average 4.7 percent. Assuming the economic situation continues to be robust, the coming years are likely to bring rent hikes in many places. Initial net yield will push upward across the 5 percent mark. Before this background, the investment risk will increase just slightly through 2010. In fact, the rent risk might continue to drop, provided the economic situation remains stable during that time.

Risk Figures Remain Stable in Germany

In Germany, risk figures are presenting a virtually stable picture. While the investment risk in the office sector did perk up over the past six months, it did so at a slower pace than in other European countries. Investment risks in the retail and residential sectors are virtually unchanged, as are the letting risks across all types of usage. Then as now, however, risks in Germany receive ratings that exceed the European average.

HSH Nordbank AG is a strong regional bank in Northern Europe. Its total balance amounts to € 206 billion. Some 4,700 of the bank’s employees provide corporate and high net-worth clients around the globe with premium bank products and services. In its core region of Hamburg and Schleswig-Holstein, it is the market leader in the corporate customer segment. HSH Nordbank is an acknowledged partner of the capital markets and international sector specialist. Its main focus is on transportation and real estate. In fact, HSH Nordbank is the world’s largest provider of ship finance and covers the entire value chain in the transportation segment. In the area of real estate, HSH Nordbank is one of the strongest banks in Germany, acting as a provider of services relating to all aspects of real estate.

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