The German office sector is already experiencing 'phenomenal growth, and it will continue to do well even if banks and financial institutions decide not to move from London to Frankfurt or Berlin, delegates at PropertyEU's latest Germany Investment Briefing have heard.
'Offices are a great story now in Germany,' said Philip La Pierre, head of investment management Europe at Union Investment Real Estate. 'The situation is truly phenomenal. We are seeing huge demand, real rental growth and fantastic returns, and the values will stay high.'
The office sector was the top sector by volume in H1 2016 at €7.6bn, according to Catella figures, overtaking the retail sector which is now a distant second at €4.1bn. 'We are constantly surprised on the upside at how quickly we can let space and at the rents we can achieve,' said Michael Walton, CEO of Rynda Property Investors.
Berlin is a good example of the strength of the sector, but also of the potential weaknesses. Germany's capital city has been touted as the alternative to London for the fast-growing fintech sector, but it is experiencing huge growth already, whether that shift from the UK actually happens or not.
The office vacancy rate is 3% and demand is strong, but the city is already struggling to meet current demand. It is not building enough, running out of land to build on, and the lack of space may make it hard to keep the positive momentum going. Part of the problem, in Berlin and elsewhere in Germany, is local authorities' reluctance to allow 100% office-use buildings, as they prefer mixed-use developments.
'If London fintech companies really want to move to Berlin, they will struggle to find space,' said La Pierre. ‘In a situation where all big European cities are competing with each other to attract banks, companies and people, Berlin now can't really compete because there is no space, so people will move to Amsterdam or Barcelona.'
The jury's still out on what the impact of Brexit on the German office sector will be. 'I am not sure the shift of offices from London to Germany is going to happen on a big scale,' said Annette Kroger, CEO of Allianz Real Estate Germany. ‘There will definitely be some shifting of people and offices but it will take time, just as the actual Brexit is taking longer than some thought.’
Stefan Wundrak, head of European Research at TH Real Estate, said that 'there is no obvious place for London office tenants to go, so there will not be one single beneficiary. People will make different choices depending on their sector and their requirements.'
Prime office yields in Germany are now at an average of 3.93%, a decline of 35 basis points compared to the same period of last year, while prime office yields in 2015 recorded a decline of 40 points, the biggest since 2006.
'As demand for core office properties is high, yields are expected to sharpen further, supported by robust occupational fundamentals,' said Thomas Beyerle, managing director, Catella Property Valuation. 'The office market will see vacancy rates decline further and take-ups and rents increase.'
