Flying High
Key Messages
With a prime total return of 7%, the Cologne office sector gives the best performance
The office sector of Berlin may create the strongest capital growth at 4%
While office yields may only fall in 2020, yield compression in the logistics sector may continue until 2021 before stabilising. In the retail sector, bottoming out already occurred several years ago
Berlin's prime rent could grow 5% on average p. a. over the forecast period
Even though the years of ultra-strong growth in the German office market centres are slowly ending, investment expansion - albeit at a lower level – carries on for now. What does seem embedded into the market are high investment volumes generally, which are a relatively new feature and will roll forward across the 2020-2024 forecast period.
German offices are likely to post strongest returns over 2020 led by Cologne and Berlin (14.4% respectively 14.3%). By average prime total return, Cologne stands out with an annual total return of 7.0% p.a. from 2020 to 2024 followed by Berlin with 6.9%.
Market returns may be in double digits in 2020, except Frankfurt. Unsurprisingly, Berlin tops all the cities at 17.0% and is the strongest on average over the forecast period (7.5% p.a.). Only Berlin market return may stay in double digits in 2021 before fading by 2024. The main driver for prime total return is capital growth at the beginning of the forecast period while it switches to the income return at the end. Capital growth will stay positive on average for all markets.
The lowest prime yield of 2.6% is achieved in Berlin and Munich. In Germany we are looking at a situation of rental led capital growth and yields bottoming out. However, yields may not start rising before 2022. After this, we forecast an increase of 5 bps for office per year.
Cologne leads prime rental growth at 9.6% in 2020 but Berlin averages at 5.0% p.a. over the rest of the forecast. Market rental growth in Berlin is exceptionally strong in 2020 at 10% and 5.7% on average. Strong growth arise from low vacancy levels. Berlin may fall to 1.4% this year-end and only expand to 2.3% by 2024.
The logistics sector starts strongly with an average prime total return of 8.4% across the five main German logistics markets, which then falls continuously until 2024 without achieving negative values. Average prime returns for markets over the period range between 4.7% to 5.8% p.a. We are forecasting on average falling capital values driven by weaker performance in the long-term. Consequently, yields may lose another 10 bps by the end of 2020, and 5 bps by the end of 2021 reaching 3.55% in all major markets.
Similar to the office sector, the logistics sector is also characterised by steady rental growth until 2024. Starting at 1.9% for 2020, rental growth of 1.6% pa may occur until 2023 ending with a slightly weaker development at 0.8% in 2024.
Retail is the loser in a total return sense as it is below 3% over the whole forecast period. At the bottom end are Munich and Hamburg with 2.1% p.a. Cologne and Dusseldorf are the best performing (3.2% in 2020) and 2.7% over the period. 2021 is the only year for positive capital growth in this sector as they turn negative across the remaining years. The retail sector is experiencing a moderate increase in yields starting in 2022 at 5 bps per year.
Retail rents in Germany have already reached a relatively high level. In addition, the physical retail trade is under competitive pressure from online trading. Both these factors mean that we expect rents to remain stable or even to decline slightly over the next two years.
Risk to the Forecast
Brexit and the trade war between US, China and the EU are the main risk factors for Germany as an export nation
These have the potential to damage economic growth and from there undermine Germany's occupational base
If it is not external demand bouncing back and pushing economic growth in Germany, it will be internal demand, largely public and private consumption
Thomas Glup