The German Victor Prime Office indicator developed by global adviser JLL to track price changes in the five major cities, rose 4.1% in the last quarter, taking its increase over 2017 to 10% and easily beating the average of the prior five years.
In addition to further yield reductions in Berlin, Düsseldorf and Hamburg, cyclical rent increases were decisive in all five markets, JLL said in a release. The aggregate gain for the year, including Frankfurt and Munich, exceeded the 8.5% annual average in 2012 to 2016.
Ralf Kemper, JLL Germany Head of Valuation & Transaction Advisory, said the strength generally resulted from strong rental progress due to an extremely dynamic economy. "Investors are currently willing to pay prices for office properties at historically high levels," he said - mainly because they are competing with a huge amount of available investment capital. "Meanwhile, the supply of adequate properties in the examined rental markets of the Big 5 also declined sharply - to 2.4%, the lowest vacancy level since the start of the Victor time series at the end of 2003."
Demand significantly outweighed supply last year, Kemper added. "And it looks like that will not change in 2018 either." Investors who bought with vacancies or short contract periods in past years were confirmed in their strategies. "Most investments are currently outperforming the business plans underlying the purchases," he added. "But it remains to be seen whether these achievements will encourage investors to increasingly accept vacancy in properties, speculate on good marketing and a higher price on divestments, as some deals suggested in the last quarter."
The North Rhine-Westphalian state capital of Düsseldorf shone with a year-end spurt and a considerable performance improvement, JLL said. With a rise of 8.3%qq in 4Q17, price levels significantly reduced their gap with others in the Big 5 which had widened steadily over the year. Office price rises in Düsseldorf were predominantly driven by prime yield compression of 30bp in the last three months, to around 3.45%.
In 4Q17 too, Hamburg and Berlin were able to emerge from stagnation, with prices in the former rising 6.3%, the Victor index showed, outpacing values in the German capital of 5.3%. Growth in both cities was driven by a fall in prime yields as well as a rise in rents. The latter were relatively clear for Berlin at +3% in both the top segment and for office properties with average quality. For Hamburg, prime rents rose 1.9% in the last three months, with average rents stable.
Indicator growth was rather moderate in Munich and Frankfurt in fourth quarter, both markets where no further yield compression could be observed, JLL's Victor showed. Any improved performance was mainly due to rent increases.