22|06|2017

Corporate News

DEMIRE & bulwiengesa publish joint study on office investments in secondary cities – higher yields and lower risk than in A cities

  • Net initial yields in B, C and D locations between 1.0 and 2.5 percentage points higher than in A cities
  • Rent and vacancy rate volatility significantly lower in secondary cities
  • Forecast increase in employment in secondary cities of at least 5% until 2020

Langen, 22. June 2017 – Selected German B, C and D locations offer higher potential yields on office investments than the seven German A cities with the same risk profile or a lower one. The locations investigated have higher net initial yields on average with lower volatility in rents and vacancy rates. While office employment is growing faster by comparison in the seven major cities, cities and towns in the other three categories also have seen a steady rise in office employment on average. This development will continue. An increase in office employment of more than 5.0% is forecast until 2020 for nine out of 21 secondary cities examined in total – with Leipzig set for an increase of as much as 9.4%.
These are the core findings of our study “Investment Opportunities in German Secondary Office Locations”, which was produced by DEMIRE Deutsche Mittelstand Real Estate AG in cooperation with bulwiengesa AG. The study compares selected office locations in the A, B, C and D cities. The result of the study proves the attractiveness of DEMIRE’s business model which solely focus their commercial real estate holdings of currently EUR 1 bn on mid-sized cities and up-and-coming locations bordering German metropolitan areas.

Net initial yields in D cities of almost 7.0%

There are clear differences between the categories as regards yields in particular. The average net initial yields of offices in central locations in A cities have now fallen below the 4% mark (2009: 5.5%, 2016: 3.6%). By contrast, the average yield in B cities is 5.1% (2009: 6.4%), in C cities 5.7% (2009: 6.8%) and in D cities 6.7% (2009: 7.4%). Seven of the D locations investigated (Kassel, Koblenz, Flensburg, Göttingen, Bayreuth, Schwerin and Stralsund) in total and two C cities (Rostock and Wuppertal) achieved net initial yields of 6.0% or higher.

C and D cities also reporting high rent increases in long term

The relatively low yields in the major cities are accompanied by high rent volatility: Office rents in A cities have fluctuated by more than 20% in the space of just a few years in the past. However, developments in the smaller cities are considerably more stable. Despite the lower short-term volatility, there have also been high rent increases in some cities here in the long term. For example, rents rose by more than 20% between 2007 and 2016 in the C cities of Regensburg and Osnabrück, and in the D cities of Kassel, Stralsund and Schwerin.

Vacancy rates can rise quickly in A cities

Volatility is the key difference between the A cities and the cities in other categories in the development of vacancies as well. For example, the average vacancy rate in major cities rocketed from 3.1% to 10.7% between 2001 and 2004. By contrast, the increase was much more moderate in the smaller cities. The vacancy rate in B, C and D locations has been declining slowly but steadily since 2007 – starting from a low level. “The vacancy rate is very low overall in the C cities and many of those in category D as well,” commented Sven Carstensen, head of bulwiengesa AG’s Frankfurt branch. “For example, the vacancy rate in Rostock (C city) is 7.0%, in Freiburg (C city) it’s 1.4%, and in Göttingen (D city) it’s 2.0%,” Carstensen continued.

Office employment will rise further in B, C and D locations until 2020

The key driver of the office markets is office employment. “While many international companies and large corporations have branches in the A cities, around two thirds of German employees work for small and medium-sized enterprises, whose locations are often far removed from the major cities,” commented Markus Drews, member of the board of DEMIRE. Around 2.9 million people currently work in offices in the seven A cities. However, the figure for the B, C and D locations is 5.4 million people. The number of office workers in A cities has increased by 28% since 1999. “Over the same period, the cities in the other categories have experienced slightly lower but steady growth. Office employment increased by between 17% and 25% in all B, C and D locations analysed,” added Drews.

B, C and D locations not a homogeneous group

Markus Drews added: “Overall, the B, C and D locations perform better than the major cities in many parameters. However, this group of cities is not homogeneous. For example, too many offices were developed at a large number of locations in eastern Germany in the early 2000s. The consequences of this can still be seen on many office markets today in the form of low rents and relatively high vacancies. However, the trend has been positive for most locations for ten years. An excellent example is Leipzig, where office vacancies have fallen from around 27% in 2007 to roughly 12%.” Yields are also somewhat mixed: Some C cities such as Freiburg or Regensburg, for example, are relatively expensive with net initial yields of 5.0% or 5.1% respectively.

60% of German office space not in major cities

bulwiengesa AG assigned cities to four classes according to their functional significance to the international, national, regional or local property market. In terms of space, A markets account for 43.2% of the German office property portfolio, the B markets for 20.5%, the C markets for 14.7% and the D markets for 21.6%.

bulwiengesa conducted a detailed analysis of the office markets of 21 B, C and D locations overall as part of the study. In the general part of the study, the cities were clustered together and compared against the seven A cities.

The study can be downloaded here

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About bulwiengesa AG
bulwiengesa is one of the major, independent real estate industry analysis companies in continental Europe. For over 30 years, bulwiengesa has supported its partners and clients in questions of real estate and location and market analysis, including with sound data services, strategic advice and bespoke surveys, analyses and valuations. Meaningful individual data, time series, forecasts and transaction data are supplied by the information system RIWIS online. Users of the data from bulwiengesa include the Deutsche Bundesbank for the ECB, BIS and OECD.

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