Survey by DEMIRE & bulwiengesa on Germany’s Office Real Estate Market: Secondary locations more robust than top seven cities (news with additional features)

DGAP-News: DEMIRE Deutsche Mittelstand Real Estate AG / Key word(s): Market Report/Real Estate

27.03.2019 / 13:25
The issuer is solely responsible for the content of this announcement.

Survey by DEMIRE & bulwiengesa on Germany's Office Real Estate Market: Secondary locations more robust than top seven cities
  • Dortmund, Koblenz and Reutlingen have the best risk-return ratios
  • Net initial yields in secondary locations up to 3.7 percentage points higher than in Class A cities
  • New Secondary Office Index (SOX): Secondary locations more resilient to economic dip
Langen, 27 March 2019 - DEMIRE Deutsche Mittelstand Real Estate AG and bulwiengesa have published their third study "Office Market: Investment Opportunities in German Secondary Locations". The study compares 31 selected secondary locations in Germany with the country's "Big Seven" cities and introduces the Secondary Office Index (SOX) for the first time. In order to compare the return potential and the earnings risk across cities, a quotient of yield and volatility was created (see Figure 1). It shows that the cities of Bonn, Koblenz and Reutlingen have the best risk-return ratios. They are followed by Düsseldorf as the only Class A city among the 20 highest-ranked locations. By contrast, the Class A cities of Berlin, Munich and Hamburg, but also the secondary locations of Leipzig as well as Potsdam and Regensburg, are at the bottom of the scale due to their high rent volatility.
Chemnitz, Stralsund and Schwerin have the highest net initial yields
The secondary locations we examined all offer higher return potential than Germany's Big Seven cities. The bigger return potential is reflected primarily in the higher net initial yields (see Figure 2). The highest net initial yields in secondary locations range from 6.1 percent in Schwerin to 6.6 percent in Chemnitz and 6.7 percent in Stralsund. In the Class A cities by contrast, the net initial yields average 3.0 percent. The lowest net initial yields in secondary locations are in Freiburg and Bonn with 4.0 percent each and Karlsruhe with 4.2 percent. That means the yield spread between the Class A cities and the secondary locations examined amounts to at least one percentage point.
"The high demand for office real estate is undiminished while supply remains limited and this has pushed net initial yields to new lows. That can be seen in both the secondary locations and the Class A cities. As investors are increasingly focusing on cities away from the metropolises, the net initial yields here are falling more sharply in comparison with the previous year, although they are still significantly higher in most cases, which makes them attractive for domestic and foreign investors," commented Ingo Hartlief, CEO of DEMIRE AG.
Sven Carstensen, Head of Office and Investment at bulwiengesa and author of the study adds: "For investors who are well versed in the market, secondary locations can still offer considerable investment alternatives even in the current market phase".
SOX Index: Secondary locations weathering economic dip better than metropolises
The newly devised SOX (Secondary Office Index) reflects the economic environment and market developments in city clusters (secondary locations and Class A markets). It is derived from weighted indicators for the economy, public finances as well as the labour, office real estate and investment markets. The index (see Figure 3) illustrates that office markets are basically subject to economic fluctuations but that the bigger markets are more vulnerable to economic downturns than smaller locations. This can be seen in the first downturn from 2000 when the New Economy bubble burst. In this phase (2000 to 2005), the Class A markets in the SOX suffered a bigger decline (-27 percent) than secondary locations (-19 percent). During the second downturn triggered by the economic and financial crisis (2007/2008), there were declines in both Class A and secondary markets within the SOX. But secondary locations were less volatile and more stable than Class A cities in this period.
Secondary locations are more stable and more resilient to crises because construction activity tends to be less speculative and the market environment is dominated by local players with greater loyalty to their respective locations. The real estate markets of secondary locations are characterised by many so-called hidden champions and a strong Mittelstand, or small and medium-sized business sector.

The newly developed SOX confirms the robustness of office real estate markets in secondary locations. Nearly all leading economic research institutes and the panel of government economic advisers have almost halved their growth forecasts for Germany in the current year. The results of the SOX reinforce our belief that we can generate stable earnings with our investments in secondary locations, even in turbulent times," commented Hartlief.
Lack of speculative new construction in secondary locations increases market stability
Speculative construction can lead to higher vacancy rates in times of weakening demand. In contrast with Class A markets, new developments in secondary locations tend to be aligned with demand, meaning they are realised with a high pre-let ratio. This lessens the risk of market distortion caused by excess supply (see Figure 4).

All things considered, many secondary locations still have greater construction activity than metropolises in relation to the total office stock. As building activity in secondary locations tends not to be speculative, the new construction results from rising demand among local businesses. Ingolstadt is a particularly good case in point. Out of the city's present office stock, 22 percent is 10 years old or younger. Other secondary locations with high proportions of new buildings are Ulm (14 percent), Freiburg (12 percent) and Kempten (12 percent). The proportion of new-build property in the Class A cities averages only 10 percent. In terms of absolute new-build figures in 2018, the highest completion rates among secondary locations were recorded in Karlsruhe, Leipzig, Dortmund, Essen and Mannheim.

Here you can download the study:
Press Contact                                                          
RUECKERCONSULT GmbH                                 
Nikolaus von Raggamby                                           
Tel.: +49 30 28 44 987 40                                         
Investor Relations
DEMIRE Deutsche Mittelstand Real Estate AG
Peer Schlinkmann
Tel.: +49 6103 372 49 44

About DEMIRE Deutsche Mittelstand Real Estate AG
DEMIRE Deutsche Mittelstand Real Estate AG has commercial real estate holdings in mid-sized cities and up-and-coming locations bordering German metropolitan areas. The company's specific forte is its focus on these second-tier cities-its claim being "First in Secondary Locations"-and on a range of assets that appeals to both internationally active and regionally rooted tenants. By the end of the 2018 financial year, DEMIRE held a portfolio with a combined lettable area of around 926,000 sqm and a fair market value of more than EUR 1.1 billion.

The portfolio focus on office, retail and logistics assets results in exactly the kind of risk/return structure that DEMIRE considers appropriate for the business line of commercial real estate. The Company puts a premium on long-term contracts with solvent tenants in anticipation of stable and sustainable rent revenues. DEMIRE has set itself the goal to keep optimising its corporate structure. To this end, it pursues an active property management approach, convinced that it is the best way to achieve economies of scale and portfolio optimisations.

DEMIRE Deutsche Mittelstand Real Estate AG shares (ISIN: DE000A0XFSF0) are listed in the Prime Standard segment of the Frankfurt Stock Exchange.
About bulwiengesa
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.

Additional features:

Document title: Figures 1-4 Study on Secondary Locations

27.03.2019 Dissemination of a Corporate News, transmitted by DGAP - a service of EQS Group AG.
The issuer is solely responsible for the content of this announcement.

The DGAP Distribution Services include Regulatory Announcements, Financial/Corporate News and Press Releases.
Archive at

show this