Munich Office MarketView CBRE Global Research and Consulting

2014 Q3

GDP 2014 Q2 –0.2% Q-o-Q

GDP 2014 Q1 +0.7% Q-o-Q

IFO BUSINESS CLIMATE INDEX 104.7 Sept. 2014

BA-X 170 Sept. 2014

UR MUC 5.1% Sept. 2014

OVERVIEW Quick Stats 2014 Q3

Q-o-Q

Take-up

108,300 sq m



Vacancy

1.49m sq m



Prime rent

€33.00 /sq m



Prime yield

4.45%



Completions

4,900 sq m



Hot Topics

•

Office take-up reduces by 3%

•

Rents in Munich continue their upward trend

•

Prime rent stable since the start of the year

•

Vacancy rate slightly below previous year’s level

•

Net initial yield for premium office property stable since the start of the year at 4.45%

Economy The effect of geopolitical uncertainties in Eastern Europe and the Middle East, and the restrained dynamic in the global economy has resulted in a slight downward correction in the Consensus Forecast growth forecasts for the German economy in 2014 (+1.7%) and 2015 (+1.8%). However, the most important indicators remain robust for Germany as an economic location. The labour market appears particularly resistant to the economic crisis with increased numbers of jobs and reduced unemployment figures compared with the previous year. In addition, the Jobs Index published by the Federal Employment Agency (BA-X), which analyses the seasonally adjusted labour demand trends, has risen by 11 points over the course of the year. Therefore, the Bavarian state capital Munich and its surrounding region continue to be the strongest economic region in Germany, with the highest level of population growth and the lowest unemployment rate, currently at 5.1%. Office market From January to the end of September 2014, a total office take-up of 419,200 sq m was registered in the Munich office leasing market. Around 4% of this was attributable to owner-occupier transactions. Take-up is around 3% down compared with the same period in 2013, which is mainly the result of a lack of large-scale transactions in the second and third quarters. The high level of demand, particularly for modern office space in city locations, has continued to cause rental price increases in Munich. The weighted average rent has risen by around 5% year-on-year to €15.82 /sq m/month. The achievable prime rent is currently €33.00 /sq m/month, which is around 3% above the previous year’s level. The vacancy rate (excluding space available for subletting) has fallen by 0.1 %-points to its current level of 7.0%. Investment market The investment dynamic in Munich’s commercial property market remains high. In 2014 to date, €3.5bn has been invested in commercial real estate, which equates to a rise of 37% compared with the same period in 2013. The investment volume registered for the period January to September has never been at such a high level since the start of the review period. €1.6bn was invested in the third quarter alone thanks to five large-scale transactions over €100m, which means that the total turnover is almost double the level of the previous quarter. In the current year, 72% of the transaction volume is attributable to office properties, and 10% each to retail property and hotels. The net initial yield for the best office properties in Munich’s top locations has remained stable since the start of the year at 4.45%. 2013 Q3

2014 Q3

Y-o-Y

Stock, million sq m

21.04

21.21

+0.8%

Take-up, cum. 1,000 sq m

433.9

419.2

–3.4%

1.50

1.49

–0.7%

7.1

7.0

–0.1%-Pts.

32.00

33.00

+3.1%

Prime yield, %

4.75

4.45

–0.30%-Pts.

Capital value index (Q1 1986 = 100)

241

265

+10.0%

Table 1: Office market key data

1

Vacancy, million sq m Vacancy rate, % Prime rent, €/sq m/month

Source: CBRE Research

© 2014, CBRE GmbH

900 800

10-year average: 663,900 sq m

700

600 500 400 300 200

100 0 2004

2005

2006

2007

2008 Q1

2009

Q2

Q3

2010

2011

2012

2013

2014

Q4

Source: CBRE Research

Chart 2:

Office space take-up (cumulated, %) by sectors* - Top 5 -

Trade 14% Remaining sectors 41%

Legal Adv., Chart. Acc. 14%

IT 12%

Other Services 7%

Industry, Construction 12%

Source: CBRE Research

Chart 3:

*in total 20 sectors

Office space vacancy

2,000

10.0

1,800

9.0

10-year average: 7.9%

1,600

8.0

1,400

7.0

1,200

6.0

1,000

5.0

800

4.0

600

3.0

400

2.0

200

1.0

0

%

VACANCY Office vacancy has reduced slightly since the mid-point of the year to its current level of 1.49m sq m (excluding space available for sub-letting). Therefore, there is now 0.8% less un-let office space in Munich than in the same period in 2013. The main reason for this is the high level of pre-lets in properties which have been completed in the meantime, e.g. Forum am Hirschgarten in the west of Munich and the Arabeska located in the Arabellapark, as well as the conversion of unmarketable obsolete office space to other uses, in combination with largely robust take-up volumes. The vacancy rate is currently at 7.0%, which equates to 0.1 %-points below the previous year’s level. Within the city of Munich, office space vacancy is around 5.7%, and in the surrounding region around 12.5%. In terms of submarkets, the largest reduction in vacancy since September 2013 was in the City South-East submarket at 36%, which was mainly due to the aforementioned large-scale transactions from the first quarter. The most significant rise in vacancy of 60% was in the Urban Area North-West submarket, which was due in part to the completion of the 88North project at the start of the year, in which space is still available to let. The volume of space currently available to let in Munich is 1.59m sq m (a fall of 3% since Q3 2013), comprising vacant space, space available for sub-letting (30,500 sq m) and speculative completions expected over the next 12 months (69,000 sq m).

Office space take-up

1,000

1,000 sq m

Munich Office | MarketView

It is evident, particularly from the last two quarters, that companies are now more cautious in the market than in the past because of more restrained economic development. There was no large-scale transaction of larger than 5,000 sq m in either the second or third quarter, which has meant that, particularly in the third quarter, the take-up of just 108,300 sq m remained at a below-average level for Munich. The largest transaction was a letting by CBRE of around 4,300 sq m of office space close to the Olympiapark to an Asian automotive company. On the other hand, smallscale deals of less than 500 sq m accounted for almost one third of the quarterly take-up. Over the course of the year, the highest level of take-up was in the City South-East submarket with 58,400 sq m (14%). Around half of this was attributable to deals by BayWa and the Bavarian Ministry for Health and Care close to the Ostbahnhof railway station from the first quarter. This was followed by the City NorthWest submarket with 50,200 sq m (12%), which was mainly due to a large number of transactions in the medium-size category, particularly in the Maxvorstadt and Moosach districts. In terms of sectors, retail companies led the take-up statistics with 60,100 sq m (14%), followed by consultants with 58,500 sq m (14%) and IT companies with 48,900 sq m (12%). 21% of the take-up volume in the current year was attributable to Munich’s well established technology, media and telecommunications sector, which also includes the IT sector.

Chart 1:

1,000 sq m

2014 Q3 2

TAKE-UP Compared with the same period in 2013, there has been around 3% less office space take-up in the past nine months. At the same time, the proportion attributable to owner-occupiers fell from 20% in 2013 to its current level of 4%. On the other hand, the letting performance alone rose by 16%, which shows that take-up performance in the Bavarian state capital in the first half of 2013 was highly supported by owner-occupier transactions.

0.0 2004

2005

2006

2007

2008

2009

Vacancy

2010

2011

2012

2013 2014 Q3

Vacancy rate

Source: CBRE Research

© 2014, CBRE GmbH

Chart 4:

Prime rent/ Weighted average rent

30

€/sq m/month

25 20 15 10 5 0 2004

2005

2006

2007

2008

2009

Prime rent

2010

2011

2012

2013

2014 Q3

Weighted average rent

Source: CBRE Research

Chart 5:

Rent index

300

250

Index Q1 1986 = 100

200

150

100

0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Germany

Munich

Source: CBRE Research

Chart 6:

Office space future supply

400 350 300

10-year average: 255,300 sq m

250

1,000 sq m

There was no change in the achievable prime rent for topquality office property in Munich’s top locations. This has been stable at €33.00 /sq m/month since the start of the year and therefore 3% above the previous year’s level. For particularly exclusive space in Munich’s prestigious properties, e.g. Palais an der Oper and the Hofgartenpalais, where office space is still available to let, rents are even higher than the achievable prime rent. The realised prime rent (the median of 3% of the most expensive lettings of the past 12 months) has risen by 3% compared to 2013, to €36.00 /sq m/month. The stable achievable prime rent meant that the CBRE Rental Price Index for Munich remained at 239 index points, the same level as at the start of the year. For the whole of Germany, the index rose by 2 points to 211.6 index points compared with the previous quarter, due to the rise in prime rents in Hamburg. PIPELINE

50

200 150 100

3

Munich Office | MarketView

35

The high level of demand for modern office space in districts close to the city centre has meant that rental prices have continued to rise in Munich. The weighted average rent, based on all letting deals over the last 12 months, showed a rise of around 5% compared with the previous year to €15.82 /sq m/month. This is around 10% above the average of the last five years. Within the city of Munich, the average office rent was €17.16 /sq m/month (a rise of 7% since Q3 2013), and in the surrounding region it was €9.56 /sq m/month (a fall of 1%). In terms of average rent, the highest year-on-year rise of 20% was registered in the City North-East submarket to its current level of €24.17 /sq m/month. The main reasons for this were a number of highly priced transactions in the location’s best properties, e.g. Alte Bayerische Börse, Ludwigpalais and Lehel Carré.

2014 Q3

RENT

50

0 2004

2005

2006

2007

Completed

Source: CBRE Research

© 2014, CBRE GmbH

2008

2009 Speculative

2010

2011 Pre-let

2012

2013

2014

Owner-occupied

2015

2016

There has been 170,000 sq m of office space (new-build and refurbishment properties) completed in Munich during 2014. This is a year-on-year rise of 51%, which is still 7% less than the first three quarters’ average volume of space coming onto the Munich market in the last five years. The high tenant demand for space with modern fit-out specification has meant that only 20% of newly completed space was un-let when it came into the market. In addition to the aforementioned office properties Forum am Hirschgarten, Arabeska and 88North, the largest scale new-build completion was the new company headquarters for Swiss Life AG in Garching, located in the northeast of Munich’s city boundaries. New completions of around 67,200 sq m are still expected for the fourth quarter, including for example the office and retail project Mona in Munich’s Moosach district, which was opened in October. The speculative share in the new-build completions expected by year-end is just 7%. For 2015, there is a projected office space pipeline volume of 237,800 sq m. This is approximately the same volume as in 2014 and approx. 3% less than the average of the last five years. Around 44% of this is still un-let, and almost one third is attributable to owner-occupiers. In 2016, 323,500 sq m of new-build completions are expected. The high level of pre-letting of over 50% (including owner-occupiers) has been achieved for almost half of the space even before commencing construction.

3

Munich Office | MarketView

In the projected pipeline to the end of 2016, the largest volume of new space is 96,400 sq m in the City South-East submarket. Almost half of this projected new-build and refurbishment space is still un-let. This includes the two office buildings HighriseOne and M-Tower at Ostbahnhof in the Werksviertel development area. The volume expected for 2016 in the Urban Area North-West submarket is similarly high at 94,500 sq m. Over 35% here, and therefore the lion’s share of the space, is attributable to owner-occupiers. Almost three quarters of the projected space is already under construction, including for example the CONNEX on Frankfurter Ring and the H2O in Moosacher Strasse. The speculative component of the submarket’s pipeline is currently 41%. A number of large-scale projects, such as the refurbishment of the BayWa headquarters in the Arabellapark and the new-build of the German Microsoft headquarters in Parkstadt Schwabing, account for a similarly high level of pipeline volume in the Urban Area North-East submarket totalling 92,400 sq m. Less than one third of this space is still available in the market.

Chart 7:

Office space future supply (2014 Q42016) by submarkets* -Top 5-

120

100

80

1,000 sq m

2014 Q3

PIPELINE BY SUBMARKETS

60

40

20

0 City S/E

Urb.A. N/W Speculative

Source: CBRE Research

Chart 8:

Urb.A. N/E Pre-let

Periph. N/E

City Ctr.

Owner-occupier

*in total 20 submarkets

Prime yield, capital value and benchmark yield

4

%

Index Q1 1986 = 100

INVESTMENT 300 6 Commercial property investments in Munich continue to be highly sought-after by investors. The total transaction volume 250 5 in the last three quarters was €3.5bn and therefore 37% above the level of the same period in 2013. Before the final 200 4 quarter commenced, more had already been invested than in the full years from 2008 to 2011, and just a little less than in the full year 2012. Therefore, Munich showed by far the 150 3 highest turnover volume of all German investment markets, outperforming for example the second placed German capi100 2 tal Berlin by around 37%. The main reasons for this were nine large-scale transactions of over €100m. There were 50 1 three times as many deals in this lot size category than in the previous year, in fact the total investment volume rose by 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q3 around 3.7 times. Five of the nine deals took place in the third quarter which, at €1.6bn, was twice as strong in terms Capital value index Prime yield (%) 10Y Bund (%) of turnover as the second quarter. With the sale of the office property Theresie to Deka by a Canadian pension fund and Source: CBRE Research the sale of an office building in Unterföhring to Allianz by a US-investment fund, there have been two transactions over the €200m mark in the last three months. The lion’s share of turnover of around €2.5bn or 72% was attributable to office property. This was followed by the retail and hotel segments, each with a share of 10%. The investment volume attributable to portfolio deals more than doubled compared with the previous year, albeit over 90% of all volume was attributable to single asset deals. As in the same period in 2013, foreign purchasers accounted for almost one third of total volume. The sale of the core property Lenbach Gärten to the Norwegian sovereign wealth fund NBIM in the third quarter meant that there was at least one deal above the €150m mark. The most active purchaser group in the last three months was asset/ fund managers with €886m or 25% of all volume, followed by open-ended property funds and special funds with €857m (24%), and insurance companies/pension funds with €599m (17%). On the vendor side, the most active group was asset/ fund managers with €753m (21%), followed by developers with €666m (19%) and insurance companies/pension funds with €474m (13%). The prime yield for office property in Munich’s top locations has remained stable since the start of the year at 4.45%, but there is likely to be a further fall in the fourth quarter. The premium compared with 10-year government bond is currently 355 basis points. As good properties in secondary locations in the Bavarian state capital and in Munich‘s surrounding region are increasingly the focus for investors, there has already been a significant yield compression in this segment.

FORECAST Taking a number of large-scale transactions which have been delayed from the third to the fourth quarter into account, we anticipate that take-up from now until the end of the year will be higher than in the third quarter. Therefore, a total take-up of 550,000 sq m to 600,000 sq m for the full year 2014 is realistic, which is around 17% below the average of the last 10 years. As premium office space in Munich is still very popular with highly liquid international tenants and the supply in this segment is still sufficient, we expect that there will be a further rise in the achievable prime rent by the end of the year. We estimate that office vacancy in Munich will remain stable or fall slightly. © 2014, CBRE GmbH

Vacancy rate %

Rental band € /sq m/month

Weighted average rent € /sq m/month

City North-East

25,100

43,600

2.3

14.00 – 23.00

24.17

City North-West

50,200

56,700

5.4

15.50 – 25.00

18.53

City South-East

58,400

96,400

5.8

12.50 – 20.00

14.64

City South-West

29,700

0

2.5

12.00 – 20.00

15.97

City Centre

26,800

63,600

2.0

20.00 – 33.00

30.73

Urban Area North-East

28,000

92,400

8.7

12.00 – 20.00

16.00

Urban Area North-West

43,200

94,500

2.9

12.00 – 19.00

15.15

Urban Area South-East

38,400

39,500

12.1

11.00 – 16.00

12.79

Urban Area South-West

34,200

23,000

9.7

11.00 – 16.00

12.45

Periphery North-East

41,600

86,400

13.7

8.00 – 12.50

9.52

Periphery North-West

13,500

1,500

8.3

8.00 – 11.00

8.08

Periphery South-East

18,600

26,500

15.9

8.00 – 12.00

8.98

Periphery South-West TOTAL

11,500

4,400

7.2

8.50 – 13.50

12.25

419,200

628,500

7.0

8.00 – 33.00

15.82

Munich Office | MarketView

Future supply 2014 Q4 – 2016 sq m

2014 Q3

Cumulated Take-up sq m

Table 2: Submarket key data

Source: CBRE Research

5

Source: CBRE Research

© 2014, CBRE GmbH

5

2014 Q3 Munich Office | MarketView

For more information about this MarketView, please contact: Research Germany Dr. Jan Linsin Senior Director Head of Research Germany CBRE Bockenheimer Landstr. 24 60323 Frankfurt t: +49 69 170077 663 e: [email protected]

Tobias Brandt Senior Analyst CBRE Isartorplatz 1 80331 Munich t: +49 89 242060 76 e: [email protected]

Agency Munich Rainer Knapek Managing Director Head of Agency Munich CBRE Isartorplatz 1 80331 Munich t: +49 89 242060 0 e: [email protected]

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Global Research and Consulting This report was prepared by the CBRE Germany Research Team which forms part of CBRE Global Research and Consulting – a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. Disclaimer 6

Information herein has been obtained from sources believed reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. This information is designed exclusively for use by CBRE GmbH clients, and cannot be reproduced without prior written permission of CBRE GmbH.

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