The outlook for German offices is positive thanks to high demand and low interest rates, delegates heard at Real Asset Media’s European Outlook Investment Briefing, which was held at PricewaterhouseCoopers’ Frankfurt office last week.
‘The beginning of the year was challenging because institutional investors were worried about higher interest rates,’ said Michael Becken, Managing Director, Becken Invest. ‘But as it became clear that interest rates would stay at current levels or lower, institutional investors have come back because the major asset class for the next few years will be real estate. For us as an office developer it is the best time’.
IW, the German Economic Institute in Cologne, calculates that the current interest rate environment will remain in place until 2050, providing a strong support to real estate for the foreseeable future.
‘Insurance companies have billions and that money is going into real estate,’ said Christian Zilly, Managing Partner, Waterway Investments. ‘This has repercussions for the office market, because with so much money around companies will seek huge buildings and values will probably go higher and higher’.
There is a trend for buying ever-larger assets among investors with deep pockets.
‘I believe it is a risky trend,’ said Becken. ‘I feel more comfortable with middle-scale buildings, between €50 and €200 mln, which can have single tenant or multi-tenant usage. Bigger buildings, €200 to €300 mln, are the first to get into trouble and they could have vacancy rates of 30/40%’.
Investing in quality rather than size is a better strategy, he said. Larger buildings are also harder to sell quickly.
‘We are a buy-and-hold investor, but even for us liquidity is a key criterion in underwriting any investment, so we think large office assets are a concern,’ said Christopher Mertlitz, Executive Director, W.P.Carey.
‘The office sector in Germany is very solid, it has good fundamentals and there are no clouds on the horizon,’ said Assem El Alami, Head of Real Estate Finance, International Key Accounts and Syndication, Berlin Hyp. ‘But I share the view that there are limits to the liquidity of large assets. We cannot pretend that Frankfurt or Berlin are as huge a market as London or Paris’.
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