Recovery in sight for office sector, London points the way

Offices have almost become a niche segment in the current market, but there are reasons to be optimistic about the outlook for the sector, experts agreed at Real Asset Media’s Germany Investment briefing, which took place recently in Frankfurt and was hosted by Ashurst.

“The office market has been paralysed but now we are getting out of that paralysis,” said Assem El Alami, head of international real estate finance, Berlin Hyp. “There is some movement in the market and that gives us some reason to be optimistic. I cannot imagine we can ever work without offices.”

Offices perform an essential function and will continue to play a significant role wherever economic activity takes place, even if there is still a question mark over the working from home trend.

“For a long time it has been difficult for managers to have the confidence to invest in the sector,” said Inga Schwarz, head of research, BNP Paribas Real Estate Consult. “But now we see some improvements: office yields have reached their peak and the compression seen in London is likely to be seen in the rest of Europe as well.”

London is usually the first to move in the cycle and represents a litmus test of what other markets will do. Take-up in central London is up 5% in the first nine months of the year.

“Office take-up has picked up q-on-q this year and institutional occupiers as well as private companies are taking up space and opting for larger offices again,” said Schwarz. “We’ve recently seen a deal for 20,000 sq m in the heart of Berlin signed by a private company, which is a positive signal.”

In order to find good tenants the office must be ESG-compliant, high-quality, close to shops and amenities and public transport. In short, Schwarz said, “it must be worth the commute.”

Vacancy rates in CBDs are low as demand for quality assets in prime locations outstrips supply, but there is a case to be made for repositioning assets.

“We see offices as a niche sector,” said Guido Gerstner, head of real estate debt and managing director, Prime Capital. “We’re driven by returns and you can’t get returns from prime, so our strategy is restructuring and transforming assets in B locations.”

Getting planning permission is a very time-consuming process, he said, but “letting the asset is the easy part and makes it worth it”.  

German institutions have traditionally been over-allocated to offices and are now trying to reposition their portfolios, so good assets could come to the market. “The office market now offers some good opportunities and smart players are already doing deals”, said Schwarz.