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02. Mai 2012 
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Prices for office real estate decouple from fundamental data
In 2011, price development in the European office real estate markets was largely decoupled from the development of fundamental data. These are the findings in the current version of the Patrizia Office Property Investment Compass. According to the Compass, price drivers are no longer the prospect of future rental increases as a result of expected growth in employment as previously, but rather the current rental situation and the size of the market.
For example, prices of properties in Berlin and London had increased by up to 10%, even though the number of office workers grew only modestly (Berlin: 1.4%) or even declined (London: -0.4%). Other markets such as Munich (3.4%), Lyon (3%) and even Budapest (2.2%) would have a considerably better employment trend, but they were not acknowledged by investors. The capital values of the properties would have fallen (Budapest) or risen only slightly (Munich and Lyon). “In 2011, the math that usually applies functioned only in the crisis-hit markets of Spain, Portugal and Ireland”, explained Karin Siebels, Head of Commercial Research at PATRIZIA GewerbeInvest KAG. Here, falling office employment and a negative outlook would have caused the capital values to decline by between 6% and 10%.
The authors of the study believe the cause of this development is a changed strategy on the part of the investors. “Our results make clear that the focus at the moment is less on future rental price trends and more on the current trend”, said Siebels. The study states that the places where rents increased more than normal - Munich, London, Berlin, Warsaw and Stockholm - have also shown the highest increases in value. On the other hand, potential for increases in rental prices, which could currently be observed in Vienna and Frankfurt/Main, seemed to crease less value.
According to the study, other factors exerting significant influence on the investment decisions were the size of the market and that of market capitalization, which resulted from available space and the average price per square meter. According to Patrizia, only this can explain why real estate prices rose more sharply than rents in the three biggest European office real estate markets of London, Paris and Stockholm as well as in many German cities. The search for core properties is reflected at this level as well. For this reason, risk premiums are significantly lower in the highly capitalized markets. Thus, the initial net return in London, Paris, Stockholm and Munich would have listed only 270 to 300 basis points above the risk-free interest rate of the 10-year German government bonds. In contrast, in smaller markets such as Prague, Lille and Lisbon, the values would have been between 410 and 470 basis points.
“Here, too, it is clear that it is not, for instance, the prospect of rising rents that causes real estate values to increase, but rather the search for reliable and secure properties”, explained Siebels. “Gut instinct seems to drive prices more than the facts in the form of high returns.” For 2012, the experts at Patrizia forecast an end to the boom. Due to falling real estate prices, rising initial net return is to be expected in 18 of 27 markets considered. However, despite a positive employment trend, many markets would record no rental price increases. “The current price level and the supply pipeline provide no reason for it”, said Siebels.
For example, prices of properties in Berlin and London had increased by up to 10%, even though the number of office workers grew only modestly (Berlin: 1.4%) or even declined (London: -0.4%). Other markets such as Munich (3.4%), Lyon (3%) and even Budapest (2.2%) would have a considerably better employment trend, but they were not acknowledged by investors. The capital values of the properties would have fallen (Budapest) or risen only slightly (Munich and Lyon). “In 2011, the math that usually applies functioned only in the crisis-hit markets of Spain, Portugal and Ireland”, explained Karin Siebels, Head of Commercial Research at PATRIZIA GewerbeInvest KAG. Here, falling office employment and a negative outlook would have caused the capital values to decline by between 6% and 10%.
The authors of the study believe the cause of this development is a changed strategy on the part of the investors. “Our results make clear that the focus at the moment is less on future rental price trends and more on the current trend”, said Siebels. The study states that the places where rents increased more than normal - Munich, London, Berlin, Warsaw and Stockholm - have also shown the highest increases in value. On the other hand, potential for increases in rental prices, which could currently be observed in Vienna and Frankfurt/Main, seemed to crease less value.
According to the study, other factors exerting significant influence on the investment decisions were the size of the market and that of market capitalization, which resulted from available space and the average price per square meter. According to Patrizia, only this can explain why real estate prices rose more sharply than rents in the three biggest European office real estate markets of London, Paris and Stockholm as well as in many German cities. The search for core properties is reflected at this level as well. For this reason, risk premiums are significantly lower in the highly capitalized markets. Thus, the initial net return in London, Paris, Stockholm and Munich would have listed only 270 to 300 basis points above the risk-free interest rate of the 10-year German government bonds. In contrast, in smaller markets such as Prague, Lille and Lisbon, the values would have been between 410 and 470 basis points.
“Here, too, it is clear that it is not, for instance, the prospect of rising rents that causes real estate values to increase, but rather the search for reliable and secure properties”, explained Siebels. “Gut instinct seems to drive prices more than the facts in the form of high returns.” For 2012, the experts at Patrizia forecast an end to the boom. Due to falling real estate prices, rising initial net return is to be expected in 18 of 27 markets considered. However, despite a positive employment trend, many markets would record no rental price increases. “The current price level and the supply pipeline provide no reason for it”, said Siebels.
