No reversion in the German office market

alstria and IPD present results of third German Office Rent Reversion Index (DMX)

(PresseBox) ( Hamburg/Wiesbaden, )
The result of the 2010 German Office Rent Reversion Index (DMX), published by IPD and sponsored by alstria office REIT AG, shows this year, that the German office market presents limited reversion potential. While the average reversion potential in Germany was around 1.5% for office space in 2009, this reversion potential is now flat and stands at -0.1% as of May 2010. The current average passing rent on existing contracts is €12.45/m² therefore tallies with the estimated sustainable market rents of €12.44/m². While the average estimated sustainable market rent remains relatively unchanged year on year the passing rent on existing contracts increased by €0.13/m².

There are, however, once again some marked differences in the development of the locations surveyed, as highlighted by the latest results of the German Office Rent Reversion Index (DMX), which show the reversion potential of the German office market, comparing the existing contractual rent and the estimated sustainable market rent, as shown on the latest valuations of the properties. The DMX is based on the analysis of more than 23,000 leases in Germany.

Overall, the DMX result seems to indicate that the leasing market in Germany was resilient in 2010 with an overall fall of the average estimated sustainable market rent limited to 0.3%.

Despite the difficult economic environment, the DMX indicates that the estimated sustainable market rent increased in Frankfurt, Cologne, Munich, and Stuttgart. According to the latest DMX data Frankfurt has seen a substantial increase in it's sustainable market rent which went up 12% from EUR 16.48/sqm in 2009 to EUR 18.46/sqm in 2010.

On the other end of the spectrum, the estimated sustainable market rent has fallen by more then 5.1% in the main secondary German cities. Berlin, Düsseldorf, and Hamburg have also seen a decrease in the estimated sustainable market rent.

Munich, Frankfurt and Hamburg are the only cities area with positive reversion potential.

Despite the increase in the estimated sustainable market rent in the main German cities the new DMX version shows limited reversion overall in the German office market. The index foresees positive reversion in only three segments out of the eight surveyed.

Dusseldorf is the worst performing city with around 5.27% of negative reversion risk, while only Munich (3.56%), Frankfurt (3.27%), and Hamburg (3.24%) seems to have positive reversion potential in the office market.

The reasons for the change in the reversion potential is however different from one segment to the other. While in Berlin for instance, the reversion gap has been closed mainly as the contract rent increased, in Frankfurt the new positive reversion is linked to an increase in sustainable rent expectation by 12%.

Further increase in the DMX data pool

The DMX results are based on eight subindices comprising a total of 23,000 portfolio rental agreements worth €270 million a month in rent. These are analysed on the basis of their market segment, their residual term and the age of the lease. The number of agreements analysed has almost doubled since 2009. "The fact that our data pool has substantially increased once again means that we can carry out very detailed and robust analyses," says Lars Dierkes, Head of Lease Intelligence at IPD Property Databank GmbH, Wiesbaden. "What is also interesting is that this year in particular, we can very accurately predict the upward rental price trends in some places. The best example of this is without a doubt Berlin, where the actual increase in rental prices is very close to the rental increase potential calculated last year."

"For the third year in a row, the DMX index is showing the limited reversion existing in the German market", said Olivier Elamine CEO of alstria. "While we wanted to introduce a tool that allows us to measure the reversion potential of German cities, a key indicator for us as a property company, the DMX is also raising additional unexpected questions" he added. "It is indeed surprising to see a 12% increase of the Frankfurt sustainable rent used for valuation, at a time when market reports tend toward a decreasing rent level".

The complete DMX results are available from IPD free of charge at www.ipd.com/germany or by sending an email to germany@ipd.com.
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