Jam tomorrow

Construction programmes in Germany continue unabated despite a precarious economic situation, as developers continue to hope for a better tomorrow. But funders are becoming more cautious. Adrian Morrison reports The bigger they come, the harder they fall. Recently, Europe’s economic powerhouse, Germany, has fallen further than most. While overall economic activity has slowed dramatically in western Europe, Germany has come closest to recession with GDP growth at practically zero during the past 12 months. This has had a knock-on effect on the office market, with Berlin rents expected to fall by nearly 7% in 2003, according to DTZ research. Nevertheless, Germany remains the biggest economy in Europe and thethird-largest globally. In addition, Berlin, Frankfurt and Munich are among Europe’s top 10 best cities to locate a business, according to Healey & Baker’s European Cities Monitor. Reunification placed a tremendous financial burden on the nation’s shoulders but also created amazing opportunities. Development was so rapid in parts of East Germany that there is now talk of oversupply. Take-up of office space in the first quarter of 2002 for the five main centres of Germany – Berlin, Dsseldorf, Frankfurt, Hamburg and Munich – dropped 45% on last year’s figure to 4.3m sq ft. On top of this, the vacancy rate increased in four of the big five cities. Berlin escaped this trend but its vacancy rate of 6.6%, although static, is still higher than those of the other four cities. Nevertheless, developers are still building. According to Jones Lang LaSalle in Germany, nearly 12m sq ft of speculative space will come onto the market in these main cities over the next nine months, with Munich accounting for nearly 40% of that. Speculative development DTZ Zadelhoff Tie Leung’s Hanns-Joachim Fredrich believes that, in the present climate, Berlin just does not have enough demand to absorb more speculative development. The city will see 6.5m sq ft of new space come onto the market in the next 18 months, despite there being 13.5m sq ft of space available in 2001. Fredrich places part of the blame on the shoulders of government, which invested €1,950bn in infrastructure in East Germany during the reunification process, but did not invest in companies or staff. He states: “We have the best streets, the best buildings, the best computer network, and Berlin has more than 100,000 flats. But Microsoft and Hewlett Packard will stay in Munich because it is impossible to find personnel in Berlin.” Berlin has a high vacancy rate partly because developers provided space in anticipation of domestic and international firms relocating their headquarters to Berlin after the 1989 reunification, but this never happened. Nevertheless, the amount of space in Berlin’s supply pipeline is shrinking, perhaps because of the 10m sq ft of vacant space already built across the city. And, like London, Berlin has seen top-end deals fall away as larger companies put property decisions on hold. The east of the city, where rents are half the cost of prime locations in the centre, has done better, as the active small- andmedium-sized enterprise sector is keen to seek space there. “The number of leases signed at the top rental levels has dropped – the tip of the iceberg has been cut off,” says FPDSavills’ Ole Sauer. He continues: “Normally, around 10-15% of the market is this size of deal, but over the past six months that has dropped to 5% or less – some would say none.” Despite all this, many believe that recovery is on the way – although nothing may be apparent until 2003. Tishman Speyer, developer of the 840 ft (256m) MesseTurm in Frankfurt, Europe’s tallest building, has expressed concern about the effect of the slowdown on its projects. However, Tishman Speyer Deutschland managing director Joachim Tenkhoff notes that, while first-quarter take-up in Frankfurt was extremely low at 540,000 sq ft, attitudes are positive. “I was at dinner with the mayor of Frankfurt and members of the Frankfurt property community recently, and was very surprised that most have an optimistic view,” claims Tenkhoff. He adds: “Psychologically, the conditions are better than the figures suggest.” The logic behind the upbeat mood is quite straightforward. Despite the city beingoff course for its usual annual turnover of 6.5m sq ft, Tenkhoff believes that the climate of uncertainty is clearing and that businesses in Frankfurt need to grow. Similarly, DTZ’s Fredrich believes that Berlin’s developers are still active because they anticipate a surge in the city’s growth five to 10 years hence. Foreign investment Many believe that Germany’s complicated tax system needs to be reformed to encourage foreign investment, especially in the face of the slowdown. Tenkhoff and others say the variety of separate taxes dissuade foreign operators from expanding into the country. In addition, it is said, taxation is too high. The taxes – a combination of corporation, trade and solidarity taxes – to aid restructuring since reunification – means that Germany penalises companies more than many other European countries. However, recent restructuring of the system, to accommodate the EU free market, has gone some way to making it clearer and cheaper for foreigners. A problem for developers of any nationality in eastern Germany is getting funding for projects. Since many developments in Berlin have failed to let, banks are unwilling to 100%-fund new schemes, especially speculative ones. Developers must underwrite 20% of the cost of new ventures themselves. But the German government’s decision to secure the €21.5bn debt of state bank Bankgesselschaft Berlin should remove some of the uncertainty for lending institutions in the light of their recent losses. Vacancy rates In addition, the relative success of the two towers on Berlin’s Potsdamer Platz is expected to drive rents forward when vacancy rates come down. Quoted rents for Sony, Tishman Speyer and Kajima’s Sony Center and DaimlerChrysler Immobilien’s tower are 40% above the average. These factors are helping to make Berlin a vibrant office centre again. Despite the amount of speculative development coming on stream in the next 18 months, overall supply is falling. This, coupled with take-up projections for 2002 that are similar to those for 2001 – give or take a few percentage points – probably means that, if developers and funders can sit tight, they will see the fruits of their labours next year. But in Berlin’s case, things will not happen overnight. Frank Rueckersberg, head of Knight Frank in Germany, says: “You cannot imagine that east and west Berlin will just suddenly become one city – it is a long-term prospect.” Rckersberg is mildly disparaging about the lack of planning control on the Berlin office boom in the past few years, and believes that more co-ordination and professional planning is required for the next phase. But this will not happen immediately. JLL’s national director for Germany, Klause Kraegel, sees the next 12 months as a time for reflection. He says: “It is clear we will not have a boom in respect of take-up and new demand. I can’t see any growth over the next year, but the economy will be stable.” Perhaps a bit of quiet time will create the environment for the more professional approach to development that Rueckersberg desires. Office space take-up March 2002 Take-up has fallen significantly in recent years, but in some centres, such as Berlin, agents are now anxious that demand will soon outstrip supply Total take-up Vacancy Rate (%) 2001 total Q1 2001 Q1 2002 % Q1 2001 Q1 2002 % Q1 2001 Q1 2002 Berlin 425,000 95,000 77,000 -18.95 1,209,000 1,034,000 -14.47 6.6 6.6 Dusseldorf 1 399,000 125,000 72,000 -42.40 154,000 254,000 64.94 4.2 4.9 Frankfurt 2 608,000 150,000 59,000 -60.67 219,000 338,000 54.34 2.6 3.3 Hamburg 3 410,000 81,000 78,000 -3.70 254,000 334,000 31.50 2.5 2.7 Munich region 912,000 274,000 116,000 -57.66 66,000 275,000 316.67 1.3 1.8 1 Including Ratingen, Neuss, Erkrath and Hilden (take-up and new inquiries only). 2 Including Eschborn and Kaiserlei. 3 From 2002 including Harburg/Suedlich der Elbe Source: Jones Lang LaSalle GmbH, Research NB. % is defined as change between Q1 2001 and total Q1 2002 Office space stock (m m2) Nearly 12m sq ft is expected onto the market 2001 Q1 2001 Q1 2002 Berlin 15.66 15.48 15.69 Dusseldorf 5.20 5.05 5.23 Frankfurt 10.13 9.69 10.18 Hamburg 11.98 11.88 12.46 Munich Region 15.52 15.00 15.64 NB. % is defined as change between Q1 2001 and total Q1 2002 Source: Jones Lang LaSalle GmbH Research Berlin office market lettings 2001 Q1 2002 Source: Knight Frank German industrial rents Industrial rents have gradually increased Source: DTZ German office rents Despite the downturn, rents have held up Source: DTZ