FRANKFURT:

GERMANY'S SKYSCRAPER CITY

Following a period of strong yield compression and rising volumes, how will investor appetite change? 

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With Germany’s most unique skyline, Frankfurt boasts an impressive tower landscape. As a leading financial centre in continental Europe,the city is host to more than 230 banking institutions, including the European Central Bank, Deutsche Bank, Commerzbank and Deka Bank.

Germany’s robust economic growth and political stability have provided a strong foundation for capital flows into commercial real estate. Investment is primarily focused on the “Big Five” cities - Munich, Berlin, Hamburg, Frankfurt and Düsseldorf. As Germany’s main financial centre, Frankfurt is a particularly attractive destination for investment capital. Although German funds are very active in the market, the city has also drawn a growing volume of cross-border capital in recent years. Institutional investors from the U.S. and pension funds from South Korea have been the primary source of demand for Frankfurt’s landmark buildings, while U.K. equity funds and French fund managers have also featured prominently in recent times.

Frankfurt was the fourth most active city investment market in Europe in 2015, behind London, Paris and Berlin. Commercial transactions soared as nearly U.S.$7.7bn was invested in commercial property in 2015. Despite a restricted availability of investment stock, Frankfurt office volumes were the highest of the Big Five cities. This was boosted by several large-scale transactions including NorthStar’s acquisition of Trianon for U.S.$603.7 million, which was one of the largest single-asset deals ever recorded in Germany.

New benchmarks for the current cycle have been witnessed, with prime yields in Frankfurt hardening by 45 bps over the last year to a record low of 4.25%. Yields in Berlin and Munich have also compressed to record lows of 3.90% and 3.50% respectively. Historically, it has been unusual for Frankfurt’s prime office yields to be highest of the Big Five markets. This is due to concerns among some investors over Frankfurt’s occupier market.

OFFICE YIELDS (%)

With financial services companies undergoing consolidation, Frankfurt’s dependence on demand from this sector has led to occupier market uncertainty. That said, some investors may focus on the relatively attractive level of Frankfurt’s yields compared with other German cities. Overall, low cost of debt and the favourable returns on property should underpin investor demand for Frankfurt’s commercial property market. 


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