THE STUDY 2019 - bulwiengesa · With its many years of experience, BEITEN BURKHARDT provides advice...

bulwiengesa

THE 5 !% STUDY 2019 WHERE IT STILL PAYS OFF TO INVEST

THE 5 !% STUDY 2019 bulwiengesa

© REF! REF! – REF!

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FOREWORDS 1

SUMMARY 2

THE MARKET ENVIRONMENT 5

THE MARKET FOR RESIDENTIAL PROPERTIES 6

EXCURSUS 1 8

THE MARKET FOR MICRO-APARTMENTS 9

THE MARKET FOR OFFICE PROPERTIES 11

EXCURSUS 2 13

THE MARKET FOR LOGISTIC PROPERTIES 14

THE MARKET FOR LARGE-SCALE RETAIL PROPERTIES 16

THE MARKET FOR HOTEL PROPERTIES 17

THE MARKET FOR UNTERNEHMENSIMMOBILIEN 18

THE 5-PERCENTERS 19

THE 4-PERCENTERS 22

THE 3-PERCENTERS 26

THE 2-PERCENTERS 31

THE RESULTS IN DETAIL 33

CONTENT AND METHODOLOGY 36

SELECTED MODEL ASSUMPTIONS 38

DEFINITIONS AND COMMENTS 39

CONTACTS 44

WHERE IT STILL PAYS OFF TO INVEST

Contents

© bulwiengesa AG 2019

bulwiengesa

A study by bulwiengesa AG

With the friendly support of



All kinds of things are being written to try to fit the currentmarket situation into an explanatory model – the descrip-tions range from “over-mature market phase” to “supercy-cle” and “megacycle”. And it seems to have become a cher-ished ritual at the end of each record year to predict whenthe market crash will take place.After all, there are a growing number of question marks asregards the macroeconomic environment – since 2018, oureconomic growth has no longer been displaying the prosper-ity of the preceding years. The trade wars waged by the USAare increasingly becoming a threat to international trade,while mounting global tensions – particularly in the MiddleEast – are causing additional nervousness.On the other hand, there is no sign of a turnaround in inter-

est rates – and the generally still sluggish eurozone indi-cates that the ECB’s ultra-expansionary monetary policy isunlikely to end in the medium term.Furthermore, (most) property markets are proving to be invery good shape – demand for residential and office space ispersistently high while supply is scarce, causing rents andpurchase prices to increase again in many markets.The fifth edition of the “5% study” thus documents anotherturn in the yield spiral. As usual, the focus is on a dynamicanalysis of yields in the form of the IRR (internal rate of re-turn), which sets the study apart from conventional marketreports. I hope you find it an informative read.

Sven Carstensen, Division Manager, bulwiengesa AG

After the rapid price increases of the past few years, wheredo real estate investments still pay off? And in which seg-ment? These are the most pressing questions for propertyinvestors. But those who seek answers in studies usually finddata on individual cities or property segments only. If inves-tors wish to gain an overview, they have to use data fromdifferent sources. This is time-consuming and prone to er-rors, as the calculation bases vary and the data thereforecannot simply be compared directly. bulwiengesa fills thisgap with its regular 5% study, in which the results are firstbroken down by asset class and then by the expected inter-nal rate of return (IRR), irrespective of the segment or re-gion. bulwiengesa doesn’t just examine the top propertiesthat generate prime rents, but illustrates the full range ofthe market.

The study therefore shows how diversified the investorlandscape is. As a listed real estate investor with a long-terminvestment horizon and more than 25 years of market expe-rience in different regions, TLG IMMOBILIEN AG invests incommercial properties in Germany. We therefore benefittime and again from this study, as it provides us with reli-able data. We advocate an industry-wide standard for prop-erty market data that benefits all market players. Competi-tive thinking is out of place here in any case, as we are allacting in the interests of our investors. TLG IMMOBILIEN AGis delighted to support the 5% study and thereby contributeto greater transparency on the market for property invest-ments.

Jürgen Overath, Chief Operating Officer, TLG IMMOBILIEN AG

The transaction market for residential properties is trackingsideways at a continued very high level. There is a similarsituation with regard to the attractiveness of the Germanproperty market, as German properties in all asset classesare highly sought-after despite sharp price increases.Germany remains a strong lessor’s and seller’s market, evenbeyond its own borders. As before, foreign investors are stilldisplaying great interest in the German property market.The planned amendments to the German Real Estate Trans-fer Tax Act will result in a lack of share deal activity on thepart of buyers. Under the current draft bill, it will no belonger sufficient for the investor to acquire less than 95% ofthe shares in the private company that owns the property.The threshold has instead been lowered to 90%. An identicalregulation for stock corporations is also to be added to theGerman Trade Tax Act, with the effect that “club deals” willno longer be possible. Existing shareholders in both privatecompanies and stock corporations must now therefore con-tinue to hold a significant stake. In addition, the holding pe-

riod has been extended from five to ten years. Only after theend of this ten-year period are the remaining 10% of theshares permitted to be transferred to the new shareholders.Now only a narrow majority of buyers still prefer share dealsand sales of fund unit certificates. The continued legislativeprocedure and particularly the transitional regulations re-main to be seen.Furthermore, the strong demand for forward deals can alsobe expected to slow as a result of rising construction costs. With its many years of experience, BEITEN BURKHARDTprovides advice on all phases of property management: fromfinancing to the land purchase and project developmentthrough to letting or selling the property. We implement in-novative forms of property sales and trading, as well design-ing German and foreign real estate funds.

Dr Detlef Koch, BEITEN BURKHARDT RechtsanwaltsgesellschaftmbH

© bulwiengesa AG 2019 page 1/44


bulwiengesa

Forewords

* Liquidity of asset classes regardless of investment cycles. Within the categories of low, medium and high market liquidity shown in the diagram,there is no further assessment of the liquidity of the individual types of use. ** UC = University Cities *** UI = Unternehmensimmobilien

For the purposes of this study, core properties are defined asproperties with a stable letting situation and sustainablelocation parameters. The matrix above shows the relation-ship between the probable internal rate of return on a prop-erty investment and the liquidity of the respective market.Here, market liquidity refers to the ability to generatedemand for transactions independently of the respectiveinvestment cycle and to offer exit opportunities even inyears of low demand.

Goodbye, 6%!This year’s study was the first in which no type of use couldbe identified that had an IRR of at least 5.5% in the core seg-ment. Those pursuing an investment target of 5% still haveto switch to smaller markets and niche segments. However,there is increasingly limited choice here as well: Only inoffice markets in D cities and with industrial parks and pro-duction properties can yields of 5% or more be achieved inthe base scenario (i.e. without taking account of fluctuationranges).

Shopping centres as yield earners?With a base value of 3.88%, shopping centres are once againthe only asset class with rising yields. The reasons are clear:

Changes in consumers’ shopping habits with a shift towardsonline offers are casting doubt on the sustainability of therental income generated by retail tenants. As a result of thisgeneral “penalty” for a product class, there may well be op-portunities for knowledgeable investors, as not all sectorsare affected by the growing competition to the same extent.Specialist stores remain unfazed by this trend, especiallythose with a relevant food retailer presence. These are re-cording falling yields again and have replaced shopping cen-tres as the core investment product in the retail sector. After4.74% in 2015, they are now generating yields of 3.59%.

Residential properties in A markets close to 2%It is evidently becoming more and more of a challenge tomake economically advantageous investments in existingresidential properties in A markets. Firstly, the increase insales factors (multipliers) is continuing, leading to a furtherrise in prices as compared to the previous year. Secondly,regulatory obstacles are increasingly curbing the possibilityfor rent adjustments. The introduction of the rent cap inBerlin represents another regulatory escalation level in thiscontext.

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bulwiengesa

Summary Core-Matrix*


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mar

ket l

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*hi

ghm

ediu

mlo

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5 %

-mar

k

property-specific IRR1 % 2 % 3 % 4 % 5 % 6 % 7 % 8 % 9 % 10 %

micro-apt. A - 10.8 %

UI light manufacturing - 6.6 %

UI*** business park + 3.3 %

office D - 3.8 %

UI warehouses - 11.3 %office C - 3.2 %

office B - 7.1 % residential B - 8.1 %

hotels - 6.0 %

micro-apt. B - 9.8 %

Y-O-Y Change IRR base value

shopping center + 5.4 %

residential UC**

office A residential A -7.9 %

modern logistics -7.9 %retail parks - 5.3 %

- 11.7 %

- 5.6 %


Investors still focussing on office marketsDemand for core properties in the office sector is undimin-ished. As a result, the yield compression is continuing.Based on the highly favourable market environment withvery low vacancy rates accompanied by consistently highuser demand, investors still expect enormous rent increasesand are accepting ever lower purchase yields. In the base scenario, the A markets are currently at 2.56% –but the yield range from 0.9% to 3.3% shows that even aninvestment in core properties can be slightly lower than theinflation rate of around 1.6% at present.The yield expectations in B markets also remain modest at3.28%.The C and D markets still represent high-yield alternativeswith IRRs of 4.18% and 5.27% respectively. However, thesupply of properties is very limited due to the small marketsizes.

Hotels close to 3%The possibilities for significantly profitable investments inthe hotel segment are also becoming increasingly limited –only around 3.2% can be achieved now. Hotels are still verypopular with operators and investors, and it is not unusualfor locations to be accepted even if they meet the stated re-quirements only to a limited extent. Therefore, it is essential to check the extent to which sus-tainable use (capacity for alternative uses) is ensured overthe term of the respective lease contract.

Modern logistics properties slip below 4% Changing consumer habits are not just affecting retail prop-erties. The increased demand from online retail is also push-ing logistics properties right to the top of investors’ wishlists. This demand pressure is having a significant impact onyields, which were close to 5% in 2015 but have now slippedbelow the 4% mark to 3.91%.Given that user demand for logistics space remains very highand the supply of industrial properties is very limited, an in-crease in yield is not to be expected in the future, either.Basic warehouse properties also remain highly sought-after.They are the only business property segment that is consid-erably below the 5% mark at 4.26%. This means that –besides small office markets – production properties andindustrial parks are the only remaining options for investorsseeking investment opportunities above 5% in the core seg-ment.

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bulwiengesa

Summary Core-Matrix

Development of Core Properties’ IRRs 2016 - 2019

Office A

Office B

Office C

Office D

Residential A

Residential B

Residential UC

Logistics

Shopping Centres

Retail Parks

Warehouses (UI)

Business Park (UI)

Light Manufacturing(UI)

Micro-Apts. (A)

Micro-Apts. (B)

Hotels

0 % 1 % 2 % 3 % 4 % 5 % 6 %

2016 2017 2018 2019

5 %

-mar

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In this study, non-core properties are defined as propertieswith an increased risk profile and thus also higher perform-ance opportunities. They are characterised by managementdeficiencies such as vacancies, are usually situated outsidethe central locations and have unstable letting structures.The matrix above shows their market potential only; exten-sive restructuring or renovations are not taken into accountin this study. No outliers are included in the analysis either,meaning that in some individual cases the attainable yieldsand also the economic risks may be considerably higher thanthose determined in the model calculation. Residential prop-erty investments in established markets do not currently of-fer high enough yield potential for non-core investors. Simi-larly, modern shopping centres and specialist retail centres(without any need for restructuring/modernisation) also arenot included in the non-core analysis.

Decreasing investment opportunities for yield huntersin the office sector

Given that the A markets are in very good shape, it is cur-rently becoming more of a challenge to find non-core prop-erties. The search for suitable properties can certainly pay

off for investors with adequate management expertise – inthe model assessment, an IRR of up to 9.1% is possible.However, this is also countered by significantly higher eco-nomic risks. The range here goes as low as a negative IRR of-3.4 %.Yields of up to 12.4% can be achieved in smaller D-city officemarkets. Sufficient local expertise and networking are a pre-requisite for successful investment here. In addition, thereare increased liquidity risks – during phases of declining in-vestment demand, the saleability of these properties de-creases disproportionately.

Business properties as yield earners Business Parks and Light Manufacturing properties with va-cancies or short-term rental agreements still offer increasedperformance opportunities – an IRR of up to 10.5% can beachieved here. However, since these properties tend to bevery management-intensive, they are suitable for specialistswith relevant knowledge of the sector and technical exper-tise.In the case of warehouse properties, the management task isless complex. Yields of up to 8.1% can be achieved here.

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*Liquidity of asset classes regardless of investment cycles. Within the categories shown in the diagram (low/medium/high market liquidity), there isno further assessment of the individual types of use.

bulwiengesa

Summary Non-Core-Matrix*


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2 % 3 % 4 % 5 % 6 % 7 % 8 % 9 % 10 % 11 % 12 % 13 %

property-specific IRR

high

med

ium

low

mar

ket l

iqui

dity

*

office Amodern logistics

office B

hotels

UI warehouseoffice C

office D

UI light manufacturing

UI business park

5 %

- m

ark


For ten years now, property prices for most use segmentshave been moving in one direction only: upwards. After thehousing market had recovered from the shock of 2009,which was brought on by the effects of the global financialcrisis, a marked upturn also began on the commercial realestate market.

Residential property prices rose rapidly – an increase that isstill continuing today despite all the efforts of politicians.Driven by robust economic growth and an associated rise inemployment, the commercial real estate market has alsogained momentum. The ECB’s low-interest policy has alsoled to high liquidity on the market, putting pressure onyields. Initial net yields for office properties in A marketshave thus fallen from 5.49% in 2009 to less than 3% now.In recent years, investment volumes have settled at a level ofover EUR 50 billion (commercial property only) and evenexceeded the EUR 60 billion mark in 2018. However, themarket is still dominated by a shortage of supply, with theeffect that this year’s transaction volume is unlikely tomatch the previous year’s record level.

Although there are a growing number of question marks asregards the macroeconomic environment – from the flag-ging general economy to uncertainties in foreign policy andgrowing political tensions within and outside Europe – Ger-man properties are still in very high demand and ever lower

yields are being accepted.The only segment not fully included in this boom is retail,where use-specific risks play a role due to the rise of onlineretail. The growing scepticism in this segment is also docu-mented by the Deutsche Hypo real estate climate index.Whereas growing general uncertainty has recently been re-flected in falling curves in the conventional asset classes, thedownward trend in the retail climate started back in 2015and has persisted up to the present. The Deutsche Hypo realestate climate index reveals an overall situation that remainspositive, but nervousness within the sector is increasing.

New investments in Commercial Properties in Germany by Institutional Investors

Source: BVI, BaFin, Bankhaus Ellwanger & Geiger, Deutsche Bundesbank, analyses Loipfinger, Scope, FERI, data is based on research and calculations by bulwiengesa AG

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

0

15

30

45

60

75

in b

n EU

R

closed property fund

open-end mutual fund

insurances/pension funds

special fund

foreign investors

listed property companies

other

forecast

Development of Deutsche Hypo Real Estateindex by Segment

Source: Deutsche Hypo/bulwiengesa AG

09 10 11 12 13 14 15 16 17 18

0

50

100

150

200

office

retail

residential

ind./logistics

hotels

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bulwiengesa

The Market Environment

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Despite rent controls, an upward trend could be seen on thehousing market in major urban centres again in 2018.Although growth was considerably lower than in 2017, rentsfor re-letting rose by around 4% year-on-year in the A citiesand by almost 3% in the B cities. Munich is still the fron-trunner on the rental market with a current average rent ofalmost EUR 17 per square metre, followed by Stuttgart andFrankfurt, where the price per square metre is above EUR 13in each case. Among the B cities, Bochum, Duisburg andLeipzig are still recording a moderate rent level of EUR 7 orless per square metre on average.Compared to rents, prices for owner-occupied apartments inexisting building saw much stronger momentum of 10% in Acities and 7 % in B cities. In the period under review, pricesfor owner-occupied properties in German A cities almostdoubled. Here, too, Munich comes top in the ranking, withprices in the Bavarian capital almost tripling in recent years. There is still a discrepancy between supply and demand forhousing. While 49,135 apartments were completed in Berlinbetween 2013 and 2017, the population grew by 123,720households. In Frankfurt, the ratio (of the increase in apart-ments to the increase in households) was around 1 to 1.7,while in Munich it was 1 to 1.4. The number of building per-mits indicates that this situation will not ease up in the nearfuture either. The multipliers for apartment buildings are also increasing.This is chiefly due to an attractive market environment andvery high demand on the investment market. In Berlin,average factors of 29.0 are currently being paid, while inMunich they are as high as 37.0.

Prices are at a very high level in the B markets, too –although structural differences in the city cluster have animpact here. While the multiplier in Münster is at the samelevel as in the A city Stuttgart at 25.5, the figure for Duisburgis still at a very low level of 15.

A tense situation can be expected on the housing markets inthe future. In German A cities in particular, prices will con-tinue to rise. If the market cools, however, it can be assumedthat lower-quality locations and properties will need to berepriced.

Development of Multipliers* by City Cluster

Source: RIWIS, 2019-2023 forecast *Existing properties

2009 2011 2013 2015 2017 2019 2021 2023

10

15

20

25

30

Development of Residential Property Market in German A- and B-Cities

Source: RIWIS, 2009 - 2023 forecast

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

0

5

10

15

Aver

age

rent

for e

xist

ing

apar

t-m

ents

in e

uros

per

sqm

per

mon

th

0

1,500

3,000

4,500

6,000

Aver

age

purc

hase

pri

ces

for

exis

ting

owne

r-oc

cupi

ed a

part

-m

ents

in e

uros

per

sqm

A-city rent B-city rent A-city purchase price B-city purchase price

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A-cities

B-cities

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The Market for Residential Properties

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bulwiengesa

The Residential Market Maximal Obtainable Property-Specific IRR for Core-Investors



Increasing regulation is putting strain on the realestate and construction industries

Real estate and construction policy and the associated legalissues have rarely been the subject of such controversial butalso irrational debate as has been the case recently. When-ever industry experts meet nowadays, it is clear that in-creasing regulation is putting strain on the real estate in-dustry and particularly the housing industry.

The coalition agreement between the Christian Democrats(CDU) and the Social Democrats (SPD) at the German federallevel already contains strict regulatory measures with a ma-jor influence on the real estate industry and particularly thehousing industry. But with the Hessian coalition agreementbetween the CDU and the Greens, this discrimination hasreached a new peak.

The Hessian coalition agreement deals in depth with issuesrelating to real estate, housing and construction. “Housing”has now even been added to the name of a ministry: the“Hessian Ministry of Economics, Energy, Transport andHousing”. It is very obvious that some passages of the coali-tion agreement paint an inaccurate picture of the real estateindustry. This is not entirely unexpected, as investors andlessors are perceived as nuisances by the public, and somepolitical actors fan the flames of these discussions, for ex-ample with the unobjective and unhelpful expropriationdebate.

The fact that the Hessian state government now has somuch scope to restrict the activities of investors, contractorsand lessors even more should give us pause for thought –because ultimately tenants and buyers will also be deeply af-fected by the consequences of these policies. Measures suchas improved protection from eviction, increased neighbour-hood preservation, stricter rent controls that extend theHousing Supervision Act and the Cap Regulation, or a longerfreeze period of eight years for conversions into owner-oc-cupied apartments (with an authorisation requirement inmunicipalities with tight housing markets) do not create asingle apartment. Only construction can help, and this mustbe promoted by politicians at federal, state and municipallevel, depending on the responsibilities. Measures that cre-ate housing include designating land for specific uses, sim-plifying and accelerating authorisation procedures, scalingback excessive building regulations and lowering buildingcosts.

In the Hessian coalition agreement, the social market econ-omy is even called into question. The sentence “The need for

rented housing, particularly in major urban centres, cannotalways be met with the rules of the social market economy”ought to be a wake-up call – after all, it undermines a cor-nerstone of our society. It is also disconcerting to see thatthose who follow the existing tax laws are stigmatised bymentioning “aggressive tax avoidance strategies” in thesame breath as “tax fraud”.

On top of this, there are federal political issues such as realestate tax and the principle that only the party that ordersan agent must pay for its services. It is hard to see why thevalue of a property should be taken into account in real es-tate tax, which is an infrastructure charge. And it is equallyunreasonable to stipulate that it should always be the sellerof a residential property who pays the agent. Municipalitiesalso feel encouraged to keep tightening the thumbscrews.Take Frankfurt am Main, for example: Besides the exerciseof pre-emption rights and the desire to introduce a rent cap,there are also efforts to demand – in addition to the imple-mentation of the social housing quota of 30% in construc-tion projects – another 15% of space for “communal and co-operative housing”.

When it comes to housing, a particularly important issue forthe public, it is no use just trotting out ideological platitudes.It doesn’t go far enough or solve any problems when indi-vidual aspects are debated in isolation. The development ofcities such as Frankfurt am Main, Munich, Hamburg,Düsseldorf and Berlin and of the surrounding areas and ruralregions has to be seen in context, just the same as the topicsof construction policy, mobility and digitalisation.

And it should also be borne in mind that three quarters ofproperties in Germany are privately owned. Fund and hous-ing companies, which own the majority of the rest, are in-stitutional investors. This means that they represent manyconsumers who have an interest in ensuring a functioningreal estate industry so that their investment will yield aprofit – which is very often to be used for retirement provi-sions – in the current meagre interest-rate environment.

What needs to be done now is to create incentives for con-struction, rather than issuing one regulation after another toimpede it.

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bulwiengesa

Excursus: Increasing regulation is puttingstrain on the real estate and housing industryby Klaus Beine, BEITEN BURKHARDT Rechtsanwaltsgesellschaft mbH



The market for micro-apartments in Germany has beenenjoying steadily increasingly demand for some years now –particularly due to the growing number of single-personhouseholds.In many cities, the share of single-person households is nowabove 50%. This structural change is most pronounced inBerlin, where the share has risen from around 45% in 1990to almost 54% now.

The changing requirements for properties also play a role.Particularly thanks to their flexible range of potential usesand their high price level, micro-apartments are currentlybecoming increasingly attractive on the German propertymarkets.

In contrast to the usual forms of housing, micro-apartmentshave particular requirements with regard to their location. Inaddition to a central location and proximity to interregional

transport connections and to workplaces, an urban nature –with services, leisure facilities, cafés and restaurants avail-able nearby – also plays a key role. Any shortcomings in thelocation should be compensated for by offers in the property.The micro-apartments asset class brings a number ofadvantages in letting business. Lessors can not only demandhigher rents than in the category of standard apartments,but can also react faster to current market developments dueto the shorter lease terms. On the other hand, it should benoted that increased letting management is required tomanage these properties and that rapid market adjustmentsmay also have negative consequences in times of recession. The term “micro-apartments” covers various different typesof arrangement, ranging from operator companies with ahigh level of service to individual rental agreements. Thestudy focuses on the latter.Growing demand for micro-apartments in recent years hasbecome a topic for the real estate industry. Whereas tenyears ago the trend was still for larger apartments, now thefocus in A cities is on apartments with one or two rooms. In2017, this size category accounted for around 41% of allnewly constructed apartments – compared to just approxi-mately 13% in 2008.

An analysis of building permits indicates that the trendtowards micro-apartments is continuing. In Berlin (51%),Düsseldorf (55%) and Munich (57%), they account for ashare of 50% or more. On the investment market, micro-apartments have becomeestablished as an asset class – their yields have now fallen tothe same level as standard apartments. However, it is un-clear whether they also have a comparable risk profile. It re-mains to be seen how sensitively this product will react tomarket fluctuations.

Share of Single-Person Households in A-Cities

Source: German Federal Statistical Office

BD

FHH

CM

S

40 % 45 % 50 % 55 %

1990

2018

Definition of Micro-ApartmentsCriteria

Complexes with around 100 to 300 units, mostly one-room apartments measuring 18 sqm to 35 sqm

Partly or fully furnished, always with a separate kitchenunit and bathroom

In some cases, optional services such as fitness facilities,concierge, laundry

Location with good local public transport and road con-nections and accessibility of workplaces

Source: bulwiengesa AG

Apartment Completions by Number of Rooms in A-Cities

Source: RIWIS; Statistical offices of German federal states

2009 2011 2013 2015 2017

0

3

6

9

12

15

18

Thou

sand

s of

apa

rtm

ents

1-2 rooms

3 rooms

4 rooms

5 rooms

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bulwiengesa

The Market for Micro-Apartments

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Dummyseite Logistikkarte

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bulwiengesa

The Market for Micro-Apartments Maximal Obtainable Property-Specific IRR for Core-Investors



A very high level of liquidity and a lack of products are stilldriving developments on the office investment market. Thishigh demand pressure has led to another decline in initialnet yields on the major markets, with the effect that they arenow below the 3% mark in Hamburg and Munich as well asin Berlin.

These low values also reflect expectations for the future de-velopment of rents. And these remain high, with a dynamictrend in market rents still anticipated for Berlin in particular.Between 2013 and the end of 2018, prime rents in the capitalrose by almost 50% – and the increase is continuing this

year, too. Another significant aspect here is that the growthnot only relates to nominal rents, but rent incentives havealso significantly decreased. Whereas just a few years ago arent-free period of six months was usual when concluding afive-year lease, this has now decreased to three months oreven less in many A markets. Given that the vacancy level is lower than the fluctuation re-serve at around 1.5%, it is not just central locations that arerecording substantial increases in value. Properties in pe-ripheral locations have also gained significant momentum.Alternatives for yield-focussed investors are still available insmaller markets, although significant yield compression canbe observed here, too. For example, the yield level in B mar-kets is lower than 4.5% and even the C markets have fallenbelow the 5% mark. The different levels range from 5.8% inMühlheim/Ruhr to 4.1% in Heidelberg.For investments in D markets, yields of around 5.6% arequoted (weighted average of all cities), with considerablyhigher levels in cities such as Solingen (7.8%) and Zwickau(7.5%).In general, the smaller the market, the lower the supply ofpotential (and market-compliant) investment properties. Astraditional “core” investors are also switching to smallermarkets now, it is likely to become increasingly difficult tofind attractive investment targets here. Relevant yield in-creases are not expected on the market in the medium termeither, and in a few cases there will even be further com-pression. Good knowledge of the market and high marketpenetration are increasingly required for successful invest-ments.

Office Market Development in Germany by City Category


2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

0

2

4

6

8

10

12

Vaca

ncy

rate

in %

(b

ars)

90

100

110

120

130

140

150

prim

e re

nts

2008

= 1

00(li

ne)

A-cities

B-cities

C-cities

D-cities

A-cities

B-cities

C-cities

D-cities

Development of Net Initial Yield


2009 2011 2013 2015 2017 2019 2021 2023

2 %

3 %

4 %

5 %

6 %

7 %

8 %

A B C D

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The Market for Office Properties

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bulwiengesa

The Office Market Maximal Obtainable Property-Specific IRR for Core-Investors



Berlin: A growth market

“Berlin is poor but sexy” – this quote by Klaus Wowereit,former mayor of Berlin, became a slogan for the capital cityin 2003. But the first part at least is no longer true. Berlin isbooming. According to the German Federal Statistical Office,the city’s gross domestic product increased by 3.1% in 2018.Nationwide, the growth rate was only 1.4%. These figuresare not outliers – the German capital has been growingfaster than the rest of the country since back in 2014. This isalso reflected in the figures for the office market. Accordingto data from BNP Paribas Real Estate, a total of 418,000square metres was handed over to new users in the first halfof 2019, putting Berlin in second place after Munich.

Demand for office space far exceeds supply. The effects ofthis shortage of supply can be seen in very low vacancy ratesand rising rents: Compared to the first quarter of 2018,prime rents were up 11% at EUR 34.50 per square metre,while average rents increased by as much as 16% to EUR22.65 per square metre. These are among the findings of ananalysis of the Berlin office market by CBRE. According tothis analysis, the vacancy rate is just 1.4%. There is effec-tively full occupancy. Only in a few years when numerousconstruction projects are completed can some relief beexpected.

The German capital has good conditions for growth. In ourview, the extremely dynamic phase we are currently seeing,which many observers are describing as a boom, is likely totail off in the medium term. Nonetheless, a consistentlypositive development can be expected in the future. Berlin isa business and administration centre that attracts a mix ofdynamic companies and reliable tenants. These include onthe one hand public administration, universities, embassiesand non-government organisations, and on the other handtechnology companies, media, service providers and start-ups. One indicator of the high concentration of start-ups andself-employed individuals is the high share of co-workingspaces. According to the industry portal gründerszene.de, anew start-up is founded in Berlin every 14 hours. It is be-coming increasingly difficult for them to find suitable andaffordable office space.

In addition to public administration bodies such as the Ger-man federal government, the Senate of Berlin and the publictransport company BVG, the capital city’s biggest employersparticularly include Deutsche Bahn, the Charité hospital,Siemens, Edeka, Daimler, Deutsche Post, Deutsche Telekomand Zalando. The wide variety of companies and sectors at-tracts skilled employees to Berlin. This in turn makes it an

attractive location for employers. Additional specialists comefrom the city’s four universities and twelve higher educationinstitutions. Many companies open their innovation depart-ments in Berlin, where they have better chances of findingsuitable staff.

According to the Berlin-Brandenburg Statistical Office, Ber-lin’s population grew to more than 3.7 million in 2018, a re-cord since the end of the Second World War. This is also re-flected in the housing market: Across Berlin, the medianquoted rent in 2018 was EUR 10.32 per square metre, whichwas 5.4% more than in 2017 according to the IBB HousingMarket Report.

Despite this significant increase, rents in Berlin are com-paratively affordable. In Munich, for example, the medianrent under new leases was EUR 17.98 per square metre in thefirst quarter of 2019, while in Frankfurt am Main it came toEUR 14.20 per square metre, according to data from the re-search institute Empirica. The lower cost of living is anotheradvantage of the capital city.

All of these aspects make Berlin an interesting market forreal estate investors, provided the political conditions areright. Various different sectors such as telecommunications,media, technology and also retail are bolstering the city’sstable economic growth. The wide variety of jobs and com-panies attract employees, business-to-business service pro-viders and start-ups alike. However, the low vacancy rate isbecoming a growing problem for Berlin’s commercial realestate markets. Together with politicians, investors can helpease the shortage of commercial and residential space.

The capital city still has a lot of potential for growth – andnot just if it uses large sites such as Tegel and Tempelhof.Greater development potential is distributed throughout thecity and is not always immediately apparent: It is a questionof redensifying, adding more storeys and using space in ex-isting districts more efficiently. For this reason, part of TLGIMMOBILIEN AG’s strategy is to leverage the existing devel-opment potential within its own portfolio. Almost everyneighbourhood in Berlin has hidden potential waiting to betapped. So Berlin is still sexy today, with plenty of potential.

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Excursus: Berlin: A growth market by Jürgen Overath, Chief Operating Officer, TLG IMMIBILIEN AG



According to the study “Logistics and Real Estate” (down-load: www.bulwiengesa.de), investment demand for logisticsproperties is steadily growing. National and international investors alike are looking forsustainable investment targets that allow for an attractiverate of return. The German market for logistics and indus-trial companies is attractive for them: Its rate of return ishigh in comparison to other asset classes and countries,even though decreased yields have considerably reduced thedistance from other types of property.

At the same time, the German market has well-knownindustrial corporations with excellent credit ratings as wellas dynamic, top-class small and medium-sized industrialenterprises (SMEs). Owing to the high degree of industriali-sation compared to other countries and the high owner-occupier ratio, investors have a wide variety of investmentoptions. On top of this, low cyclicality and high cash flowyields add to the appeal of this asset class. The German logistics market is divided into 28 regions thatdisplay significant differences in terms of their rent andyield levels. As with other property classes, Munich standsout as the most expensive location. Initial net yields herecome to 4%, followed by Berlin, Hamburg and the Rhine-

Main region with yields of 4.2%. The steady growth of the logistics market is reflected inincreasing take-up (letting and purchases of owner-occu-pied properties). A few years ago, the annual average wasstill below 4 million square metres, whereas the average forthe past ten years is now almost 6 million square metres.The fact that around 81% of this relates to the logisticsregions clearly demonstrates their importance on the logis-tics market.

In established logistics regions, there have particularly beenrising rents as a result of growing demand and the increas-ing shortage of space. For example, average rents in theRhine-Main region are around EUR 5 per square metre,while in other logistics regions they come to around EUR 4per square metre. Average rents in the Hanover/Braunschweig region have risen 23.7% from EUR 2.96 toEUR 3.60 per square metre over the past ten years. A furtherincrease is expected.

Net Initial Yield in selected Logistis Regions

Source: bulwiengesa AG, as of H1 2019

Munich

Berlin

Hamburg

Rhine-Main

Stuttgart

Düsseldorf

Cologne

Halle/Leipzig

Han./Brunswick

North Sea Ports

Dortmund

Rhine-Ruhr

3.0 % 3.5 % 4.0 % 4.5 % 5.0 %

National Take-up of Logistics Properties in mof sqm


09 10 11 12 13 14 15 16 17 18

0

5

10

Logistic regions Periphery

Average Rents in certain Logistics Regions

Source: bulwiengesa AG, as of H1 2019, 2019- 2023 forecast

09 10 11 12 13 14 15 16 17 18 19 20 21 22 23

2.53.03.54.04.55.05.5

in E

uro/

sqm

Rhine-Main

Halle/Leipzig

Han./Brunswick

Rhine-Ruhr

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The Market for Logistics Properties

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Dummyseite Logistikkarte

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The Market for Logistics Maximal Obtainable Property-Specific IRR for Core-Investors



Alongside office properties, retail properties were still thesecond-strongest segment on the German property invest-ment market in 2018. However, the downward trend of thepast few years could not be halted, resulting in a volume ofaround EUR 10.9 billion and a share of 17.8%.

This development is linked to low product availability andgrowing uncertainty over the future development of retail.Home shopping (online retail and traditional mail-orderretail) posted another new sales record of EUR 68.1 billion(gross) last year, corresponding to a 9.5% increase. By con-trast, sales in bricks-and-mortar retail only rose by 1.7%.However, the share of home shopping varies significantlybetween different types of goods. For example, it comes to27.7% in the fashion segment and 31.0% for electronics/technology, but only 1.2% in the food segment.

Ten years ago, prime yields for specialist retail centres andshopping centres were around 6.5% and 5.5% respectively,whereas now both of these property types have a yield ofaround 4%.

In spite of everything, retail properties will still be needed inthe medium and long term and show correspondingdemand. It is extremely import for investors to analyse theextent to which the existing retail uses are affected by thechange process so that they can price in potential re-pur-posing. Given that the market prices for many retail proper-ties (e.g. shopping centres) are generally falling again some-what, in contrast to other asset classes, the non-core seg-ment can be expected to play a role in determining marketdevelopments.

Transaction Volume for Retail Properties


09 10 11 12 13 14 15 16 17 18

0

5

10

15

20

in E

UR

billi

on

Development Gross Initial Yield


08 09 10 11 12 13 14 15 16 17 18

3 %

4 %

5 %

6 %

7 %

Spec. Retail Parks Shopping Center

Retail Sales Development 2005 - 2030* Abstand oben/unten: je 0,1 cm - Höhe: automatisch, Ausrichtung: oben, zentriert, Absatz/Schrift: 07a-Tabelle/Grafik ÜS weiß, Hintergrund: Füllung Tab Titel Blau1

*dynamic scenario; **retail sales in a narrow sense: not including car dealerships, petrol stations, fuel, pharmacies; *** interactive retail of goods, also including traditional mail-order retail; from 2018 on: provisional/forecast. Source: HDE, bevh. Calculations by bulwiengesa AG

Höhe: 5,2 cm, Hintergrund: Hintergrund Blau2 30%

2005 2008 2011 2014 2017 2020 2023 2026 2029

0

200

400

600

800

in E

UR

billi

on

Bricks-and-mortar retail sales** E-commerce sales***

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The Market for large-scale Retail Properties

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Tourism in Germany remains a success story. In 2018, touristaccommodation businesses in Germany once again recordedgrowing numbers of arrivals and overnight stays. The num-ber of arrivals increased by 3.8%, while the number of over-night stays was up 3.9%. Germany is a popular destination for many foreign tourists,with Asian visitors alone generating around 10.7 millionovernight stays per year. Tourism within Germany is also in very good shape – Ger-mans like going on holiday in their own country. For thesereasons, it is not rare for capacity shortages to arise in holi-day regions.This high demand is also reflected in positive bed occupancyrates. From January to October, hotels recorded an averagebed occupancy rate of 48.2%, while bed-and-breakfastsachieved 49.6%. According to the German Hotel Association (IHA), chainhotels are well above these levels at 69.5%. Average netroom prices accordingly rose by 1% to EUR 94. As a result,average revenue per available room (RevPAR) increased by1.2% to EUR 65 in the first half of 2018.

The signs point to expansion at many hotel chains – anddespite this “rate curb”, almost all major hotel chains intendto keep growing in Germany, while some players that werenot previously present in Germany are entering the market,such as the South American hotel brand Selina.User demand is therefore at a high level and hotels are alsohighly sought-after on the investment market. The transac-tion volume in 2018 came to just under EUR 4 billion afterhotels worth EUR 4.2 mrd had been sold in 2017.

Meanwhile, yields in the hotel segment are falling. Initialgross yields in A cities are around 4%, and as low as 3.75%in Munich.The bulk of the deals related to smaller transactions forunder EUR 25 million in which it was mostly branded econ-omy hotels (e.g. Ibis, Prizotel, B&B) that changed hands. Dueto scarce supply, the share of forward deals also increased,accounting for around 20% of transactions in 2018. Investorsparticularly often secured properties in B and C cities (Kiel,Lübeck, Essen, Oberhausen, Eschborn, Freiburg, Hanover,Darmstadt, etc.).The outlook for the hotel market remains positive: Tourismin Germany is set to keep rising, meaning that additionalhotels will be required. Limiting factors include the highbuilding costs and the lack of skilled workers, both in theconstruction industry and in the hotel sector.

Development of Gross Initial Yield

Source: bulwiengesa AG, 2019 forecast

2013 2014 2015 2016 2017 2018 2019

3 %

4 %

5 %

6 %

7 %

Hotel Market Development in A-CitiesOvernight stays Beds Room

equivalent

2018

CAGR*

2008-2018

Forecast

2021

Existing

2018

Required

2021

Difference

Berlin

Munich

32,636,488

17,220,000

Hamburg

Frankfurt

14,489,692

10,253,972

6.3 %

5.7 %

39,165,727

20,363,826

6.5 %

6.6 %

17,496,983

12,409,403

149,933

80,005

179,929

94,611

67,966

54,949

82,072

66,500

+ 29,996

+ 14,606

+ 14,998

+ 7,303

+ 14,106

+ 11,551

+ 7,053

+ 5,775

Cologne

Düsseldorf

6,270,890

4,958,661

Stuttgart

Total

3,900,653

89,730,356Source: Statistical offices of German federal states; calculations by bulwiengesa AG; * CAGR = compound annual growth rate

3.8 %

4.0 %

7,018,153

5,572,608

3.6 % 4,338,470

106,365,170

32,453

27,967

36,320

31,430

20,746

434,019

23,075

513.936

+ 3,867

+ 3,463

+ 1,934

+ 1,731

+ 2,329

+ 79,917

+ 1,164

+ 39,959

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The Market for Hotel Properties

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Business properties are regularly analysed by the “Busi-ness Properties Initiative”(www.unternehmensimmobilien.net). They can be bro-ken down into:• business parks• warehouse properties• light manufacturing properties• transformation propertiesBecause no project developments are analysed in thisstudy, there is no separate focus on transformation prop-erties.

Owing to the sharply increasing scarcity of supply and thehigh yield pressure in conventional asset classes, Unterneh-mensimmobilien are increasingly finding their way ontoyield-focussed investors’ shopping lists. After a high invest-ment volume of around EUR 3 billion in 2017, a relevanttransaction volume was also recorded in the past year at EUR2.6 billion.Around 36% of this was attributable to business parks,which thus represent the most important asset class in thecategory of Unternehmensimmobilien again.

The growing investment volume in the past two years is alsoattributable to a larger number of portfolio deals, whichaccounted for around 50% of the transaction volume.Regional preferences are not clearly distinguishable here:Due to the larger stocks of business and warehouse proper-ties, the highest average investment volume in recent yearswas in fact in the Rhine-Ruhr urban agglomeration withEUR 379 million p.a. However, an average of more than EUR300 million p.a. was also invested in Berlin and Munich(including their surrounding areas) in the past five years.

The overview of rent levels below shows that business prop-erties do not represent a homogeneous asset class, butrather combine different use structures and qualities.

Due to their different use patterns, flex spaces – i.e. spacesthat are not characterised by a particular type of use (office,warehouse, production, etc.) but instead are suitable for avariety of use requirements – have a wide range of rentalprices extending from EUR 4.90 to EUR 17.25 per squaremetre. A similarly large range can be seen for small ware-house spaces. This is particularly due to the widely varyingquality of the space – from very basic to modern with a highlevel of service (e.g. in the case of self-storage).Larger warehouse spaces fall within a range of EUR 2.55 toEUR 5.82 per square metre. For all types of warehouse space,rising average rents have been recorded in recent years.Light manufacturing properties usually consist of individualhall properties. They generally have only a moderate share ofoffice space and are in principle suitable for a wide range oftypes of production. Rents here range between EUR 4.30 andEUR 8.67 per square metre.

Average invest,ent volume p.a., 2014-2018 inEURO millions


Berlin and surroundings

Hamburg and surroundings

Munich and surroundings

Northern region

Eastern Region

Southern region

Western region

Stuttgart and surroundings

Rhine-Ruhr urbanagglom.

Rhine-Main-Neckarurban agglom.

0 100 200 300 400

Rent level in EURO/sqm/month

Source: Initiative Unternehmensimmobilien

* Large: 500 sqm or more; ** Medium: up to 499 sqm; *** Small: up to 100 sqm

Office

Flex spaces

Light Manufacturing

Warehouse (L)*

Warehouse (M) **

Warehouse (S) ***

0 2 4 6 8 10 12 14 16 18

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The Market for Unternehmensimmobilien (UI)

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43

The 5 - Percenters6

2


bulwiengesaTHE 5 !% STUDY 2019 WHERE IT STILL PAYS OFF TO INVEST

Non-Core

The Market for Business Parks (UI)

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Core

Non-Core

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The 4.50- to 5.49-Percenters Property-Specific IRR

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IRR Range UI Business Park

Results RangeIRR base value 5.33 % Maximum

1.78 %

performance expectation

4.5 – 6.4 %

Who should invest?

Core-investors

4.3 – 6.3 % previous year

up to 10.0 %

up to 9.4 %

Non-Core-investors

previous year

1.95 %

2.12 %

2.28 %2.45 %

2.62 %

2.79 %2.96 %3.13 %

Conclusion

Business parks display a very wide range of qualities,which makes it difficult to provide uniform key market fig-ures. Based on data from the Initiative of Unternehmen-simmobilien, user demand remains at a high level whilerents are generally rising.

Market Environmentinvestment demand

demand for space

regional up to international

local up to national

liquidity

volatility

medium

medium

3.30 %

3.46 %3.63 %

3.80 %3.97 %4.14 %4.31 %4.47 %

marketable size approx. 2 - 70 m euros 4.64 %4.81 %

1.8 % 3.1 % 4.5 % 5.8 % 7.2 % 8.5 % 9.9 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

7 %

prob

abili

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Core

Non-Core


IRR Range Office D-Cities


-0.11 %


3.6 – 6.4 %

Who should invest?

Core-investors


up to 12.4 %

up to 12.3 %

Non-Core-investors

previous year

0.14 %

0.40 %

0.65 %0.91 %

1.16 %

1.42 %1.67 %1.93 %

Conclusion

D-cities are still the office market segment with the high-est yield expectations. However, investors should ensurethat the amount of space is in line with the market. Theperformance of the individual cities varies greatly due totheir different structural characteristics.


demand for space


regional up to national

liquidity

volatility

low

low

2.18 %

2.44 %2.69 %

2.95 %3.21 %3.46 %3.72 %3.97 %


-0.1 % 1.9 % 4.0 % 6.0 % 8.1 % 10.1 % 12.1 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

prob

abili

ty

Core

The Market for Office Properties in D-Cities

Non-Core

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IRR Range UI Light Manufacturing


1.93 %


4.3 – 6.3 %

Who should invest?

Core-Investors


up to 10.5 %

up to 12.0 %

Non-Core-Investors

previous year

2.11 %

2.28 %

2.45 %2.63 %

2.80 %

2.98 %3.15 %

3.32 %

ConclusionLight Manufacturing properties are a type of businessproperty and are highly dependent on the mac-roeconomic and regional economic environment. Inves-tors should therefore examine the prospects for the rele-vant sectors. The capacity for alternative uses is generallylimited.


demand for space

national to international

regional to national

liquidity

volatility

low

medium

3.50 %

3.67 %3.84 %

4.02 %4.19 %4.37 %4.54 %4.71 %

marketable size from 1 m euros upwards 4.89 %5.06 %

1.9 % 3.3 % 4.7 % 6.1 % 7.5 % 8.9 % 10.3 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

prob

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The Market for Light Manufacturing (UI)

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Core

Non-Core

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The 4.50- to 5.49-PercentersProperty-Specific IRR

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The 4 - Percenters3

56

2


IRR Range Office C-Cities

Results Range

IRR base value 4.18 % Maximum-1.76 %


2.4 – 5.1 %

Who should invest?

Core-Investors


up to 10.1 %

up to 10.6 %

Non-Core-Investors

previous year

-1.51 %

-1.27 %

-1.03 %-0.79 %

-0.55 %

-0.31 %-0.07 %

0.18 %

Conclusion

With a yield expectation of over 4%, C cities continue tooffer good investment opportunities. However, supply issomewhat limited due to the small market sizes. Investorsshould also have sufficient local expertise.


demand for space



liquidity

volatility

low

low

0.42 %

0.66 %

0.90 %

1.14 %1.38 %1.62 %1.87 %2.11 %

marketable size approx. 3 - 25 m euros 2.35 %

2.59 %

-1.8 % 0.2 % 2.1 % 4.0 % 6.0 % 7.9 % 9.8 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

prob

abili

ty

Non-Core

Core

IRR Range UI Warehouse


1.48 %


3.5 – 5.2 %

Who should invest?

Core-Investors


up to 8.1 %

up to 8.3 %

Non-Core-Investors

previous year

1.62 %

1.75 %

1.89 %2.02 %

2.16 %

2.29 %2.43 %

2.56 %

ConclusionThe yield level for warehouse properties has fallen signifi-cantly in recent years as a result of strong demand. Owingto new user requirements, particularly in relation to urbanlogistics locations, strong demand can still be expected inthis segment.


demand for space

regional bis international

local up to national

liquidity

volatility

low up to medium

medium

2.70 %

2.83 %

2.97 %

3.10 %3.24 %3.38 %3.51 %3.65 %

marketable size approx. 1 -10 m euros 3.78 %

3.92 %

1.5 % 2.6 % 3.7 % 4.7 % 5.8 % 6.9 % 8.0 %


0 %

1 %

2 %

3 %

4 %

5 %

prob

abili

ty

The Market for Warehouse Properties (UI) The Market for Office Properties in C-Cities

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Core

Non-Core

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Non-Core


IRR Range Modern Logistics

Results Range

IRR base value 3.83 % Maximum1.52 %


3.2 – 4.5 %

Who should invest?

Core-Investors


max. up to 6.4 %

max. up to 7.4 % previous year

1.61 %

1.71 %

1.81 %1.91 %

2.01 %

2.11 %2.21 %

2.30 %

Conclusion

For investors looking for large-volume investment opportu-nities, modern logistics properties represent a compara-tively high-yield alternative to office markets.


demand for space

national up to international


liquidity

volatility

high

low

2.40 %

2.50 %

2.60 %

2.70 %2.80 %2.90 %2.99 %3.09 %

marketable size > 10 m euros 3.19 %

3.29 %

1.5 % 2.3 % 3.1 % 3.9 % 4.7 % 5.5 % 6.3 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

prob

abili

ty

Non-Core

Core

IRR Range Shopping Centres


2.07 %


3.2 – 3.9 %

Who should invest?

Core-Investors


max. up to 5.0 %


2.13 %

2.19 %

2.25 %2.31 %

2.37 %

2.43 %2.49 %

2.55 %

Conclusion

Shopping centres are particularly affected by the struc-tural changes in retail. They represent the only asset classwith rising yields. For market experts, this can give rise toopportunities.


demand for space



liquidity

volatility

high

medium

2.61 %

2.67 %

2.73 %

2.79 %2.85 %2.91 %2.97 %3.03 %


3.15 %

2.1 % 2.6 % 3.0 % 3.5 % 4.0 % 4.5 % 5.0 %


0 %

1 %

2 %

3 %

4 %

5 %

prob

abili

ty

The Market for Shopping Centres The Market for Modern Logistics Properties

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Core

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IRR Range Specialist Retail Parks


1.43 %


2.8 – 3.7 %

Who should invest?

Core-Investors


max. up to 5.3 %


1.51 %

1.59 %

1.66 %1.74 %

1.82 %

1.90 %1.98 %

2.06 %

ConclusionDespite the structural change in retail, demand for spe-cialist retail centres remains high, which is resulting inyield compression again. With a base value of around3.59%, their yield level is now well below that of shoppingcentres.


demand for space

international

international

liquidity

volatility

high

medium

2.14 %

2.22 %

2.29 %

2.37 %2.45 %2.53 %2.61 %2.69 %


2.85 %

1.4 % 2.1 % 2.7 % 3.3 % 4.0 % 4.6 % 5.2 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

prob

abili

ty

Core

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The Market for Specialist Retail Parks

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The 3.50- to 4.49-PercentersProperty-Specific IRR

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4The 3 - Percenters

56

2


IRR Range Office B-Cities


-1.52 %


1.9 – 4.2 %

Who should invest?

Core-Investors


up to 9.7 %

up to 9.9 %

Non-Core-Investors

previous year

-1.29 %

-1.06 %

-0.84 %-0.61 %

-0.38 %

-0.15 %0.08 %

0.31 %

Conclusion

B-cities are regarded as alternative markets to the larger Amarkets. However, supply here is increasingly limited dueto high demand. The IRR of 3.28% is at the level of the Amarkets in 2017.


demand for space



liquidity

volatility

medium

medium

0.54 %

0.76 %

0.99 %

1.22 %1.45 %1.68 %1.91 %2.13 %


2.59 %

-1.5 % 0.3 % 2.1 % 4.0 % 5.8 % 7.6 % 9.5 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

prob

abili

ty

Core

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The Market for Office Properties in B-Cities

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The 2.50- to 3.49-Percenters

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IRR Range Economy Hotel

0.6 % 1.5 % 2.4 % 3.2 % 4.1 % 5.0 % 5.8 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

prob

abili

ty

IRR Range Midscale Hotel

0.9 % 1.7 % 2.6 % 3.5 % 4.3 % 5.2 % 6.0 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

prob

abili

ty

IRR Range Upscale Hotel

1.2 % 2.1 % 2.9 % 3.7 % 4.5 % 5.3 % 6.1 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

prob

abili

ty

Results RangeIRR base value 3.15 – 3.23 %


2.8 – 4.1 %

Who should invest?

Core-Investors

Maximum1.47%

1.54%

1.62%


up to 6.2 %

up to 6.7 %

Non-Core-Investors

previous year

Conclusion

The hotel market environment is characterised by strongmomentum. Hotels have thus become established on thecore investment market. When designing rental and leasecontracts, particular attention should be paid to sufficientcapital preservation (protection from inflation).

1.69%1.76%

1.84%

1.91%1.98%

2.06%

2.13%

2.20%

Market Environment

type of market

investment demand

hotels in former magiccities


demand for space

liquidity


high

volatility

marketable size

medium

approx. 5 - 100 m euros

2.28%

2.35%

2.42%

2.50%2.57%2.64%2.71%2.79%2.86%2.93%3.01%3.08%

The Market for Hotel Properties

Core

Core

Core

Non-Core

Non-Core

Non-Core

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IRR Range Micro-Apartments B-Cities


0.56 %


2.4 – 3.4 %

Who should invest?

Core-Investors


max. up to 4.9 %


0.65 %

0.73 %

0.82 %0.91 %

1.00 %

1.08 %1.17 %

1.26 %

Conclusion

B markets with positive population development and a sus-tainable economic structure are generally recommendedfor security-focussed investors. On the whole, the risk ofrevenue losses or strong market price fluctuations is low.


demand for space


national

liquidity

volatility

medium

medium

1.35 %

1.43 %

1.52 %

1.61 %1.70 %1.78 %1.87 %1.96 %

marketable size up to approx. 20 m euros 2.05 %

2.14 %

0.6 % 1.3 % 2.0 % 2.7 % 3.4 % 4.1 % 4.8 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

prob

abili

ty

Non-Core

IRR Range Residential University Cities


1.69 %


2.7 – 3.4 %

Who should invest?

Core-Investors


max. up to 4.4 %


1.74 %

1.79 %

1.85 %1.90 %

1.96 %

2.01 %2.07 %

2.12 %

Conclusion

Demand for housing in university cities is generally high.However, the varying structural conditions mean that gen-eral investment recommendations are possible only to alimited extent.


demand for space



liquidity

volatility

medium

low

2.18 %

2.23 %2.28 %

2.34 %2.39 %2.45 %2.50 %2.56 %

marketable size up to approx. 50 m euros 2.61 %2.66 %

1.69 % 2.12 % 2.56 % 2.99 % 3.43 % 3.86 % 4.30 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

prob

abili

ty

The Market for Residential Properties in Uni-versity Cities

The market for micro-apartments in B-Cities

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IRR Range Office A-Cities


-3.16 %


0.9 – 3.3 %

Who should invest?

Core-Investors


up to 9.1 %

up to 8.6 %

Non-Core-Investors

previous year

-2.91 %

-2.66 %

-2.41 %-2.16 %

-1.91 %

-1.66 %-1.41 %

-1.16 %

Conclusion

The A markets are generally characterised by high excessdemand that is reflected in low vacancy rates. The attain-able yields are at a very low level, particularly due to risingrent expectations.


demand for space



liquidity

volatility

high

high

-0.91 %

-0.66 %

-0.41 %

-0.16 %0.09 %0.34 %0.60 %0.85 %


-3.2 % -1.2 % 0.9 % 2.9 % 4.9 % 6.9 % 8.9 %


0 %

1 %

2 %

3 %

4 %

5 %

6 %

7 %

prob

abili

ty

Non-Core

IRR Range Residential B-Cities


1.41 %


2.4 – 3.2 %

Who should invest?

Core-Investors


max. up to 4.2 %


1.47 %

1.52 %

1.58 %1.64 %

1.69 %

1.75 %1.81 %

1.86 %

ConclusionB markets with positive population development and asustainable economic structure are generally recom-mended for security-focussed investors. On the whole,the risk of revenue losses or strong market price fluctua-tions is low.


demand for space



liquidity

volatility

high

low

1.92 %

1.97 %

2.03 %

2.09 %2.14 %2.20 %2.26 %2.31 %


1.4 % 1.9 % 2.3 % 2.8 % 3.2 % 3.7 % 4.1 %


0 %

1 %

2 %

3 %

4 %

5 %

prob

abili

ty

The Market for Residential Properties in B-Cities

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The 2 - Percenters


IRR Range Residential A-Cities


0.46 %


1.6 – 2.5 %

Who should invest?

Core-Investors


max. up to 3.6 %


0.53 %

0.59 %

0.66 %0.72 %

0.78 %

0.85 %0.91 %

0.97 %

Conclusion

For investors, apartments in A markets offer stable invest-ment opportunities with very low yields. Growing regula-tory obstacles are curbing the possibility for rent adjust-ments.


demand for space



liquidity

volatility

high

low

1.04 %

1.10 %

1.17 %

1.23 %1.29 %1.36 %1.42 %1.48 %


0.5 % 1.0 % 1.5 % 2.0 % 2.5 % 3.0 % 3.5 %


0 %

1 %

2 %

3 %

4 %

5 %

prob

abili

ty

Non-Core

IRR Range Micro-Apartments A-Cities


-0.04 %


1.7 – 2.8 %

Who should invest?

Core-Investors


max. up to 4.5 %


0.05 %

0.14 %

0.24 %0.33 %

0.42 %

0.51 %0.60 %

0.69 %

Conclusion

Apartment living in big cities characterised by strong inter-national connections is still in high demand. The rents arewell above those for standard housing, thus increasingthe attractiveness of this segment for investors


demand for space



liquidity

volatility

high

medium

0.78 %

0.88 %

0.97 %

1.06 %1.15 %1.24 %1.33 %1.43 %


-0.0 % 0.7 % 1.4 % 2.2 % 2.9 % 3.6 % 4.4 %


0 %

1 %

2 %

3 %

4 %

5 %

prob

abili

ty

The Market for Micro-Apartments in A-Cities

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The Market for Residential Properties in A-Cities

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The Results in Detail



Städtezuordnung Büro

Office A-, B-, C- and D-Cities in Detail — Property Specific IRR in %type city

A

A

Berlin

Cologne

A

A

Düsseldorf

Frankfurt (Main)

A

A

Hamburg

Munich

A Stuttgart

B

B

Bochum

Bonn

B

B

Bremen

Dortmund

core-i.

from to

non-core i.

up to

type

0.7 %

1.0 %

3.6 %

3.4 %

1.1 %

0.8 %

3.2 %

3.1 %

10.9 %

8.2 %

C

7.1 %

7.1 %

D

D

0.8 %

0.5 %

3.4 %

3.2 %

0.9 % 3.3 %

8.0 %

8.7 %

D

D

7.4 % D

D

2.4 %

2.3 %

4.9 %

4.8 %

1.8 %

1.8 %

4.5 %

4.3 %

9.9 %

10.2 %

D

D

10.2 %

8.6 %

D

D

city core-i.

from to

non-core i.

up to

Wuppertal 2.8 %

Albstadt

Aschaffenburg

4.2 %

2.7 %

5.7 % 13.0 %

7.5 %

5.2 %

14.2 %

10.9 %

type city core-i.

from to

D

D

Krefeld

Landshut

D

D

Leverkusen

Lüdenscheid

2.8 %

3.4 %

5.5 %

6.0 %

3.0 %

4.8 %

5.9 %

7.6 %

Bamberg

Bayreuth

2.9 %

3.0 %

Bergisch Gladbach

Bottrop

2.9 %

3.4 %

6.0 %

5.6 %

13.0 %

11.2 %

5.5 %

6.2 %

10.2 %

11.2 %

Brandenburg (Hl.)

Bremerhaven

3.8 %

3.0 %

Chemnitz

Coburg

4.2 %

3.2 %

7.2 %

6.4 %

13.6 %

14.3 %

7.0 %

6.2 %

13.5 %

11.7 %

D

D

Ludwigshafen

Lüneburg

D

D

Marburg

Minden

3.3 %

3.4 %

6.1 %

6.2 %

3.4 %

3.9 %

6.0 %

6.7 %

D

D

Moers

Neubrandenburg

D

D

Neumünster

Neuss

3.8 %

4.9 %

6.6 %

7.9 %

3.4 %

2.7 %

6.0 %

5.3 %

B

B

Dresden

Duisburg

B

B

Essen

Hanover

B

B

Karlsruhe

Leipzig

B

B

Mannheim

Münster

2.1 %

2.3 %

5.0 %

4.8 %

1.7 %

1.8 %

4.1 %

4.3 %

10.7 %

9.4 %

D

D

8.8 %

8.4 %

D

D

1.4 %

1.9 %

3.9 %

4.8 %

1.5 %

1.8 %

4.0 %

4.4 %

9.4 %

10.5 %

D

D

9.5 %

10.4 %

D

D

B

B

Nuremberg

Wiesbaden

C Aachen

C

C

Augsburg

Bielefeld

C

C

Brunswick

Darmstadt

1.6 %

1.6 %

4.3 %

4.1 %

2.0 % 4.7 %

10.0 %

9.1 %

D

D

9.8 %

D

D

2.2 %

2.5 %

4.8 %

5.0 %

2.8 %

1.9 %

5.9 %

4.3 %

10.6 %

10.9 %

D

D

12.1 %

9.5 %

D

D

Constance

Cottbus

3.1 %

4.0 %

Dessau

Detmold

4.3 %

3.5 %

5.8 %

7.0 %

10.9 %

13.4 %

7.6 %

6.5 %

14.8 %

12.5 %

Düren

Eisenach

3.1 %

3.9 %

Flensburg

Frankfurt (Oder)

3.3 %

4.2 %

5.9 %

6.8 %

12.4 %

12.9 %

5.9 %

7.1 %

12.2 %

13.7 %

D

D

Oberhausen

Offenburg

D

D

Oldenburg

Paderborn

2.7 %

3.1 %

5.4 %

5.6 %

3.3 %

2.8 %

6.3 %

5.4 %

D

D

Passau

Pforzheim

D

D

Plauen

Ratingen

2.6 %

2.4 %

5.1 %

5.3 %

5.4 %

2.7 %

8.8 %

5.2 %

Friedrichshafen

Fulda

2.7 %

3.0 %

Fürth

Gelsenkirchen

2.4 %

3.0 %

5.1 %

5.6 %

9.5 %

11.3 %

5.3 %

4.3 %

11.4 %

11.4 %

Gera

Gießen

4.3 %

3.2 %

Görlitz

Göttingen

5.0 %

3.4 %

7.5 %

5.8 %

14.7 %

10.9 %

8.7 %

6.0 %

16.5 %

11.7 %

D

D

Ravensburg

Recklinghausen

D

D

Remscheid

Reutlingen

3.2 %

3.4 %

5.8 %

6.2 %

3.5 %

3.3 %

6.3 %

6.0 %

D

D

Rosenheim

Salzgitter

D

D

Schweinfurt

Schwerin

3.0 %

3.3 %

5.4 %

6.2 %

3.6 %

3.4 %

6.7 %

6.2 %

C

C

Erfurt

Erlangen

C

C

Freiburg

Heidelberg

C

C

Kiel

Lübeck

C

C

Magdeburg

Mainz

2.6 %

2.0 %

5.5 %

4.7 %

1.5 %

1.8 %

4.0 %

4.0 %

10.9 %

10.5 %

D

D

9.3 %

8.0 %

D

D

2.8 %

2.8 %

5.7 %

5.5 %

2.6 %

2.0 %

5.2 %

4.3 %

12.6 %

10.9 %

D

D

9.5 %

9.6 %

D

D

C

C

Mönchengladb.

Mülheim (Ruhr)

C

C

Offenbach (Main)

Osnabrück

C

C

Potsdam

Regensburg

C

C

Rostock

Saarbrücken

2.3 %

3.1 %

4.7 %

5.8 %

2.2 %

2.0 %

4.7 %

4.8 %

10.3 %

11.1 %

D

D

9.2 %

11.0 %

D

D

2.0 %

2.1 %

4.7 %

4.8 %

3.0 %

2.8 %

5.5 %

5.7 %

11.3 %

11.0 %

D

D

11.0 %

10.9 %

D

D

Greifswald

Gütersloh

4.0 %

3.4 %

Hagen

Halberstadt

4.0 %

4.0 %

7.0 %

6.5 %

12.4 %

11.6 %

6.8 %

7.6 %

12.2 %

14.2 %

Halle (Saale)

Hamm

3.3 %

3.1 %

Hanau

Heilbronn

3.1 %

2.5 %

6.3 %

6.0 %

12.9 %

11.7 %

5.7 %

5.4 %

9.9 %

10.6 %

D

D

Siegen

Solingen

D

D

Stralsund

Suhl

3.5 %

5.0 %

6.2 %

8.0 %

4.1 %

4.9 %

7.2 %

8.5 %

D

D

Trier

Tübingen

D

D

Ulm

Villingen-Schwenn.

3.1 %

2.8 %

5.8 %

5.3 %

2.4 %

4.3 %

4.8 %

7.1 %

Herne

Hildesheim

4.5 %

3.2 %

Ingolstadt

Jena

2.3 %

3.1 %

7.4 %

6.0 %

12.5 %

12.0 %

5.0 %

5.9 %

10.5 %

11.5 %

Kaiserslautern

Kassel

3.1 %

2.5 %

Kempten (Allgäu)

Koblenz

3.0 %

3.1 %

6.0 %

5.6 %

11.5 %

14.5 %

6.1 %

5.5 %

14.7 %

10.7 %

D

D

Weimar

Wilhelmshaven

D

D

Witten

Wolfsburg

3.5 %

4.4 %

6.6 %

7.5 %

3.4 %

2.6 %

6.6 %

5.2 %

D

D

Würzburg

Zwickau

3.0 %

4.9 %

5.5 %

8.1 %

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9.5 %

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page 34/44

bulwiengesa

Property-Specific IRR in Detail



Städtezuordnung Büro

Residential A-, B- and University Cities (UC) in Detail — Property-Specific IRR in %type city

A

A

Berlin

Cologne

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Kiel

Koblenz

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Lübeck

Lüneburg

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Chemnitz

Constance

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Cottbus

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3.7 %

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Erfurt

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Flensburg

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UC

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Micro-Apartments A-, B- and University Cities (UC) in Detail — Property-Specific IRR in %

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Berlin

Bremen/North Sea P.

Cologne

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Mannheim

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Nuremberg

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Hamburg

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Koblenz

Lower Bavaria

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Oberrhein

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Rhine-Neckar

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Rhine-Ruhr

Saarbrücken

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Düsseldorf

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Münster/Osnabrück

Nuremberg

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max.

up to

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4.3 %

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page 35/44

bulwiengesa

Property-Specific IRR in Detail



Content of the study

Using dynamic performance measurement, the 5% studyprovides a new approach for describing property markets.The yield prospects of various asset classes are presented onthe basis of an analysis of the internal rate of return on aninvestment. In light of the recognition that a single datapoint can reflect the complexity of a market only to a verylimited extent, this study also highlights the range of invest-ment profitability. Descriptions of property markets in mar-ket reports are usually based on top properties that generateprime rents and are accordingly traded at prime yields.However, this does not take account of the high diversifica-tion of the investor landscape, where extremely security-fo-cussed investors increasingly find themselves alongsideplayers seeking to identify and take advantage of market op-portunities. This study also offers these players an overviewof the market.The subject matter analysed in this 5% study is the per-formance expectations in the asset classes that currentlydominate the German investment market. These include:– office– residential– shopping centres and specialist retail centres– hotels– modern logistics properties

as well as the newer property types:– micro-apartments and business properties (BP)

Basic concept

The study uses a dynamic model to determine the probableinternal rate of return (IRR) on an investment, assuming aholding period of ten years. It is assumed that the invest-ment takes place at typical parameters for the market inquestion. A cash flow approach was applied, describing theanticipated future cash flows (purchase, rental income,property and operating costs, sale). The internal interest rateon these cash flows represents the IRR.

No financing effects

In addition to the success of the properties themselves, suc-cessful real estate investments are also dependent on fi-nancing strategies (e.g. taking advantage of interest leveragethrough increased borrowing). There is typically a very widerange of variants on the market in this respect. To allow forclear statements regarding the property performance, theseeffects and investor-specific adjustments were not includedin the model.

No project developments

This model assumes that the investment is made in build-ings that do not require renovation or restructuring. Projectdevelopments as part of asset management strategies are

therefore not included in the analysis.

Procedure

It was assumed that the success of the investment may beinfluenced by various different determinants such as man-agement performance and market fluctuations. Accordingly,a simulation (Monte Carlo) of possible results was per-formed on the basis of changing parameters. To this end, therelevant characteristics affecting the success of the invest-ment were assigned fluctuation ranges that were derived inadvance based on consideration and analysis of the respec-tive market. Using Monte Carlo simulation, the probability ofoccurrence of the individual results was also calculated onthe basis of 1,000 draws.

Monte Carlo simulation

Monte Carlo simulation is a stochastic model for the projec-tion of a forecast or base value. Put simply, this statisticalmethod is a sort of limited random number generator thatoperates within framework conditions and values defined bythe user. To map these parameters realistically and in linewith market conditions as far as possible, a base value canalso be defined in addition to a value range. After the simu-lation has been performed, the user receives a large numberof results (depending on the number of draws) taking ac-count of the predefined conditions. The modelling calculatesprobabilities of occurrence for the individual results withinthis range. The value range itself has a probability of occur-rence of 100%.For the performance of the simulation, base values andranges were defined – depending on the asset class underreview – for groups of variables including the rent, vacancyrate, property costs and operating costs. The internal rate ofreturn on the investment resulting from the cash flow calcu-lation was set as the forecast value or IRR base value.

Core versus non-core

Core and non-core have become established as terms for in-vestment strategies on the market, but there are no fixeddefinitions for them (at property level). Instead, there are awide range of attempts at definitions, most of which aresuggested by the respective investors themselves.

page 36/44

bulwiengesa

Content and Methodology



This study does not aim to add a further suggestion to thesedefinitions. The division into core and non-core investors istherefore made at a purely statistical level. In the study, thecorridor for core and non-core investors was delimited basedon the assumption that core investors assume less risk andaccept lower yields while non-core investors are less risk-averse but have higher yield targets. Accordingly, the Monte Carlo results/IRRs between the 25%quantile and the 75% quantile (corresponding to a 50%probability) are defined as the range within which coreinvestors operate. The rest of the range – starting from anattainable rate of return of 6.49% as the IRR base value – isseen as being for non-core investors. Here, there is a prob-ability of 25% that internal rates of return beyond the corerange will be achieved. However, non-core investors mayalso fall below the attainable rate of return for core investorsand in some cases may even generate negative IRRs.

Parameters and fluctuation ranges

bulwiengesa AG’s data system (RIWIS) was generally used asthe source for rental, vacancy and yield information. Forbusiness properties, information from the Business Proper-ties Initiative was selected as the basis. The data for hotelsand retail properties were also checked for plausibility usinganalyses of investment transactions and other secondarysources (e.g. data from HypZert).The cost data were calculated using primary analyses (wherepossible) and on the basis of typical market assumptions.The fluctuation ranges for costs and income were definedindividually for each type of use and are based on typicalmarket parameters. Extreme values were excluded in thiscontext.

The internal rate of return method

The internal rate of return method shows the rate of returnfor which the net cash flows/the net present value is exactlyzero. It thus represents the average rate of return on an in-vestment. The internal rate of return method is not to berecommended as the sole basis for an investment decision,

since it has a number of methodological shortcomings – thereinvestment assumption is criticised, for example. However,calculating the internal rate of return offers the advantagethat this represents the success of a certain investment pe-riod (in the case of this study, ten years). This differentiatesit from the static yield assessments that are typical on themarket. In addition, the internal rate of return method isused by many investors and thus enjoys widespread accep-tance.

Performance measurement – guidance for readers

In view of the complex subject matter, guidance for readersis provided below for better understanding of the results.This guidance relates to the sections on the 6-, 5-, 4-, 3-and 2-percenters.In general, all calculations in the study are based on propertysizes and parameters in line with the market.The “Selected model assumptions/parameters” table onpage 38 shows the key parameters incorporated in the cashflow calculation and simulation.The results columns present/summarise the results of theMonte Carlo simulation.In the diagram, the x-axis shows the projected IRRs basedon the Monte Carlo simulation, while the y-axis shows theprobability of occurrence for each projected IRR. The dark blue bars represent the IRR range relevant to coreinvestors as defined by the study. This has a 50% probabilityof occurrence and is delimited by the 25% and 75% quan-tiles. In line with this, the top results box shows the corerange with values.The rest of the range – relevant to non-core investors ac-cording to the study’s definition – is marked in light blue.This is above the core range in 25% of cases, but may also bebelow this range. The maximum attainable IRR according tothe simulation is specified in the bottom results box belowthe core range.The internal rate of return on the investment (IRR), calcu-lated using the base values in line with the cash flowmethod, also corresponds to the base value of the simula-tion.

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Office Markets

typeA-Cities

existing buildingtypical property sizenet initial yield

24,600 sqm 3.0 %

market vacancymarket rent acquisition date

3.3 %20.60 Euro/qm

avg. term of lease 3 years

B-Cities C-Cities D-Cities

9,300 sqm4.3 %

6,100 sqm4.8 %

3.5 %10.65 Euro/qm

4.5 %9.50 Euro/qm

3,900 sqm6.1 %5.6 %7.60 Euro/qm

3 years 3 years 3 years

Residential Markets

typeA-Cities

multi-family house, existing buildingtypical property sizeno. of apartment units

4,000 sqm55 units

net initial yieldvacancy acquisition

2.5 %200 sqm (1 Monat)

market rent acquisition 13.10 Euro/sqm

B-Cities University Cities

4,000 sqm55 units

4,000 sqm55 units

3.3 %200 sqm (1 Monat)

3.4 %200 sqm (1 Monat)

8.90 Euro/sqm 9.00 Euro/sqm

Unternehmensimmobilien (UI) and Modern Logistics

typeUI Light Manufacturing


10,000 qm5.4 %

vacancy acquisition datemarket rent acquisition date

2,500 qm (3 months)5.15 Euro/sqm

avg. term of lease* relation office (o) warehouse (w) 30:70

5 years

UI Warehouse UI Business Park* Modern Logistics

10,000 qm4.8 %

12,000 qm6.0 %

2,500 qm (3 months)4.30 Euro/sqm

rd. 1,000 qm9.40 / 4.50 Euro/sqm (B/L)

20,000 qm4.4 %5,000 qm (3 months)4.00 Euro/sqm

3 years 2 years 3 years

Micro-Apartments

typeA-Cities


4,000 sqm (200 apt. units)2.7 %

vacancy acquisition datemarket rent acquisition date

200 sqm (1 month)26,15 Euro/sqm

avg. term of lease max. 2 years

B-Cities

3.3 %

17,80 Euro/sqm

Retail

typeShopping Centerstock, three-floor*

property size / number of shopsnet initial yield

48,000 sqm / 75 Shops5.0 %

range of rent (p.m.)avg. weighted rent (basement)

10.00 – 60.00 Euro/sqm15.0 Euro/sqm

avg. weighted rent (ground floor)avg. weighted rent (first floor)

23.30 Euro/sqm19.40 Euro/sqm

*inner-city location, no revitalisation

Retail

typeSpecialist Retail Parksexisting building*

typical property sizenet initial yield

approx. 25,000 sqm4.3 %

base rent e. g. construction marketbase rent e. g. electronics store


base rent e. g. clothes storebase rent e. g. drugstore


* no restructuring, good condition

Hotel

building existing building*typical property size net initial yield

2.600 – 9.000 sqm NF3.6 %

range of lease economyrange of lease midscale

200 – 450 (euros/room/month)400 – 600 (euros/room/month)

leasing rate upscalelease term

600 – 1.000 (euros/room/month)5 – 25 years

* no restructuring

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Selected model assumptions



Classification as A-, B-, C- and D-cities was used to catego-rise the German real estate market. This was based on thefunctional significance of the cities for the international, na-tional and regional or local real estate market:

A-Cities

The most important centres in Germany with national andsometimes international significance. Large, well-function-ing markets in all segments.

B-Cities

Large cities with national and regional significance.

C-Cities

Major German cities with regional and limited national sig-nificance and an important impact on the surrounding regi-on.

D-CitiesSmall, regionally focussed locations with a central role fortheir direct surroundings; lower market volume and sales.

University cities

47 cities with at least 7,000 students are classified as uni-versity cities in this study, not including A- and B-citiessince these are analysed separately.

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Overview A-, B-, C-, D- and University-Cities (UC)

city

Berlin

category

A

Cologne

Düsseldorf

A

A

Frankfurt (Main)

Hamburg

A

A

Munich

Stuttgart

A

A

Bochum B

Bonn

Bremen

B

B

Dortmund

Dresden

B

B

city

Lübeck

category

C/ UC

city

Fürth

category

D

Magdeburg

Mainz

C/ UC

C/ UC

Mönchengladbach

Mülheim (Ruhr)

C/ UC

C

Gelsenkirchen

Gera

D

D

Gießen

Görlitz

C/ UC

D

Offenbach (Main)

Osnabrück

C

C

Potsdam

Regensburg

C/ UC

C/ UC

Göttingen

Greifswald

C/ UC

C/ UC

Gütersloh

Hagen

D

D

Rostock

Saarbrücken

C/ UC

C/ UC

Wuppertal C/ UC

Halberstadt

Halle (Saale)

D

C/ UC

Hamm

Hanau

D

D

city

Neuss

category

D

Oberhausen

Offenburg

D

D

Oldenburg

Paderborn

C/ UC

C/ UC

Passau

Pforzheim

C/ UC

D

Plauen

Ratingen

D

D

Ravensburg

Recklinghausen

D

D

Remscheid

Reutlingen

D

D

Duisburg

Essen

B

B

Hanover

Karlsruhe

B

B

Leipzig

Mannheim

B

B

Münster

Nuremberg

B

B

Albstadt

Aschaffenburg

D

D

Bamberg

Bayreuth

C/ UC

C/ UC

Heilbronn

Herne

C/ UC

D

Hildesheim

Ingolstadt

C/ UC

D

Bergisch Gladbach

Bottrop

D

D

Brandenburg (Hl.)

Bremerhaven

D

D

Jena

Kaiserslautern

C/ UC

C/ UC

Kassel

Kempten (Allgäu)

C/ UC

D

Wiesbaden B

Aachen

Augsburg

C/ UC

C/ UC

Bielefeld

Brunswick

C/ UC

C/ UC

Darmstadt

Erfurt

C/ UC

C/ UC

Chemnitz

Coburg

C/ UC

C/ UC

ConstanceCottbus

C/ UC

D

Koblenz

Krefeld

C/ UC

D

Landshut

Leverkusen

D

D

Dessau

Detmold

D

D

Düren

Eisenach

D

D

Lüdenscheid

Ludwigshafen

D

D

Lüneburg

Marburg

C/ UC

C/ UC

Rosenheim

Salzgitter

D

D

Schweinfurt

Schwerin

D

D

Siegen

Solingen

C/ UC

D

Stralsund

Suhl

D

D

Trier

Tübingen

C/ UC

C/ UC

Ulm

Villingen-Schwenn.

C/ UC

D

Weimar

Wilhelmshaven

D

D

Witten

Wolfsburg

D

D

Erlangen

Freiburg

C/ UC

C/ UC

Heidelberg

Kiel

C/ UC

C/ UC

Flensburg

Frankfurt (Oder)

C/ UC

C/ UC

Friedrichshafen

Fulda

D

D

Minden

Moers

D

D

Neubrandenburg

Neumünster

D

D

Würzburg

Zwickau

C/ UC

D

bulwiengesa

Definitions and Comments



Yields/Multipliers (source: gif e. V.)Gross initial yield

The gross initial yield is a simple comparison of the contrac-tual rent to the purchase price, not including incidental ac-quisition costs. The gross initial yield is equivalent to the re-ciprocal of the multiplier that is typically used in the market(e.g. 12.5 times the contractual rent = 8 % p.a. gross initialyield).

Gross initial yield = contractual rent / net purchase price

Net initial yield

The net initial yield represents net rental income in relationto the purchase price plus property-specific incidental ac-quisition costs. For the sake of clarification, please note thatother non-recurring costs and revenue losses/risks are notdeducted from the net rental income.However, calculatory items (e.g. maintenance costs) are alsotaken into account in the operating costs or in the gross pur-chase price. The valuations used for this must be in line withthe market standard and must be reported separately whenstating the net initial yield. They can be disclosed either in-dividually for each item or for the cost block as a whole, inwhich case they can be referred to “operating costs” and“incidental acquisition costs” as a simplification (e.g. “netinitial yield x.x % p.a. including y % operating costs and z %incidental acquisition costs”).

Net initial yield = net rental income / gross purchase price

Short Glossary for Office PropertyVacancy

Vacancy refers to vacant office space at the end of the re-spective year. It takes account of marketable properties only;structural vacancy therefore is not included.The vacancy rate shows the ratio of vacancy to total space.

Take-up

Take-up is defined as an annual amount. It describes mostlyoffice space taken up for rent, but also includes project de-velopments focussing on owner-occupiers. The take-up dateis the conclusion of the contract in the case of letting and thestart of construction in the case of owner-occupiers.

Rents

Office rents are reported in euros per sqm rentable area ac-cording to gif e.V. (RA-C) and apply to office space in a mar-ketable (technical/spatial) condition with good fixtures andfittings and small to medium-sized rental units. The re-ported rents are nominal values. The nominal rent is the ini-tial rent shown in the contract, not including incentives, an-cillary costs or local taxes.The prime rent relates the top price segment – in relation tothe respective market area – with a market share of between3 % and 5 % of rental revenues (not including owner-occu-piers) in the past twelve months and represents a median

value. At least three concluded contracts should be included.It does not correspond to the absolute top rent (defined asoutliers). To calculate the average rent, the individual rentsfor all new rental agreements concluded in the defined pe-riod are weighted according to the space rented in each caseand an average is calculated.

Short Glossary for Residential Properties/Micro-Apart-mentsResidential rents

Residential rents for re-letting are reported in euros per sqmof residential space and ideally apply to an apartment withthree rooms, around 65 to 95 sqm of residential space andstandard fixtures and fittings. Because the fixtures and fit-tings and the sizes are standardised, the degree of variationshown in the rent range is influenced mainly by the locationand the micro-location. The reported rents are nominal val-ues.The rents are stated without including ancillary costs or tak-ing account of other benefits. Average rents represent theaverage value across the whole of the defined market.The stated rents are average values intended to map a typicalor usual level. They do not represent the strict arithmeticmean, the mode (most frequent value) or the median (cen-tral value) in a mathematical sense.

Micro-apartments

Micro-apartments or business apartments are generallyfound in larger complexes with 100 to 300 units. They areoffered as partly or fully furnished one-room apartmentsmeasuring between 18 and around 35 sqm, with a smallkitchen and a separate bathroom. Optional services often in-clude a concierge service, fitness facilities and laundry serv-ice. In terms of tax law, micro-apartments represent pri-vate-sector letting rather than operator-managed proper-ties, meaning that rental agreements are concluded directlybetween the investor and the tenant.

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Short Glossary for Retail PropertySpecialist retail parks

Specialist retail park are defined as follows: They have: – gross lettable area (GLA) of 10,000 sqm or more – locations on the city outskirts with good transport con

nections; they are generally easy to reach, including for the wider surroundings

– ground-level floor space and extensive parking space, usually also at ground level

– simple functionality in terms of their appearance – discount retailers with aggressive price strategies that

have a crowd-pulling effect and are supplemented by retailers and service providers with small amounts of space.

Shopping centres

Shopping centres are large-scale facilities that are con-structed on the basis central planning and cover short-, me-dium- and long-term requirements.They are characterised by: – a spatial focus on retail, catering and service businesses of

different sizes – a generous supply of parking spaces– central management/administration – joint performance of certain functions by all tenants (e.g.

advertising) – and generally have sales space of at least 10,000 sqm.

Short Glossary for Unternehmensimmobilien(Source: Initiative Unternehmensimmobilien)The statements on Unternehmensimmobilien (UI) in thisstudy are based on the market data of the Initiative Unter-nehmensimmobilien published in its Market Reports No. 10.According to these data, UI are mixed-use commercial prop-erties, typically with a SME-dominated tenant structure. Themix includes office, warehouse, production, research, serviceand/or wholesale space as well as open space. Unternehmensimmobilien comprise four different propertycategories:– Converted properties (not included in the study due to

their very high degree of variation)– Business parks – Light manufacturing properties – Warehouse propertiesAll four categories are characterised by the features of ca-pacity for alternative uses, use reversibility and fundamentalsuitability for multi-party structures. This means that thestrengths of Unternehmensimmobilien lie in their flexibilitywith regard to not only the use but also the users.

Business parks

– Usually planned and constructed specifically to be let out to companies

– Consist of several individual buildings forming a complex– Management and infrastructure are organised uniformly

– Have all types of space (share of office space generally between 20 % and 50 %)

– Usually located on the outskirts of cities and easily accessible

Light manufacturing properties

– Predominantly individual hall properties with a moderate office share

– Suitable for a variety of types of production– In principle, hall space can also be used for other pur

poses such as storage, research, services, wholesale and retail

– Capacity for alternative uses depends primarily on the location

Warehouse properties

– Predominantly existing properties with mainly basic storage facilities and in some cases service space

– Within Unternehmensimmobilien, distinguished from modern logistics halls by a maximum size of 10,000 sqm

– Varying fit-out and quality standards– Flexible and inexpensive types of space– Generally reversible and suitable for higher-value uses(e.g. through retrofitting of ramps and gates)

Short Glossary for Logistics PropertiesThe study relates to a modern logistics property with hallspace of more than 10,000 sqm.Rents for warehouse/logistics space are reported in euros persqm of hall space and apply to a heatable hall with standardfixtures and fittings, not including high-bay warehouses orsimilar, that are located in a conventional industrial areawith good connections. The reported rents are nominal val-ues.

The rents are stated without including ancillary costs or tak-ing account of other benefits. Maximum and average valuesare shown. The maximum rents represent an average valuefor the top 3 to 5 % of the market. They do not correspond tothe absolute top rent (defined as outliers). Average rentsrepresent the average value across the whole of the definedmarket. The stated rents are average values intended to map a typicalor usual level. They do not represent the strict arithmeticmean, the mode (most frequent value) or the median (cen-tral value) in a mathematical sense

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Short Glossary for Hotels"Magic Cities"

This term refers to the former city alliance Magic Cities e. V.,which included the following cities as its members:Berlin,Cologne, Dresden, Düsseldorf, Frankfurt am Main, Hamburg,Hanover, Leipzig, Munich, Nuremberg and Stuttgart. Thesecities are characterised by above-average tourist demandand a corresponding diverse offering for tourists.

Classification

This study is based on the following breakdown:Economy: 1 or 2 stars(Upper) midscale: 3 stars (3+ stars)(Upper) upscale: 4 stars (4+ stars)Luxury: 5 starsThe breakdown is based on the hotel classification used byDEHOGA (German Hotel and Restaurant Association), whilethe number of stars is taken from the online portalsexpedia.de and booking.com.

List of abbreviations

In general, renovations and project developments are not in-cluded. All calculations in the study are based on data, fore-casts and analyses by bulwiengesa AG and its knowledge ofthe market. In addition to rent loss risk, vacancy risk is alsotaken into account in the cash flow calculation.

Terminology

Market liquidity is defined as investment demand irrespec-tive of economic cycles.Fluctuation refers to changes in tenants assumed at prede-fined dates – depending on the asset class.

Office

The study presents 127 office markets, broken down into A-,B-, C- and D-cities. A notional existing office property withaverage-quality space is assumed. The property size varies

depending on the volume of the office market and the aver-age take-up over the past ten years. The model also assumesannual fluctuation of 10 % of the property size and a three-year term for newly concluded rental agreements. The officerents are index-linked. The market rent in the year of therespective contract conclusion corresponds to the company'sown forecast, while the ageing process of the property istaken into account with a rent discount. The purchase yield(net initial yield) in the model corresponds to the exit yield,so as to avoid distortions.

Residential

The study presents 68 residential markets, broken down intoA-, B- and (other) university cities. The calculation is basedon the assumption of an existing apartment building with4,000 sqm of residential space and 55 residential units andwith average fixtures and fittings. Annual fluctuation of 200sqm is assumed. The fluctuation corresponds to the respec-tive newly let space and a one-month vacancy p.a. For exist-ing rental agreement space, rent adjustments to the marketlevel every three years are assumed. The purchase yield(gross initial yield) in the model corresponds to the exityield, so as to avoid distortions.

Micro-apartments

A-, B- and (other) university cities – a total of 68 cities –are analysed. The calculation is based on the assumption of aproperty with 4,000 sqm of residential space and 200 fullyfurnished residential units of 20 sqm each. The base scenarioassumes annual fluctuation of two-thirds of the total resi-dential space, but the simulation also includes fluctuation of0 % and 100 %. The purchase yield (gross initial yield) in themodel corresponds to the exit yield, so as to avoid distor-tions. An operator model is not assumed.

Specialist retail parks

The model is based on an ideal specialist retail centre withfloor space of around 20,000 sqm. The user structure con-sists of several retail spaces. Two anchor tenants and a usemix in line with the market are assumed.

Shopping centres

The model is based on a three-storey shopping centre (in-cluding a basement level). It assumes one anchor tenant, atotal of 78 retail spaces and sales space of 48,000 sqm.

Modern logistics properties

The model assumes an existing modern distribution/han-dling centre. Good divisibility and capacity for alternativeuses are assumed. The hall space totals 20,000 sqm. Officespace accounts for less than 10 % of the hall space, meaningthat it can be assumed that the amount of space for admini-stration of the logistics hall is in line with demand. For rea-sons of simplification, office space therefore is not takeninto account separately in the model.

List of abbreviations

ECB

GDP

European Central Bank

gross domestic product

gif e. V.

IRR

gig Gesellschaft für immobilien-wirtschaftliche Forschung e.V.

internatl rate of return

(non-)core-I.

RA-C

(non-)core-investors

rentable area according to gif

SME

sqm

small and medium-sized enterprises

square metres

UI Unternehmensimmobilie

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Business parks (UI)

An existing business park with rental space of 12,000 sqm isassumed, with office use accounting for 30 % and warehouseuse accounting for 70 %. All assumptions and data are basedon information from the Initiative Unternehmensimmobilienand its Market Report No. 10.

Warehouses (UI)

A simple existing warehouse with 10,000 sqm of warehousespace is assumed. In contrast to modern logistics space,there is only limited divisibility and capacity for alternativeuses and the property quality is lower (including with regardto hall height, floor load capacity etc.). All assumptions anddata are based on information from the Initiative Unterneh-mensimmobilien and its Market Report No. 10.

Light manufacturing (UI)

A light manufacturing hall with 10,000 sqm of productionspace is assumed. In view of the high level of user specificity,longer lease terms (five years) are assumed than for theother types of described Unternehmesimmobilien. All as-sumptions and data are based on information from the Ini-tiative Unternehmensimmobilien and its Market Report No.10.

Hotels

The calculations in this study relate to chain hotel busi-nesses, defined as businesses with four or more individualhotels.In addition, the analysis is based on fundamental assump-tions that reflect only part of the market. For example, it wasassumed that a lease contract is concluded; operator contactsand hybrid forms were not included in the analysis. Anotherfundamental assumption is that the contract has a longterm. The presentation of short-term contracts in the case ofyield-focussed investments with additional capex require-ments on expiry of the lease contract (generally two to threeannual rents) was ensured by means of risk premiums andyield mark-ups. The model is based on city hotels with busi-ness customers and city tourists as their target groups. Ahigh level of tourist demand is also assumed.

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Contacts

Published bybulwiengesa AG Eschersheimer Landstraße 1060322 Frankfurt am Main

Phone: +49 69 7561 467 60

www.bulwiengesa.de

Published in September 2019

Conception and EditingSven Carstensen, bulwiengesa [email protected]

Silvia Beck, bulwiengesa [email protected]

Stephanie Schramm, bulwiengesa [email protected]

Picture Creditswhite-studio / photocase.de

Copyright © 2019All rights reserved. Excerpts may be used when the source is provided. More extensive reproduction, publication, or dissemi-nation of content to third parties in any form is permitted only with the prior written consent of bulwiengesa AG and only ifthe original source is provided. The use of the study or parts of it for marketing prospectuses constitutes an exception – insuch cases, prior written consent must always be obtained from bulwiengesa AG.

DisclaimerThe evaluations and calculations presented in this study and the research conducted were developed according to the best ofour knowledge and with the necessary care on the basis of existing sources or sources that were accessible when the studywas prepared. We do not provide any guarantee of the factual correctness of data and information from external sources.The results are interpreted and assessed in the context of bulwiengesa AG'S experience in its German and European researchand consultancy activities. The study makes no claim to be comprehensive and is made publicly available in order to encoura-ge discussion and dialogue with the relevant players.

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