In the latest in our new series putting a spotlight on different real estate markets across the world, Property Week takes a look at Munich’s office sector.
Q&A with André Zücker, Head of Real Estate at KGAL Investment Management:
1. How has Munich’s office market performed in the last year?
Office take-up in Munich has been running at record levels and now has one of the lowest office vacancy rates in Germany (1.9% in Q2 20). Its market is underpinned by its position as the Bavarian capital, and a strong economic base. Rents has been rising as a consequence with prime space now commanding around €41 per sq m per month.
Prime initial office yields stand at around 2.7% - some of the lowest across the whole of Europe – and office portfolio owners have seen double digit total returns during the past five years.
2. What has happened to take-up in Munich’s office market?
The second quarter of this year was, of course, massively impacted by the pandemic and quarterly take-up was down 35-40% like-for-like. However, during the past few weeks, we have seen an increase in new enquiries for office space.
3. Who are the typical occupants in Munich’s office market?
Munich’s office market is driven by big manufacturing corporates such as MAN, Siemens and BMW together with insurance companies like Allianz and Munich RE. There is also a rapidly growing tech sector.
4. What are the main challenges facing Munich’s office market at the moment?
Despite the pandemic’s dampening effect on demand, the extremely low office vacancy rate in Munich is a challenge. In the city’s central business district, the vacancy rate is below 1% and there is very little new Grade A space available.
However, the city is fast evolving in other locations and KGAL has recently invested into the Perlach Plaza development in the ‘KulturQuadrat’ area to the east of the city centre which is seeing a growing number of residential and commercial projects. This type of location will write the next chapter in the story of Munich’s development.
5. What has happened to investment volumes in Munich’s office market?
In comparison with the five-year average, transactions volume were down in Q2 by 45%. However, this can largely ascribed to the pandemic disruption and we are expecting that H2 will see a notable recovery. We don’t expect that prime office values will deteriorate, but a relaxation of the “never seen before” pricing level is possible and should be viewed as normal under these circumstances.
6. What are your expectations for the sector over the next 12 months?
There are two areas challenging the Munich office market. The high level of employees working remotely will reduce in the near future, but will not return to pre-Covid levels. Therefore, we anticipate that the demand will shift and the focus will be much more on modern and flexible “pandemic-proofed” buildings. The second will be the accelerated disruption of the traditional economic structure, particularly across the manufacturing industry. For example, automotive producers such as BMW and MAN are facing considerable challenges from the shift to electric vehicles.
However, the Munich office market is resilient with its broad economic structure, low vacancy rate, and extremely low refinancing costs for investors and companies. We anticipate that the measures being taken by the German government to soften the economic impact of Covid-19 will absorb much of the economic shock, and Munich remains in a good position to weather the storm.
Andre Zucker is Head of Real Estate at KGAL Investment Management