Comparison of the Office Market in France and Germany - Essay Example

Running Head: COMPARE THE OFFICE MARKET IN FRANCE AND GERMANY Introduction “US Stocks down in Early Trading after Grim World Bank Report” was the headline for many newspapers across the world on June 22, 2009. The world economy has been in a continuous downfall since last 18 months. Many companies are going bankrupt, people all loosing jobs and manufacturing and services industries have been financially bleeding for last two years. Fall of the financial giant ‘Lehman Brothers’ and turmoil in many of the largest corporate behemoths like Citibank and AIG shook the whole world financially. Realty market across the globe has been the worst hit in this recessionary period. The latest realty boom period started around the last financial quarter of year 2002. The technology bubble bust of the late 90’s had passed and the rippling effect of the terrorist incident of September 11, 2009 had waned. Both these issues that were negatively weighing down on economies worldwide had somewhat moved to the background. That is when people started taking an advantage of the then financial boom and invested heavily into the real estate market, both residential and commercial. And that is when huge banks with their billion dollar profits started lending to sub-prime realty market to maximize their profits during the financial boom time. The financial turmoil or the bubble burst in commercial realty sector; especially the ‘office market’, has been substantial. Europe saw its first ever GDP decline for two consecutive quarters. The largest of the European economies of France and Germany were also not spared the onslaught. Office Market of France France has a stable government system, clear tax policy, low corruption and a prolific cultural tradition. All these elements offer investors a great opportunity to invest at a time when French real estate is depressed not because of its inherent financial strength but because of a global financial turmoil. Commercial real estate in France is in a period of significant re-pricing. France offers ‘office space’ options mainly in and around Paris, the greater Lyon region and the Bordeaux region. The rates in regions other than Paris offer competitive choices to investors who are planning to invest in office space at these emerging locations, which are better priced and offer a great investment opportunity. Paris Region covers 12,000 km² and claims to be Europes biggest commercial real estate offer, much more ahead of London for office space and having almost 49 million m² of office space. Office market trends in the Paris region vary for different districts (Paris region, 2009). The sectors most popular with office space occupiers, in particular the Central Business District (CBD) and La Défense, have a real space supply deficit, particularly for new or redeveloped offices. There has been a low vacancy rate in La Défense district of Paris that helped rents to rise initially. This was totally opposite from Paris CBD Etoile, where a net fall in office take-up and rising office space supply helped rents to fall substantially. Overall through the year 2008, business activity in Paris fell substantially by around 55% from its 2007 level. Following steep rises, the rents finally stopped climbing at the end of 2007. Top rents are being quoted at around Euros 840/sq. m. per annum for the Central Business District in Paris and at Euros 560 in La Défense (Paris Region, 2009). The quality of premises let during a certain quarter also influences the average rents. In the months ahead we should see a widespread downward adjustment of rents for second hand office space as office space occupiers renegotiate leases at lease breaks and because supply has been rising steadily. But high-end rents will be relatively protected from drops because of the scarcity of quality premises. In France, a total of 660,000 sq m of space was taken up in the 3rd quarter 2008. The letting market was strong. Though the markets have dropped since the boom times of year 2005 and 2006, year 2008 still fetched some of the highest ever rates in country’s history. Commercial office space investments have seen a major decline owning to repercussions from financial crisis across the world. Only about 1.7 billion Euros were invested in the third quarter of year 2008, which was 55% lower than the corresponding quarter of the previous year. The Paris Region rental market registered an office take-up of nearly 2.4 million m² in 2008 which is highest volume in Europe. It was only a marginal decline from 2.7 million m² in 2007. The office space market held out despite the downturn in the business sector. (C B Richard Ellis,2009) There are many factors that will govern trends for ‘Office Space’ market in France. Rising vacancies, more newly-completed buildings and the fall in net absorption are likely to drastically increase supply in the secondary office market in 2009 and 2010. Regions like ‘Bordeaux’ and ‘The Greater Lyon’ are also fast catching up with their offer of a great lifestyle, nearness to the ports and by cheap office markets. Office Market of Germany Most of the office space in Germany is being offered by bigger cities like Berlin, Dusseldorf, Frankfurt, Hamburg and Munich. Munich and Frankfurt top the list of major resilient ‘office markets’ in Europe. The German business environment has been dominated by the automotive industry, mechanical engineering, banking and service providers. There is performance uncertainty just not in Europe but across the world financial markets. There has been a trend in the past that one would see revival of business activity around spring, but this time, first since 1929, there has been an actual decline. Even the economic output that had never seen declines of more than two percent is charting new territories and showing bigger declines and projections of up to seven percent. In the major ‘office markets’ in Germany, around 500,000 m² of office space was let or sold to owner-occupiers in the first quarter of year 2009 (Source: Jones Lang LaSalle). This represents a decrease of at least thirty percent from the take-up volume in the corresponding quarter of year 2008. This decrease has been the highest in last five years. According to the estimates by the Jones Lang LaSalle quarterly research report for the first quarter of year 2009, the overall office take-up in Germany may be at least half a million square meters less than last year’s. Even though the realty market across Europe has been on a downslide and the ‘office market’ take-up predictions have been all gloomy, there is a hope that the prices will stabilize towards the end of the year. To help the demand stabilize further there will be renegotiations during renewals of the ten year contracts that were signed in the economic boom year of 2000. This will help cut a real picture of the ‘office market’ trends in Western Europe. Year 2008 as a whole, for Germany, has been resilient to recessionary trends elsewhere. A buoyant demand for office space kept its rentals buoyed throughout the year 2008 and the prime rate of 450 Euros/ m² per year in the Westend district stayed stable through the year. According to BNP Paribas ‘Office Market’ Research of 2009, there was a total take-up of 596,000 m² office space in the Frankfurt market area in 2008 which represented a decline of around five percent. Space under construction has increased by almost 40% in the past twelve months to 547,000 m². Frankfurt saw an investment of Euros 1.45bn in its office space market (BNP Paribas, 2009). The Berlin office space market also performed well in year 2008. Its prime rent in Topcity East and Potsdamer Platz stayed at 264 Euros/ m² per annum. Berlin’s office market showed resilience in rental trends with total take-up at 468,000 m² of space. Most of the space under construction has already been pre-let according to the information provided by BNP Paribas. Though substantially lower than that of year 2007, the volume of investment was close to Euros 2.3bn which was similar to that posted in the boom year of 2000. First quarter of year 2007 saw huge deals happening that brought in a half of the total investment. Prime rentals in Cologne climbed again by almost two percent to Euros 258/m² per annum. In year 2008 Cologne had a take-up space of 290,000 m², which was at least four percent more than the previous year and was just lower than the peak year of 2006. Modern office spaces in Dusseldorf pushed up the demand also for such office spaces. A scarcity of such infrastructure let the prime rent to climb by 4.4percent to Euros 282/m²/ per year. Strikingly, this rent was quoted for the ‘Medienhafen’ and not the ‘Banking District’ as previously the case has been. In 2008, the Düsseldorf office market enjoyed was very active. Office space take-up volume stood at 424,000 m² which, though was almost 13% down on the record result of 2007, but was nevertheless the second-best result achieved in the past decade. Rental prices for modern office premises in Hamburg rose during 2008. The prime rent climbed by 4percent to Euros312/m²/ per annum. The modern and newly built Hafen City and exclusive office units in the submarket gave the best value as far as the rents are concerned. The total office space take-up for Hamburg in 2008 was 544,000 m². Though it was 3.5 percent lower than the record 2007 result, it still was the second best performance ever registered by the Hamburg ‘office market’ ever. There was a stable rise in market rentals in Munich as far as office premises are concerned. The prime office space rent rose by almost 10%, from Euros 372/m²/ per annum in 2007 to Euros 408/m²/per annum in year 2008. There was though a decline in the take-up. It decreased from 800,000 m² in year 2007 to 786,000 m² in 2008. Among the German ‘office space’ market regions, Munich by far performed the best in year 2008 Comparison of Markets France and Germany both share their borders but business activity is very different in both these countries. France has most of its business activity happening in around Paris Region. Though Bordeaux and Lyon offer great choices, they may not be lucrative options for business to look for office spaces for many reasons. The prime rent for year 2008 in France was Euros 840/sq. m. per annum for the Paris CBD Etoile region whereas the comparative prime rent in Germany for year 2008 was substantially lower at Euros 450 Euros/ m² per year for the Westend district. If we compare the take-up space also, it was 2.4 million m² in 2008 for Paris region. In Germany total office take-up space in major cities was as follows: 596,000 m² for Berlin, 468,000 m² for Frankfurt, 290,000 m² for Cologne, 424,000 m² for Dusseldorf, 544,000 m² for Hamburg and 786,000 m² for Munich (BNP Paribas,2009). Paris region roughly covers 12000 sq. Km. of Area and has office space and has 49 million m² of office space (Paris Region, 2009). Germany has its business centers across the country from Berlin to Frankfurt with office space market shared between all the cities. Six major cities of Berlin, Cologne, Dusseldorf, Hamburg and Munich share a total of 3.1million m² of take-up space between them. If we looked at the trends closely we will see that the German ‘office market’ has held its ground as per the data available from year 2008. The take-up space has fallen by a few percentage points from the past year and the rents have remained stable or risen from the previous year. The figures say a different story in case of CBD or the Central Business District of Paris. The take-up fell by almost 39 percent in CBD whereas the figures show a 17% increase for the inner ring of Paris region. Overall, the take-up figures for Paris region fell by 12% to 1,932,000 m² (BNP Paribas, 2009). A decline of investment of 55% from the previous figures from year 2007, a plentiful supply of close to 870,000sq.mts and a sharp rise is yields couple with the global economic gloom have had a great impact on the French ‘office market’. On a contrasting note, the vacancy rates have come down and the rents have seen a rise over the past one year. Conclusion We can compare the ‘office ‘market’ of France with that of Germany using only a few parameters. Both the markets are different in respect to each other. Geographically, the German market is spread to regions across the country whereas the French ‘office space’ market is concentrated near the Paris region. Though both Germany and France vary in size and numbers, results are still very comparable. Germany had a total of 3.1million sq.mt. of office space for take-up in year 2008 as compared to 2.4 million sq.mt. available in Paris region. The spread of Geographies and the investments in case of Germany has helped it achieve better yields related to the ‘office market’ It saw a rental rise amid market gloom. This year itself Deutsche Bahn’s deal for 72,000 m² in Frankfurt’s banking district, as confirmed on 31 March 2009, kept the ‘office market’ buoyant for Germany (Cushman & Wakefield, 2009). The realty projects related to office space saw an increase in completions in year 2008 for Paris, which invariantly increased the supply by great numbers to the French ‘office market’ portfolio. This also led to rental consolidation in the market for Paris. In contrast, most of the markets in German say a vacancy decrease for the same period and in spite of a global economic recession, the rents rose in all major cities like Munich, Frankfurt, Hamburg, Dusseldorf and Cologne. Global recession was triggered by the sub-prime crisis in the United States. What it did was point at gaping holes in the realty market, both residential and commercial, across the world. Financial giants had invested heavily into commercial properties across Europe to maximize their investment returns during the period of realty boom. This also added to inflationary mismatch of price, demand and supply scenario of the ‘office space’ market. European economy which was already under pressure for the last five years couldn’t bear the full fledged onslaught of recession that started a couple of years ago. Business behemoths like the Lehman Brothers that drove quantum jump in commercial property prices collapsed amid the current economic gloom. Financial giants like the Citibank were forced to cut their exposure to commercial office real estate in last one year of crisis. This further precipitated fall of ‘office market’ across Europe, where the largest financial institution of the world had considerable investments. Considering the data available in the market, this can be conclusively said that the ‘office market’ of Germany has shown greater resilience to market pressures related to recession than the markets of Paris. This invariably is due to spread of investments, geographical spread of office markets and supply balance. Whereas economic activity related to office spaces is concentrated in the Paris region for France, Germany has a spread out market across the nation. This resulted in better utilization of market resources, including investments, for the country and helped it create a balanced ‘office market’ economy. References _Paris region: A highly attractive and competitive commercial real estate offer (2009), [Internet], Available from: < http://www.paris-region.com/ard/paris-region-economic-developpement-agency/live/news/paris-region-a-highly-attractive-and-competitive-commercial-real-estate-offer-9124.kjsp?RH=1200397741822>, Accessed on: 23 Jun 2009 Cushman & Wakefield Inc (2009), Lease for 72,000 sqm keep Frankfurt office space moving [Internet], Available from: , Accessed on: 23 Jun 2009 IPE Real Estate (2009), French Property Market must adapt to Survive [Internet], Available from: , Accessed on: 22 Jun 2009 Read More