Frankurt office property market seen softening

Source : Business Times - 27 Nov 2008

But it won’t be as bad as London given smaller bank job loss

The office property market in Frankfurt, Germany’s banking capital, looks set to soften but is likely to hold up better than London, Europe’s top financial centre, mainly because fewer bankers are losing their jobs.

Property yields are expected to rise less in Frankfurt than in London, and rents, which generate crucial cash flow for real estate investors in times such as these when properties are hard to sell at a profit, will fall less, industry watchers say.

Thanks to its lower volatility, Frankfurt offices will play a key role for long-term institutional investors such as insurers, pension funds and sovereign wealth funds - all of which are expected by analysts to increase their real estate exposure as part of a more diversified asset allocation mix.

The return on real estate as an asset class was negative to the tune of 30 per cent in January-October, broadly on a par with the S&P 500 US equities benchmark.

Real estate has been hit by falling commercial property prices, lack of access to deal financing, rising re-financing costs, higher vacancy rates and lower rents, investment bank Morgan Stanley said in a report.

Financial firms worldwide have slashed over 150,000 jobs in the current crisis with the drain the most pronounced in New York and London.

Last month, the Centre for Economics and Business Research estimated that London would have lost 28,000 financial-sector jobs by the end of this year, and a further 34,000 in 2009.

‘The crisis is also hitting Frankfurt . . . but the impact is quite moderate compared to London,’ said Carsten Ape, head of Frankfurt office rentals at property consultancy CB Richard Ellis (CBRE).

In Germany, the biggest finance sector job cut announcement to date has come from Commerzbank, which plans to axe 9,000 positions in the wake of its takeover of Dresdner Bank. About 2,500 will be outside Germany.

Deutsche Bank, the country’s top bank, is expected to sack about 900 traders, with most of those layoffs in London and New York.

Frankfurt may not have lost many banking jobs yet, but its office property market took an indirect hit last month when real estate fund managers KanAm pulled out of a deal to buy a skyscraper under construction in the heart of the city.

Swiss bank UBS, which is cutting 7,500 jobs, has signed up as the main tenant of the OpernTurm office tower. KanAm said that its fund did not want an increased rental exposure to banks as the financial market turbulence was making the outlook for the sector uncertain.

Fewer buyers usually translate into lower prices, which move in the opposite direction to yields.

‘In a worst-case scenario, you might still see a lot of pressure on prices in Germany,’ said Olivier Elamine, chief executive of Alstria Office, which manages a portfolio of 90 properties in Germany valued at about 1.9 billion euros (S$3.7 billion).