Investors scrap over Frankfurt’s skyscrapers
Demand for high-rise properties in Germany looks set to outstrip supply, as their future moves towards mixed-use.
February 7, 2019Real Estate
Frankfurt’s skyscrapers are being snapped up by foreign investors looking for big-ticket acquisitions. In November 2018, Frankfurt’s 45-story Trianon skyscraper was bought for €670m by IGIS Asset Management, South Korea’s largest real estate asset manager, in consortium with South Korean financial services company Hana Financial Investment. And in December 2018, Taiwan-based insurer Fubon Life acquired Frankfurt’s 40-storey Eurotower for €530m. According to Fubon, one of the attractions of the investment was the potential offered by Germany’s status as the largest economy in Europe, together with the fact that Frankfurt may gain even more in significance as a financial hub once the UK withdraws from the European Union.
Richard Tucker, international partner and head of capital markets, Cushman & Wakefield, who advised owners NorthStar Realty Europ Corp on the sale of the Trianon building, comments that amongst Asian investors interested in Germany, those from Korea and Singapore are currently the most active. “Chinese capital has been a little difficult, but will come back. There has also been some interest from Japanese investors, who have been analysing the market more closely in the last 12 months - but it takes around two years to move from analysis to action. And Taiwanese investors have been looking at Frankfurt, partly because they are just allowed to invest in certain cities.”
Germany is seen by international investors as a safe harbour, continues Tucker, with Frankfurt itself seen as a fast-growing, strategically important gateway city. Furthermore, although Berlin and Munich each have a larger office market in terms of stock and square meterage, Frankfurt’s market is far more liquid. “The market in Frankfurt is very active right now,” says Tucker. “We have a pipeline of deals ranging from single asset values of €10m up to €600m, and new investors are popping up all the time.” The threat of Brexit translates into a positive for Frankfurt, and Tucker expects that as many as 5,000 or 10,000 bankers could arrive in the city, given the increase in applications for banking licences over the last four months, from 25 to 45. The threat of rising interest rates also appears to have receded since the beginning of the year. “I can see no rain clouds up ahead,” says Tucker.
The high-rise market
Colliers counts skyscrapers as buildings above 60m in height. Its report on Frankfurt’s skyscrapers encompasses all such buildings with office use in central locations - a total of 39 stock properties - together with six property developments, making up 37% of Frankfurt’s entire office stock; 15 of the high-rises rise are taller than 150m, and four are taller than 200m.
The weighted average rent for high-rises is €30.70/sqm, 20% above rents recorded for Frankfurt’s central business district (CBD) office market. “Rents in high rises are higher, partly because of higher construction and maintenance costs, but also because the demand groups have a willingness to pay higher rents,” says Müller. “The 20% gap would be even higher if Frankfurt’s high rises had been compared to buildings outside the main, central zones.”
Banks are the dominant class of tenants, accounting for around 50% of total office take-up, while law firms come in second with a share of just under 14%. All 11 of the single-tenant high-rises are occupied by banks or financial advisers, the largest users being DZ Bank and Commerzbank. Law firms are willing to pay the highest rents and usually look for office space at heights above 70 meters (higher than the 15th floor), while banks are the dominant tenants for units below the 15th floor, using the open-plan offices on lower floors as customer service areas.
The dominance of banks, including the German central bank (the Bundesbank) and the European Central Bank, as high-rise tenants is striking. However, as Müller accepts, their enduring presence has to be questioned. “Frankfurt’s office market is highly dependent on banks, but they do go through phases of weakness. After 9/11 and the financial crisis of 2008, many banks decided to shrink their operations.”
Mixed-use future
Prices for high-rise buildings in Frankfurt have increased significantly over the last five years or so, with a commensurate fall in yields: prime yields for office towers and multi-storey office buildings have fallen by 165 bps since 2013, and fell by 100 bps in 2017 alone, before slowing in the first half of 2018 to 3.3%.
“We are currently facing a boom phase in real estate, in terms of letting and investment demand,” says Müller. “But there’s also a structural trend. High rises are extremely attractive in highly populated areas and there is big potential for the future, mixing offices and other usages such as residential together. Mixed-use will be the future trend - there is no way back.”
Previously, banks have been none too keen to occupy office alongside residential and hospitality space, mainly for security reasons. But developers as well as the public administration are pressing on regardless with mixed-use approaches. Two mixed-use developments which stand out are the 45-storey, 190m high OmniTurm tower, set for completion in September 2019, and FOUR Frankfurt, which includes a 59-storey, 228m high tower and is set for completion in 2022/2023.
The OmniTurm tower - resembling a ‘Jenga’ stack - includes residential units in the middle of the tower, sandwiched between class A office space, as well as public space, a start-up centre and co-working areas. “It’s not something new by international standards, but it is new for Frankfurt,” says Müller. FOUR Frankfurt comprises four high-rise buildings being built on the former site of Deutsche Bank, and Müller considers it an outstanding development for Frankfurt. “Because of its size, it will make the whole area more liveable - it has been a dead area of the city. It’s a real neighbourhood development.”
Framework update
There are many challenges involved in developing high-rises. Building costs are more expensive than low-rises, so rental levels always have to be taken into account. Permits are required, architectural competitions take time, and construction companies need to be found - an increasing problem, according to Müller. In all, she reckons that the time taken between the acquisition of a plot and completion is between five and seven years.
However, the biggest restraint on future development is the approach of city governments. In Berlin, says Müller, there have been some moves to encourage high-rises, but in Frankfurt, the number of designated development plots is fast running out. “Frankfurt is a city where the government has decided that it does not want uncontrolled development, so it has a framework - taking into account matters such as neighbourhood integration, shading, wind effect, and the organisation of infrastructure.”
Müller estimates that there are currently only six to seven plots left in Frankfurt where commercial high-rises could be developed: “Since the framework plan was published in 2008, some areas that were originally planned for office use have been redesigned as residential developments.” When will the framework next be updated? Müller does not predict any update happening before 2020/2021.
Trends and opportunities in Germany’s commercial and residential real estate markets will be discussed further at Deutsche GRI 2019 on 8-9 May in Frankfurt.
Richard Tucker, international partner and head of capital markets, Cushman & Wakefield, who advised owners NorthStar Realty Europ Corp on the sale of the Trianon building, comments that amongst Asian investors interested in Germany, those from Korea and Singapore are currently the most active. “Chinese capital has been a little difficult, but will come back. There has also been some interest from Japanese investors, who have been analysing the market more closely in the last 12 months - but it takes around two years to move from analysis to action. And Taiwanese investors have been looking at Frankfurt, partly because they are just allowed to invest in certain cities.”
Germany is seen by international investors as a safe harbour, continues Tucker, with Frankfurt itself seen as a fast-growing, strategically important gateway city. Furthermore, although Berlin and Munich each have a larger office market in terms of stock and square meterage, Frankfurt’s market is far more liquid. “The market in Frankfurt is very active right now,” says Tucker. “We have a pipeline of deals ranging from single asset values of €10m up to €600m, and new investors are popping up all the time.” The threat of Brexit translates into a positive for Frankfurt, and Tucker expects that as many as 5,000 or 10,000 bankers could arrive in the city, given the increase in applications for banking licences over the last four months, from 25 to 45. The threat of rising interest rates also appears to have receded since the beginning of the year. “I can see no rain clouds up ahead,” says Tucker.
The high-rise market
Colliers counts skyscrapers as buildings above 60m in height. Its report on Frankfurt’s skyscrapers encompasses all such buildings with office use in central locations - a total of 39 stock properties - together with six property developments, making up 37% of Frankfurt’s entire office stock; 15 of the high-rises rise are taller than 150m, and four are taller than 200m.
The weighted average rent for high-rises is €30.70/sqm, 20% above rents recorded for Frankfurt’s central business district (CBD) office market. “Rents in high rises are higher, partly because of higher construction and maintenance costs, but also because the demand groups have a willingness to pay higher rents,” says Müller. “The 20% gap would be even higher if Frankfurt’s high rises had been compared to buildings outside the main, central zones.”
Banks are the dominant class of tenants, accounting for around 50% of total office take-up, while law firms come in second with a share of just under 14%. All 11 of the single-tenant high-rises are occupied by banks or financial advisers, the largest users being DZ Bank and Commerzbank. Law firms are willing to pay the highest rents and usually look for office space at heights above 70 meters (higher than the 15th floor), while banks are the dominant tenants for units below the 15th floor, using the open-plan offices on lower floors as customer service areas.
The dominance of banks, including the German central bank (the Bundesbank) and the European Central Bank, as high-rise tenants is striking. However, as Müller accepts, their enduring presence has to be questioned. “Frankfurt’s office market is highly dependent on banks, but they do go through phases of weakness. After 9/11 and the financial crisis of 2008, many banks decided to shrink their operations.”
Mixed-use future
Prices for high-rise buildings in Frankfurt have increased significantly over the last five years or so, with a commensurate fall in yields: prime yields for office towers and multi-storey office buildings have fallen by 165 bps since 2013, and fell by 100 bps in 2017 alone, before slowing in the first half of 2018 to 3.3%.
“We are currently facing a boom phase in real estate, in terms of letting and investment demand,” says Müller. “But there’s also a structural trend. High rises are extremely attractive in highly populated areas and there is big potential for the future, mixing offices and other usages such as residential together. Mixed-use will be the future trend - there is no way back.”
Previously, banks have been none too keen to occupy office alongside residential and hospitality space, mainly for security reasons. But developers as well as the public administration are pressing on regardless with mixed-use approaches. Two mixed-use developments which stand out are the 45-storey, 190m high OmniTurm tower, set for completion in September 2019, and FOUR Frankfurt, which includes a 59-storey, 228m high tower and is set for completion in 2022/2023.
The OmniTurm tower - resembling a ‘Jenga’ stack - includes residential units in the middle of the tower, sandwiched between class A office space, as well as public space, a start-up centre and co-working areas. “It’s not something new by international standards, but it is new for Frankfurt,” says Müller. FOUR Frankfurt comprises four high-rise buildings being built on the former site of Deutsche Bank, and Müller considers it an outstanding development for Frankfurt. “Because of its size, it will make the whole area more liveable - it has been a dead area of the city. It’s a real neighbourhood development.”
Framework update
There are many challenges involved in developing high-rises. Building costs are more expensive than low-rises, so rental levels always have to be taken into account. Permits are required, architectural competitions take time, and construction companies need to be found - an increasing problem, according to Müller. In all, she reckons that the time taken between the acquisition of a plot and completion is between five and seven years.
However, the biggest restraint on future development is the approach of city governments. In Berlin, says Müller, there have been some moves to encourage high-rises, but in Frankfurt, the number of designated development plots is fast running out. “Frankfurt is a city where the government has decided that it does not want uncontrolled development, so it has a framework - taking into account matters such as neighbourhood integration, shading, wind effect, and the organisation of infrastructure.”
Müller estimates that there are currently only six to seven plots left in Frankfurt where commercial high-rises could be developed: “Since the framework plan was published in 2008, some areas that were originally planned for office use have been redesigned as residential developments.” When will the framework next be updated? Müller does not predict any update happening before 2020/2021.
Trends and opportunities in Germany’s commercial and residential real estate markets will be discussed further at Deutsche GRI 2019 on 8-9 May in Frankfurt.
