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Pfandbrief Banks launch new indices for German office market

  • Contribution to further raise level of market transparency
  • Generally stable performance since 2003 of both prices and rental levels
  • Indices for owner-occupied housing already established

The Association of German Pfandbrief Banks (vdp) today in Frankfurt presented a new set of indices which measure changes in rent levels and capital values for office buildings in Germany. This marks the first major expansion to the vdp Property Price Index family, which was first unveiled in February 2010 with the launch of price indices for owner-occupied housing. Further additions are planned, including indices for retail buildings in Germany.

Calculations for these index series are performed by vdpResearch, a subsidiary of the Association, based on high-quality data from actual transactions obtained through Pfandbrief Banks in the course of their lending activities.

“The vdp member banks combined are leaders in the financing of commercial real estate in Germany and have a knowledge of local office property markets which is rivalled by few other market participants,” said Jens Tolckmitt, Chief Executive of the vdp. “Through the large number of property transactions which they finance, the Pfandbrief Banks have an extraordinary breadth and depth of expertise within this field.” It is this vast base of information which the vdp brings together, making the compiled knowledge available, through its German Property Price Index family, not only to its member institutions but also to governmental bodies and other interested parties. “Following the launch of the indices for owner-occupied housing, these new commercial property indices are a significant contribution by the Association toward further raising the level of transparency in the German real estate market,” added Tolckmitt.

Until now, few indices of rental levels and property prices have existed for the German office property market, and those are for the most part updated only annually or are mostly limited to top-tier properties in the largest metropolitan areas. The vdp indices for office buildings, in contrast, capture quarter-to-quarter changes across the entire German commercial office market from the start of 2008, providing unique insights into rental levels and property values based on actual transaction data. “They thus are a very significant addition to the existing set of indices,” noted Tolckmitt.

Indices show stable performance of German office markets

The graph depicting the vdp Rent Index for Office Buildings shows stability over the past eight years. Apart from cyclical fluctuations typical for office property markets, the overall picture here is one of sideways fluctuation. In the first quarter of 2011, the Rent Index was, at 96.9, only modestly below its starting point in 2003 (100). This demonstrates, contrary to the conjecture of some, that the financial market crisis and subsequent overall economic recession in Germany has had only a muted effect on office rental levels. In the course of 2010, half of the drop in office rental levels registered in the previous year was regained.

The vdp Capital Value Index for Office Buildings shows somewhat greater volatility than the Rent Index. This may be attributed to the greater caution exercised by investors in downward market phases and the larger risk premiums which they thus demand. Particularly during the financial market crisis, the office market was dominated by a high degree of risk aversion relative to normal market conditions. However, when measured against changes in values in other countries, these fluctuations in property values in the German office market are comparatively modest. As the improving overall economic situation in Germany has become increasingly clear, this investment risk premium has begun to revert to pre-crisis levels. This reduction in risk premiums, along with the recovery in rental levels, provides an explanation for the slight upward trend in capital values over the past few quarters.

“These data provide new evidence of the high degree of stability and protection from crisis offered by the German real estate market. The Pfandbrief Banks, with their financing and refinancing policies firmly oriented to the long term, are an important contributor to this,” remarked Tolckmitt.

Detailed data enable analysis of specific regional markets

A major strength of the vdp indices is that they are based on anonymised data on property purchase prices and lease agreements from a large base of actual transactions in the German commercial office market dating back to 2003. In addition, this vast and detailed database of commercial real estate transactions makes it possible to break down rental, price and capital value statistics to the level of individual regional markets.

Because no two individual office buildings are alike, a hedonic procedure is applied to the data, eliminating disparities in the grade and quality of individual buildings and enabling the accurate measurement of changes in pure rent and price levels. This complex form of statistical evaluation requires a large base of property data, including information about lease agreements, purchase prices and other value determinants such as location and year of construction. The calculation of the Rent Index is based on the roughly 50,000 commercial office lease agreements currently in the Association’s database, while the Capital Value Index is based on some 13,000 transactions within the German commercial office market. In addition, the vdp database includes other details which play a role in determining and evaluating price and rental levels, such as the date of agreement, the property location, and the quality of the office space. The number of buildings and transactions in this database has become sufficient to enable quarterly statistical evaluation from the start of 2008.

“There are only a few commercial real estate indices worldwide which can match these in terms of methodology and breadth of database,” noted Reiner Lux, Managing Director of vdpResearch. “Later this year we plan to launch additional indices for the German rental housing market, to be followed by indices for German retail space starting in the first half of 2012. This means that the overall vdp Property Price Index, consisting of its four components – owner-occupied housing, office buildings, rental housing and retail buildings – will cover more than 90 per cent of the total German property market. The outlook is thus excellent for it to become a central indicator of property prices spanning the entire German market.”

Indices for owner-occupied housing already well established

The vdp indices for owner-occupied residential properties in Germany, first introduced by the Association in early 2010 and regularly released since then, have already attracted broad interest among investors, intermediaries and information providers in the property market. These statistics, which now also include German office buildings and will in the future be expanded to other index components, provide a valuable source of additional data to banks for their risk management and business activities. Deutsche Bundesbank also incorporates them into its regular reports on this topic.

In addition, the indices serve as reliable indicators of changes in the relationship between supply and demand in specific markets. “The vdp indices for office buildings serve as excellent benchmarks for comparing prices in this market segment, both nationally and internationally,” said vdp General Manager Jens Tolckmitt in conclusion.

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