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Capital Markets

Debt threat to German real estate

Will the long-awaited recovery in the German real estate market be stopped in its tracks by turmoil in the debt markets? Louise Bowman reports.

GERMANY ARRIVED VERY late to the European commercial real estate party. In fact, no sooner had it walked through the door and taken its coat off than the music stopped. And while revellers such as the UK and Spain are now slowly opening one eye to greet their long and painful hangovers, Germany is looking pretty fresh faced by comparison.

Long the laggard in Europe, the German property market spent the past few years slowly beginning to catch up. According to EuroHypo’s 2007 German Market Report, prime office yields in big cities now vary from 4.25% in Munich and 4.5% in Frankfurt to 6.5% in Leipzig. The enduring problem of this market has been overcapacity, and vacancy rates remain stubbornly high in some areas. Office vacancy rates range from 7.5% in Hamburg to 21.2% in Leipzig but many cities in between are well into double digits.

"If you drive through Leipzig at night most of the high-rise buildings have dark windows – there is simply no one in them," says a property analyst. "Anecdotal stories persist of investors buying blocks of, say, 10,000 flats in Dresden or Leipzig just to tear two-thirds of them down to reduce supply."

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