The Empira Group, an investment manager for institutional real estate investments in the DACH region, has examined the developments and challenges of office property markets in major European cities, in particular by linking them to economic, demographic and regulatory indicators, as part of a recent research report.
The study analysed the office markets of various European countries and a total of 24 major European cities.
“There is a high need for refurbishment, as three quarters of all buildings in the EU are currently considered energy inefficient. This also has a direct impact on the office property market. Energy efficiency is becoming a key criterion in the selection of office space and therefore has a significant influence on the qualitative requirements of buyers,” explains Prof Dr Steffen Metzner, Head of Research at the Empira Group.
Office buildings in Germany’s top 7 cities have hardly any certification
Only a small proportion of office properties in Germany’s top 7 cities are currently certified – between 7 per cent in Stuttgart and 26 per cent in Frankfurt am Main. Certification practice to date indicates that energy efficient buildings in particular have been certified in order to increase their value. Certification was often avoided for less efficient buildings, which indicates high costs compared to the benefits. It is therefore to be expected that many of the buildings still to be certified will require extensive energy refurbishment. Studies from the USA, for example, show rent premiums of around six per cent for certified office buildings. Less sustainable buildings have a shorter remaining useful life and higher risks, which results in lower multipli ers and has a negative impact on the capitalised earnings value.
Letting or rent default risks in the German top 7 due to a potential collapse in demand or letting bans along the lines of the UK could be financially significant. Based on a medium scenario, a third of the older top 7 office buildings could be affected, which would affect a total area of 29 million square metres. Assuming that an average rent of 12 to 13 euros per square metre per month can still be achieved, this results in imputed risks of 5 billion euros. Based on an approximate yield of 5.5 per cent as a basis for calculation, investment assets of 92 billion euros would be affected by the above-mentioned risks in the medium scenario.
Significant differences in the European countries
In European countries, the proportion of buildings that do not fulfil the requirements of efficiency class D or higher varies considerably. The European Commission only publishes specific data on this for selected countries.
In the Netherlands, almost half of all office space corresponds to at least energy efficiency class B, which indicates a high proportion of office buildings with an excellent energy standard. Many of these buildings are either modern new buildings that meet current energy standards or older buildings that have been modernised through extensive renovations.
France and the United Kingdom have similar energy profiles for their office buildings. In both countries, around 70 per cent of office buildings are assigned to energy efficiency classes C to E. However, more than 20 per cent of office buildings in these countries meet a very high energy standard. The short-term need for action in these countries is comparatively low.
In the previous dynamic market phase, there was a strong increase in new office space in the seven largest office locations in Germany, particularly in Berlin. Until 2014, less than 200,000 square metres of new office space were created in Berlin each year, whereas in 2021 and 2022, the figure was over 500,000 square metres in each year.
As the new construction rates of the other German cities fall significantly behind Berlin, it can be concluded that a continuous renewal of the existing stock is not realistic in the medium term purely on the basis of current levels of new office construction activity. With new construction rates of just over one per cent, the office stock in Germany’s top 7 locations continues to age. In Munich, 62.1 per cent and in Hamburg as much as 67.6 per cent of office space is more than 30 years old. High energy properties therefore remain scarce overall.
The European comparison cities of Paris, London and Amsterdam are above the German cities (excluding Berlin) in terms of their relative new construction activity.
Furthermore, the office stock in Amsterdam and London in particular tends to be younger than in the German centres (with the exception of Frankfurt am Main). It can therefore be assumed that there is a comparatively high need for investment to modernise the German stock, especially as it is much easier to comply with energy standards in other countries, particularly France. Further tightening of the energy requirements could lead to a critical situation with a lack of stock of a quality that is still permissible or still in demand.