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Allan Saunderson is managing editor of Property Finance Europe and a contributor to GlobeSt.com.

German office valuations in the major cities are likely to run up against growing macro-economic weakness later this year and into next, putting an end to the ‘honeymoon’ period of hesitancy after the rise in yields caused by withdrawal of investor interest, according to indications from Jones Lang LaSalle’s recently-launched VICTOR index.

JLL’s Head of Valuation Advisory Andrew Groom, whose team developed VICTOR, told PIE in an interview that investor-driven price corrections have pushed average yields up around 100bp to 5.5% over the last 18 months.

“But we have not seen the impact on the occupier side; we are sitting in this sort of honeymoon period almost in the eye of the storm .. waiting to see how much the macro-economic negative effects will have on the occupier side,” he said. “We are seeing a slump in take-up in all of the major cities, and that will slowly but insidiously affect prime rental values from the fourth quarter.” Company insolvencies are expected to rise strongly next year too.

JLL launched its proprietary VICTOR index in April to provide a market snapshot of office prices in the Big Five German office locations – Berlin, Hamburg, Munich, Frankfurt and Dsseldorf.

“One of the reasons we launched the indicator was because of the dearth of open and transparent information on the German market and the disregard for the volatility that we saw coming out of some reports,” Groom said. “We wanted to show that Germany is like other markets, that it does rise and fall in booms and busts, and there is an element of volatility.” He sees VICTOR playing an important role in relative benchmarking.

“The proprietary index we have produced enables an owner or investor to set the relative position of their portfolio in the marketplace and also potentially to identify market entry and exit points… It isn’t a future-looking indicator but it certainly lets you draw conclusions about where the market might be going.” JLL has been in Germany for 35 years, and has amassed a wealth of information and data. VICTOR was developed as a synthetic analysis based on this.

It differs from other indexes by taking into account market indications such as vacancies and incentives – varying from, for example, the Investment Property Databank DIX index which uses a longer-term methodology that eliminates peaks and troughs. “You are looking at a specific snapshot in time, reflecting the positives in boom times and also the negative aspects. There is simply a different raison d’etre,” Groom said.

What JLL found was that the boom phase started later in German pricing than in other European countries. “We really reached the bottom at the end of 2004/beginning of 2005 and from then had a very slight recovery towards the first quarter of 2006. As this wall of money was growing across Europe .. Germany hitched up its britches, as it were, and began to run with the boom phase from the start of 2006.”

Office prices rose by mid-2007 by around 20% but since then have given up virtually all gains. In 2008, Big Five German office values recorded negative capital value growth of 12.6%, with a drop since the peak at mid-2007 of 16.8%. In first quarter 2009, prices dropped another 1.2%. City comparisons show that while Frankfurt had by far the largest price volatility, Berlin has the least. “The two black swans in the analysis are Berlin and Frankurt, with the Frankfurt reiterating its volatility – which is why a benchmark indicator such as VICTOR is that much more important for an investor committed to the Frankfurt market,” Groom said.

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