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

FRANKFURT-VICTOR, the German office value indicator launched earlier this year by Jones Lang LaSalle, posted a fall of 2.3% in the second quarter, re-accelerating from the quarterly fall of 1.2% in the first. In particular, the Dusseldorf and Frankfurt banking quarters, at -2.8% and -3.7% respectively, demonstrated a distinctly weaker performance.

The third calculation of VICTOR, which measures office values quarterly in the five largest German cities reached an absolute level of 98.9 and thus was below its base of 100 at end-2003 for the first time since the boom period of commercial property in 2006 and 2007. But the picture looks different on an annual basis. There, Frankfurt is fractionally recovered but still 15.6% below June 2008, and Munich in particular shows strength, down just 7.3% in value after a fall to a discount of nearly 9% in the 12 months to end-March.

Compared to the peak at end-June 2007, the indicator was nearly 20% lower, with the average across the Big 5 only exceeded by Frankfurt, where office valuations, according to VICTOR, were 26.6% down from the recent market top.

JLL said investment continued to stagnate at extremely low turnover, with unchanged or marginally increased initial yields. Rental markets were all characterised by a severe reduction in demand caused by the uncertain economy and a considerable reluctance for tenants to conclude leases – with the result that transaction volumes suffered a severe fall.

Although a continued reduction in nominal average rentals has not been detected, “we are assuming that there will be a sharp change in future market rentals, a factor which is already reflected in expectations,” JLL said. “All indicators point towards downward trending rentals in the future. This is only partially priced into today’s yields and values… The intensity of the fall in rentals will be the crucial factor in deciding whether the market segments enter a period of relative stabilization or whether the downturn continues or intensifies.”

Andrew Groom, JLL European Head of Valuation Advisory in Germany, commented: “The modest falls in values are mainly due to the weakening state of rental markets and not a broader further fall in the investment market. In spite of stumbling markets, an apparent floor for core investment properties in the prime office locations seems to be slowly forming… In an international context the German investment and rental markets are reasonably stable and, up until this point, remain relatively unscathed.”

However low rental turnover may lead to falling prime and average rentals the second half which will would have a major impact on the indicator. “Until recently the full impact of the global economic crisis has not been felt in the prime office real estate markets,” Groom added. “We need to see the results of the next two quarters .. In the last recession the bottom was not formed until three years after the boom ended. In today’s terms that would be the middle of 2010 at the earliest.”

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