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ANALYSIS-Frankfurt office mkt to hold up better than London

Published 11/25/2008, 10:42 AM
Updated 11/25/2008, 10:44 AM

By Peter Starck

FRANKFURT, Nov 25 (Reuters) - The office property market in Frankfurt, Germany's banking capital, looks set to soften but is likely to hold up better than London, Europe's top financial centre, mainly because fewer bankers are losing their jobs.

Property yields are expected to rise less in Frankfurt than in London, and rents, which generate crucial cash flow for real estate investors in times such as these when properties are hard to sell at a profit, will fall less, industry watchers say.

Thanks to its lower volatility, Frankfurt offices will play a key role for long-term institutional investors such as insurers, pension funds and sovereign wealth funds -- all of which are expected by analysts to increase their real estate exposure as part of a more diversified asset allocation mix.

The return on real estate as an asset class was negative to the tune of 30 percent in January-October, broadly on a par with the S&P 500 U.S. equities benchmark.

Real estate has been hit by falling commercial property prices, lack of access to deal financing, rising re-financing costs, higher vacancy rates and lower rents, investment bank Morgan Stanley said in a report.

Financial firms worldwide have slashed over 150,000 jobs in the current crisis with the drain the most pronounced in New York and London.

Last month, the Centre for Economics and Business Research estimated London would have lost 28,000 financial-sector jobs by the end of this year, and a further 34,000 in 2009.

SOFT BLOW

"The crisis is also hitting Frankfurt ... but the impact is quite moderate compared to London," said Carsten Ape, head of Frankfurt office rentals at property consultancy CB Richard Ellis (CBRE).

In Germany, the biggest finance sector job cut announcement to date has come from Commerzbank, which plans to axe 9,000 positions in the wake of its takeover of Dresdner Bank. About 2,500 will be outside Germany.

Deutsche Bank, the country's top bank, is expected to sack about 900 traders, with most of those layoffs in London and New York.

Frankfurt may not have lost many banking jobs yet, but its office property market took an indirect hit last month when real estate fund managers KanAm pulled out of a deal to buy a skyscraper under construction in the heart of the city.

Swiss bank UBS, which is cutting 7,500 jobs, has signed up as the main tenant of the OpernTurm office tower. KanAm said its fund did not want an increased rental exposure to banks as the financial market turbulence was making the outlook for the sector uncertain.

Fewer buyers usually translate into lower prices, which move in the opposite direction to yields.

"In a worst-case scenario, you might still see a lot of pressure on prices in Germany," said Olivier Elamine, chief executive of Alstria Office, which manages a portfolio of 90 properties in Germany valued at about 1.9 billion euros ($2.5 billion).

YIELD EXPANSION

Based on anecdotal evidence from recent transactions and deals in the pipeline, CBRE sees net initial yields for Frankfurt office properties in prime locations rising to 5.5 percent in the first quarter of 2009 from 5.3 percent at present and 5.1 percent in the first half of 2008.

"It could go even higher," said Burkhard Plesser, head of Frankfurt office property investment at CBRE, referring to the net initial yield -- a central metric for property investors.

Recent analyses from investment banks JPMorgan, Nomura and Collins Stewart estimate that London office property yields could rise to between 7.5 percent and 8.5 percent by 2010 from around 5.5 percent in the first half of 2008.

Such a jump in yields, corresponding to a fall in property values of up to one-third, would be far more pronounced than the rise to 6.0-6.5 percent from 5.1 percent projected by equity analysts for Frankfurt office properties.

JPMorgan sees Frankfurt office rents falling by 5.5 percent next year and by 5.2 percent in 2009 while it expects rents to tumble by more than 20 percent in London's West End and City districts in 2009, and by more than 8 percent in 2010.

Real estate markets, in Frankfurt and elsewhere, are unlikely to recover until banks become confident enough to resume lending, property analysts and executives say.

But once bank vaults re-open, deep-pocket buyers are expected to pile in, with early birds having the chance to pick up so-called distressed assets brought to market by sellers who bought at the peak in 2007 with the help of high leverage.

"There will be one or more fire sales," Plesser said. "We will have a very difficult year in 2009 ... but the bottom will be reached sometime in 2009," he said. (Editing by Chris Wickham)

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