The number one ‘core‘ city, Paris, which was second last year behind Munich, has become one of Europe’s most liquid office markets, with the second-highest average investment volume over the last 10 years while the vacancy rate in the central business district hit a record low of 1.8% at the end of the second quarter 2019, the lowest level since late 2001.
The Republic of Ireland’s capital is the top-ranked ‘value-add‘ city and is one of the big movers in this year’s study. Demand for space in the city has seen Dublin‘s office yield premium over government bonds become one of the most attractive in Europe on an absolute basis; its capital value stands around 6% below its prior high point whereas the European average is 46%.
|Rank 2019||Rank 2018|
|Top 5 - Core|
|Top 5 - Value-add|
Source: Allianz Real Estate - Cities That Work 2019
Munich remains the highest-ranked German city. Given general supply constraints from high urban density and regulatory limitations, Munich has the highest forecast real rental growth rate over the next five years.
London, despite Brexit, has risen this year in terms of core opportunities. Due to its significant concentration of international talent and abundance of capital, accelerators, industry events and government support, London has become Europe’s global tech hub and was the number one recipient of venture capital investments in 2018.
“Based largely on the same research we use to make investment decisions, we believe that our Cities That Work report represents the most thorough analysis of the investment prospects for the continent’s office sector,” said François Trausch, CEO, Allianz Real Estate. “The sector continues to provide significant long-term value for investors and remains the mainstay of Allianz Real Estate’s European portfolio. We have seen sector AUM increase by EUR 1.8 billion in the first six months of 2019 and expect continued, strong activity going forward.”
Olivier Téran, Chief Investment Officer, Allianz Real Estate, added: “We are mindful of the wider macroeconomic and geo-political environment, both in Europe and globally, but it is clear that excellent opportunities remain through core and value-add developments in established major cities such as Paris, London and Berlin as well as the likes of Copenhagen. We buy assets with the full knowledge that economic activity rises and falls over time - one reason why we continue to place so much emphasis on investing in prime assets and working with prime partners and stakeholders.”
In calculating this year’s Cities That Work rankings(1), the research team at Allianz Real Estate studied 36 diverse indicators: 23 structural and 13 tactical. These included rent volatility over the past 15 years; prime rent as a percentage of last peak; real GDP growth (10-year forecast); and prime yield.
Significant input once again came from how ‘technological’, connected and entrepreneurial a city is, as measured by, e.g., its digital footprint; the quality of transport and trade infrastructure; the number of universities among Times Higher Education’s European Top 200; the number of start-ups; and volume of venture capital funding.
A link to the full Allianz Real Estate Cities That Work 2019 report can be found here.
(1 )From an investment universe of 60 European cities with a population greater than 500,000, a shortlist of 34 cities were selected based on a number of screening criteria. The index was compiled using data across nine dimensions, incorporating 36 proprietary and external indicators, which were used to generate structural and tactical scores for each city. To differentiate between core and value-add investment rankings, the weighting of these two scores was adjusted, adopting a balanced approach for the core ranking, and a tactical bias for the value-add ranking.
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