What the Garden Tower financing tells us about German offices

MünchenerHyp's financing of one of Frankfurt's most distinctive buildings highlights three trends in the German office market.

German lender Münchener Hypothekenbank has provided a loan to Frankfurt-based investor GEG, to finance the acquisition of the 27,000-square-metre Garden Tower office building, located in its home city, from Tristan Capital Partners for around €275 million in November last year.

The deal highlights three key aspects of the current German commercial real estate market:

1. Appetite to finance large deals. Although the size of the loan was undisclosed, MünchenerHyp said it was for a three-digit figure, which is in line with the bank’s strategic aim to increase its offering of large-scale loans. According to a market source, the loan amount was €159 million. Across the German real estate banking market, the proportion of total lending in deals of more than €100 million increased from around 14 percent in 2013 to around 32 percent in 2017, according to the latest German Debt Report, published last June by the International Real Estate Business School at Bavaria’s University of Regensburg.

2. Leverage remains conservative. In the previous financing of the Garden Tower for Tristan, provided by Aareal Bank in December 2015, the loan was understood to comprise senior debt at a loan-to-value ratio of slightly less than 70 percent. The loan provided by MünchenerHyp has a lower LTV, in the range of 57 percent considering the size is understood to be €159 million. “The equity involved in the deal was quite substantial and, on the LTV basis, the risk was within our normal parameters,” Jan Polland, head of commercial real estate finance at MünchenerHyp, told Real Estate Capital. MünchenerHyp’s typical LTV range lies between 40 and 60 percent, the bank said. In the wider market, too, core transactions are characterised by low leverage, according to the German Debt Report.

3. High property prices. The Garden Tower was sold to GEG for €275 million, which is €100 million more than the sum paid by Tristan just over three years ago. “The asset has increased in value over time, but it provides a sustainable cash flow from rent income, which is in line with the market levels,” Polland said. Market observers say prime office prices are at or near the peak, although there are still prospects for rental growth. In Q3 2018, prime office rents in Frankfurt were up by 4 percent year-on-year to €39 per square metre per month, according to JLL. “The debt yield is in the range of 6 to 7 percent and there are growth prospects for rent income,” Polland added.

The Garden Tower deal illustrates how the German office market has experienced strong value growth in the past few years, but is there room for further growth? According to Savills, the bullish trend in the office market is now coming to an end. “However, that is not to say that the market is immediately about to go downhill. Rather, that the boom is set to revert to an upturn since the stimuli of monetary policy that created the boom are becoming weaker,” the property research firm said in a briefing note in December last year.