Weighing Risks and Opportunities in the German Investment Market

An investor who wishes to invest in commercial property is forced to consider a number of different risks and opportunities. A property investment is influenced by both economic and real estate factors. At present, the factors influencing the underlying economy differ considerably from the factors that have an impact on real estate. The euro crisis is having a significant effect on the former (risk), while a low vacancy rate and a slight increase in rents affect the latter (opportunity). It is nonetheless important to consider and weigh up these two areas before making a property investment in order to assess whether risks or opportunities are predominant.

The measurement of risk plays an increasingly important role in investment decisions. In view of this, we have developed a tool to help visualise and assess the opportunity/risk ratio: the Jones Lang LaSalle Risk Seesaw.

The Risk Seesaw for the first quarter of 2013 shows a slight tilt towards risks. Does that mean you should steer clear of the German office property? No, far from it. It is more the case that the risks outweigh the opportunities and an above-average risk premium is necessary. A quick look at the current risk premium actually shows that property investors are getting a higher risk premium than ever before, with a risk gap of 350 basis points between an office property investment and a German state bond. With such a premium, you would in fact expect the Seesaw to be tilted even further towards risks. Since this is not the case, an investment on the German property investment market is very attractive at present. Accordingly, the capital value index for German office properties is at a 10-year high. This is an indication of the expected opportunities for growth in earnings and value.

From now on we will use the Risk Seesaw to make regular contributions to the debate in order to lend greater visual awareness and give more weight to the subject of risk on the investment market.