In B cities like Leipzig, yields similar to those in the A cities can be achieved with almost the same construction costs and with lower rents. (Source: iStock Unreleased)
Over 80 percent of ESG-compliant office properties in Germany are currently being built in the A cities. According to analyzes by Aengevelt Research, the decisive factor is the higher top rents there, which offer more scope for the realization of more cost-intensive sustainability criteria. B and C cities, on the other hand, can score with lower property prices. Accordingly, B and C cities in particular offer interesting potential for ESG-certified properties, as they enjoy a significantly higher reputation and marked market acceptance here, are affected by lower vacancy rates, achieve above-average rents and offer more sustainable investment security overall.
ESG certification is playing an increasingly important role in office properties. On average in Europe, around a fifth of office properties are sustainability-certified – and the trend is rising. In the Big Seven markets in Germany, however, the proportion of office properties with certification is still well below the European average at a good ten percent of existing buildings. High-rise Frankfurt has the largest share nationwide with a good twenty percent, while other A cities such as Munich, Düsseldorf and Hamburg are only in the single-digit percentage range.
According to market estimates, the investment volume for certified Green Buildings in Germany was over eleven billion euros in 2022. There is a great deal of dynamism, particularly in the case of new construction projects and total renovations, with an above-average proportion of certifications.
Background: ESG-compliant investments in all three dimensions of sustainability create a distinctive competitive advantage. Positive effects on reputation – also in relation to the capital market, business partners, the public and financial institutions – as well as from the user’s point of view in terms of a significantly better working atmosphere can make the decisive difference in the “war for talent”. In addition, the operating costs are lower due to the higher energy efficiency. This is accompanied by the growing willingness of investors to pay premiums for ESG-compliant spaces. Overall, ESG-certified buildings therefore represent investments that have a significantly lower risk of loss, even if the sustainability criteria were to be tightened politically in the future.
Similar yields as in the A cities
What is striking, however, is that more than 80 percent of the investment volume in certified assets in Germany is concentrated in A locations alone. The reason is that the higher costs for meeting the ESG criteria are easier to bear there due to the higher top rents (Berlin: EUR 44.50/m²; Frankfurt: EUR 46.00/m²; Düsseldorf: EUR 38.00 /m²). In B cities (Leipzig: EUR 18.50/m², Dresden: EUR 18.70/m²) or C cities (Magdeburg: EUR 14.00/m²), on the other hand, the top rents are significantly lower.
On the other hand, the land price level in B and C cities is considerably lower. The standard land values in Magdeburg are between 1,200 and 1,500 euros per square meter in top locations, in Dresden between 4,100 and 4,950 euros and in Leipzig between 3,500 and 4,200 euros. In Berlin, on the other hand, standard land values in prime locations are between 23,000 and 70,000 euros, in Düsseldorf between 40,000 and 55,000 euros and in Frankfurt between 32,000 and 41,000 euros per square metre. Against this background, similar returns can be achieved in B and C cities with almost the same construction costs and with lower rents as in the A cities with their extremely high property costs.
Less competitive pressure, higher crisis resilience
So far, ESG criteria have not yet been a major issue in the B and C cities. This is precisely why unique selling points can be achieved here with sustainability-certified properties, which are usually rewarded by higher demand and a higher willingness to pay rent. In addition, certified office properties offer significantly improved opportunities for companies with an international focus or international background to settle here, as meeting ESG criteria is often an important rental requirement for them.
“According to our experience, B and C locations such as Leipzig, Dresden or Magdeburg are characterized by a higher crisis resilience due to their lower competitive pressure,” comments Dr. Wulff Aengevelt, managing partner of Aengevelt Immobilien. “They are also increasingly appearing on the radar of domestic and international investors, pension funds and family offices. The economic momentum at the B and C locations is very often higher for a variety of reasons, as shown, for example, by the recent decisions on the construction of new chip factories by intel in Magdeburg and TSMC in Dresden. It is therefore becoming increasingly worthwhile to construct or retrofit high-quality office buildings there that meet ESG criteria.”
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