FT.com / World - Rising demand stirs Leipzig’s top properties

FT.com / World - Rising demand stirs Leipzig’s top properties

Rising demand stirs Leipzig’s top properties
By Hugh Williamson in Leipzig

Published: August 4 2007 05:20 | Last updated: August 4 2007 05:20

For the past decade Leipzig’s property market has been known for one thing: a surfeit of places to rent or buy.

Like many towns in eastern Germany, the region’s largest city outside Berlin experienced a large expansion in construction projects after German reunification.

The subsequent pricking of this largely artificial bubble in the late 1990s became synonymous with the economic mistakes made in Germany’s troubled unity process, as investors failed to materialise, generous tax breaks lapsed and financial instruments such as closed-end property funds lost their shine.

But in a sign that Germany’s recovery is reaching even such difficult economic corners, central Leipzig’s property market is stirring. Rental prices have risen as, for the first time in years, demand is again outstripping supply.

At present, it applies largely to “top-of-the-range office properties”, says Elke Engel, Leipzig director of Aengevelt, a real estate company. In the business heart of Leipzig’s old town, Ms Engel shows visitors around an elegant 300 square metre suite of lawyers’ offices with upmarket fittings and a view of the city’s skyline.

“This costs around €11.50 ($15.80, £7.80) per square metre, a very high rent for Leipzig,” if not for west German cities, she says. She adds: “And finding a new tenant [if the lawyers moved out] would be easy – demand is high.”

This contrasts with Leipzig’s bleak years, when top office rents fell from more than €20 per sq m in the early 1990s to below €10 per sq m in 1998.

Rents are also rising for standard office space, says Wolfgang Morenz of EPM Assetis, another Leipzig estate agent.

“Many companies want to move back into the city centre,” he says. The economic upswing also plays a role, he adds: “Companies accept the argument that, as the economy improves, rents go up,” noting that some rents are edging up from €6 per sq m to around €8 per sq m.

Yet in what property experts see as a “tale of two cities”, Leipzig’s pinch in supply of upmarket office property sits alongside a huge oversupply of less desirable older premises.

As much as 740,000 sq m of Leipzig’s office capacity remains empty – a huge 27 per cent share that tops vac­ancy rates across ­Germany.

Towards the outskirts of the city, Ms Engel shows another set of offices, this time gapingly empty, with cables hanging from the ceilings. There have been no tenants for more than two years.

She is convinced these premises will soon be rented but admits the offices – despite a price tag of €5 per sq m – have problems, including their location and the lack of modern underfloor cabling facilities.

Uwe Albrecht, Leipzig’s deputy mayor, says city authorities work with businesses and property companies to find appropriate office space, but ultimately it is the responsibility of investors and property owners to deal with empty premises. Market forces have the final say, he argues.

Tobias Just, a property analyst with Deutsche Bank Research, confirms that despite the vacant premises, Leipzig and eastern Germany as a whole are again becoming promising locations for property investors. But he warns of the risks, including the relative weakness of the eastern economy, including its services sector, and the lack of company headquarters in the region. “Ignoring these risks would be a mistake,” he says.

That view is shared by Christian Ullrich, a property expert at Leipzig’s chamber of commerce. He points out the city’s latest, ambitious construction project: three derelict blocks of offices and apartments that are to be replaced by an upmarket shopping centre.

Reflecting a worry that the flaws of the building boom in the 1990s could repeat themselves, he says: “I’m not sure there’s really the demand for more shopping space, especially selling luxury products. People in Leipzig are not very wealthy.”

Copyright The Financial Times Limited 2007