Imagine walking the streets of London in the 1840s. A city of dense fog, thousand chimney pots, horse-drawn carriages, and crowds of people navigating the busy malodorous streets. It is the Victorian London and the London of Charles Dickens, the largest city of the 19^th century. With the turn of the century and Queen Victoria's death in 1901, the Victorian period came to an end, giving way to a new era in the city’s development propelled by education, technology, and social reforms.

Today’s London is one of the most desirable cities, ranking first both in global city status, human capital, and office sector investment opportunities, according to Allianz Real Estate’s new Cities That Work 2021 report, and followed closely by Stockholm and Berlin. The study examines 26 top-tier cities in Europe and incorporates 20 proprietary and external indicators that are used to generate structural scores for each city. 

In the light of all these changes, Allianz Real Estate rebuilt their existing model of city rankings by introducing new metrics. The new model incorporated a new category to represent the growing internal and external ESG awareness with distinct environmental, social, and governance components. In addition, the tech and connectivity category was given more prominence. Highly unusual market conditions and the lack of liquidity in most markets has made many of the short-term indicators used previously within the tactical scorings unreliable or even misleading. All these changes have resulted in considerably different rankings for many of the cities scored.

What emerged out of the new city ranking model are seven categories essential in making a city attractive to office investments: global city status; office market size; office market balance; economic strength; human capital; technology & connectivity; and ESG.

“Investment opportunities remain in commercial real estate, given the extended elevated spread to real risk-free rates; this will support investor demand alongside occupier demand for major, multicultural cities such as Stockholm, Berlin, and London – truly international hubs with strong structural scores, underpinning our commitment to the region,” concluded Megan.

London comes out significantly ahead in the rankings, despite the impact of both Brexit and Covid-19. With excellent scores in each category, it ranks first for both global city status and human capital and is also set to disproportionally benefit from the rise of the tech sector and the predicted falls in prime core office vacancy rates.

London’s network of six major airports creates a truly international hub, with more than 37 percent of the population born outside of the UK. It also has a student population of more than 400,000, which means that the proximity of talent enables an excellent supply of labor.

London’s office market is also one of the most important ones globally, second only to Paris. International investors looking for trophy assets and stable income have a strong preference for London – the city has often received more foreign capital than any other city globally.

Stockholm earns a second overall ranking through top scores in the office market balance, economic strength, human capital, technology & connectivity, and ESG categories. Stockholm’s biggest strength is its office market balance, rated first. Low volatility has resulted in significantly above average risk-adjusted returns over the last 15 years. It also has the second-highest rental growth.

Stockholm’s robust economy has some of the highest rankings for both overall GDP growth and service sector growth. Adding to this is also Stockholm’s growing tech industry, with three times as many people employed now in IT and communications as the EU average (think of Spotify and Klarna).

In terms of ESG criteria, Stockholm was awarded Europe’s first European Green Capital in 2010 and aims to be fossil fuel free by 2040. Alongside environmental strengths, the city also does well on governance and social cohesion, being ranked the 9^th happiest city in the world by the World Happiness Index.

According to Allianz Real Estate, Berlin is the highest-ranked German city, rated above Munich and Frankfurt. The most globally connected city in Germany with a rich history and world-class cultural offerings, Berlin has used its open values and accessibility to attract international talent and cultivate a growing tech sector – ranking third for market balance, technology & connectivity, and global city status.

The city’s multiculturalism, with more than 800,000 of the 3.7 million residents possessing a foreign passport has also fueled its universities, which have, in turn, bolstered a booming startup scene that has produced eight tech unicorns.

Berlin’s office vacancy rate remains one of the lowest in Europe, due in part to the city being also almost twice as dense as other major German cities. Forecasted rental growth and risk-adjusted returns remain both above average.

Despite the impact of the pandemic, Allianz Real Estate has continued to invest in the European office sector both through direct equity acquisitions and financing. Key deals over the past 12 months include the EUR 1.4 billion forward purchase of FOUR Tower 1 in Frankfurt, and the first equity office investment in London. On the financing side, the company has continued to strengthen its pan-European loan book with major office lending transactions in Paris, Amsterdam, and London.

If you wish to take a deep dive into top-ranked cities or find out more about Allianz Real Estate’s metrics, you can find the whole report here.