THE location of the European Monetary Institute's first headquarters is the talk of the Frankfurt property market. Tipped as the hot favourite is the high profile Messeturm, the 70-storey tower block built by Tishman Speyer, Kajima and Nomura International. The 650,000-square-foot building is 70 per cent let to tenants Banque Indosuez, Nippon Credit Bank and GoldmanSachs. German fund Despa's Poseidon House, which is opposite, is another strong contender. The bank is looking for 140,000-sq ft premises through agents DTZ Zadelhoff and is due to make a decision in the next few weeks. It is likely to have a 200-strong staff which will grow once the institute is operating as a bank. The decision by the European Union to base the bank in Frankfurt late last year was a big boost to the Frankfurt property market. According to Frankfurters, it confirmed the city as a pre-eminent financial centre next to London. Robert Orr, head of property agents Jones Lang Wootton in Frankfurt, has predicted that, because of this, more international banks will want to locate in Frankfurt rather than London. The city, with a vacancy rate that has risen to 5.5 per cent from two per cent in the early 1990s, has been boosted by the restructuring decisions of various banking firms. The other German property market affected by the recession has been Berlin, the most high-flying market in the early 1990s. Berlin has finally had the uncertainty of the government's move from Bonn resolved. The delay was having a detrimental effect on the future development of the eastern Berlin Mitte city centre. It has now been decided the government will move between 1998 and 2000 at a maximum cost of GBP7.8 billion (about HK$88 billion) as departments are more likely to move to refurbished buildings rather than new developments. This decision is to become law to ensure the government will not back out. Rents from a peak of GBP40 per sq ft have settled down to a more realistic top rent of GBP25 to GBP26 per sq ft, according to property agents, Richard Ellis in Berlin. Vacancy rates are now between two and three per cent and pre-lettings are now becoming a feature of the market for the first time. The Dusseldorf market has experienced a dramatic fall in demand for large offices and provides strong investment interest in the city centre. Office rents are likely to remain stagnant until 1995. Gailiford Property recently sold the 110,000 sq ft office building, Euro Centre 2 in Am Seestern to Internationales Immobilien Institut (iii-Fonds) for GBP1.5 million. The fund, which manages a volume of GBP2.5 billion of assets, bought the first 125,000-sq ft phase of Euro Centre at the beginning of 1993 for GBP2.5 billion. According to the vendor's agents, Jones Lang Wootton, the tenants of the development include firms such as Sony and Feldmuhle. Leipzig is the most active property market in Germany in relation to its size. Demand is strong but so is supply, which is set to double in the next few years. Dresden and Erfurt, also key eastern German cities, are showing encouraging levels of activity in all sectors. The signs are the German economy has reached the bottom of its recession and is gearing up to start growing again. The property markets have been helped by the incredibly cash-rich domestic open-ended pension funds, such as Difa, Despa, Degi and tax-driven close-ended funds which are investing mainly in eastern Germany. Open-ended funds received GBP4.7 billion of fresh capital last year and the same is likely again in 1994. Prime yields are back down at between five and 5.5 per cent and are forecast to stay there. The significant fall in interest rates in the past year has increased the attraction of property relative to bonds and equities even more. Property in Germany has always been perceived as a safe form of investment. One recent deal included the Saale Park Shopping centre near Leipzig, Germany's largest shopping centre at one million sq ft. It was sold by a Westdeutsche Landesbank consortium to Despa Fund for GBP150 million, reflecting a yield of 6.5 per cent. German investment interest, which had been concentrated on the London market for international exposure, is now predicted to turn to North America, Belgium, the Netherlands or Luxembourg. Deals in Germany are now relatively cheap compared with those available in Britain.