Prime office yields in Europe’s principal CBDs reach record low in Q1, Savills

According to international real estate advisor Savills, the average yield in Europe’s prime CBD office market dropped for the first time on record to just below 4% in the first quarter of this year.  Prime office yields continued to harden on a quarterly basis in Paris La Défense (-50bps), Amsterdam (-40bps), Vienna (-25bsp), London City (-25bps) and in the ‘big six’* German cities (-10bps).  However Savills claims that prime office yields remained stable in most other markets and overall their level is 90bps below the long term average.

Eri Mitsostergiou, Director of European Research, Savills, comments: “Despite the fact that the gap between core and peripheral office markets has been closing over the past few years, in the last quarter it has slightly widened as yields have stabilised in most markets, except the core ones where they continue to harden due to high investor demand.”

In Q1 this year Savills observed that the real estate market in Europe saw little change in terms of transaction volumes, compared to the same period last year. The volume of circa €44.5m was however one third above the ten year long term average, with countries such as Greece (+ 130%), Austria (+50%), Netherlands (+41%), Norway (+35%) and Germany (+34%) showing the biggest increase.

Furthermore, rising cross border investor interest in the Nordic countries and the high volume of cross border investment in Germany, France, Italy and the UK have squeezed the share of domestic investment in these countries. According to Savills,  48% of the overall investment activity in Europe can be attributed to domestic capital, compared to 52% which came from international investors. Their share was highest in Italy (81%), Spain (63%) and Netherlands (61%).

Focusing on the core markets, Savills observed that American investors favoured Germany in Q1 17 compared to Q1 16 (79% yoy), while they invested less in the UK (-56%) and France (-96%). France was however favoured by investors from the EU (+15%) and Asia Pac investors who invested €290m compared to €45m in the first quarter of  last year. The UK is the preferred market of Asia Pac investors, where they invested over €3bn just in Q1 17.

Eri Mitsostergiou acknowledges: “Higher liquidity and the diminishing supply of quality product in the core markets has led to increasing capital flows into non-core markets such as Spain, the Nordics and the Netherlands. As a result, the share of investment activity in the core markets has dropped from 70% in 2007 to 65% in Q1 2017. In addition, less prospects for capital gains has shifted investor focus onto income. In the office sector good fundamentals shaped by economic resilience, demand for quality space and restricted development pipeline support a positive outlook for prime rental values.”

Savills forecasts that the European average annual office rental growth in the prime CBD locations will be 3.6%, driven by Oslo (28.2%), Stockholm (8.3%), Amsterdam (8.0%) and Paris CBD (7.6%). Only a decrease of about 5.5% pa is anticipated in prime London office rents.

Marcus Lemli, Head of European Investment, comments: “With the threat of anti-EU parties now eliminated in both France and the Netherlands this year, our projection for the total investment volume for our survey area is that it will remain broadly in line with last year’s levels, in the region of €200bn.”

Savills also predicts some modest further yield compression during the course of the year in Frankfurt, Hamburg, Amsterdam and Milan, and some softening in La Défense and London, with the average CBD office yield projected to remain slightly below 4.0%.