Berlin, Amsterdam, Madrid and Munich offices now offer ‘fair value’ as European prime office yields move out a further 20 bps during Q3

Fair pricing indicates that the fundamental capital value* is within 10% of market capital value, says Savills. In its latest European Office Value Analysis report, it says that since Q1 2022, average European office prime yields have moved out in total by an average of 130 bps from 3.4% to 4.7%, with a 20 bps softening in Q3 2023 alone, reflecting higher debt costs and risk free rates.

Based against the previous five year average risk premium, average European prime office capital values require a further -18% adjustment to return to fair value pricing. Berlin (-44%), Amsterdam (-41%) and Cologne (-40%) are the cities which have observed the largest yield impact on capital values since Q1 2022, although rental growth has been supported by low vacancy rates. According to Savills, non-core market yields have been less impacted by the rising cost of debt, but have been slower to adjust as investors wait for core pricing to settle first.

Tristam Larder, Head of European Capital Markets at Savills, comments: “As focus remains on refinancing existing portfolios, European office vendors accept that values have fallen, but price discovery is ongoing and mark downs will vary depending on the market. Rents have risen for prime space in core markets, buoyed by a lack of supply and continued occupier demand, and this will dampen some of the outward yield movement. Prime markets such as London’s West End or the Paris CBD are also seeing a higher proportion of cash buyers as they are attracting a global buyer pool, but other less prime office markets are suffering the body blow of weakened tenant and investor demand and the mark down will, as a consequence, be much more severe.”

Mike Barnes, Associate Director in Savills European commercial research team, adds: ”There is not yet evidence to suggest that price adjustment in the European office sector is slowing, however, given that Euro area interest rates are beginning to stabilise, this will help form a base for pricing expectations. Value-add capital remains ready to deploy, and we expect that investors asset-managing older stock in prime locations will be rewarded.”

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Notes to Editor:

*Methodology:  Savills European Office Value Analysis compares the fundamental (calculated) yield relative to current market pricing across 22 European markets, covering London-City, Stockholm, London-WE, Manchester, Lisbon, Oslo, Berlin, Paris, Copenhagen, Dublin, Amsterdam, La-Defense, Prague, Hamburg, Madrid, Barcelona, Munich, Warsaw, Brussels, Frankfurt, Milan and Bucharest.

An investor must be compensated for bearing the risk of investing in real estate over sovereign bonds - the risk premium. The calculated yield is derived as the current risk free rate plus five year average office risk premium, discounting for nominal rental growth (source: IPF, Savills), inflation (source: Oxford Economics) and depreciation across each market. The fundamental yield represents a hypothetical yield assuming a fully liquid market and that the investor is fully hedged against currency risk.

Given the inverse relationship between yields and capital value, Savills uses the following definitions for fair-pricing;

Market capital value >10% above fundamental capital value, is considered over-priced

Market capital value within 10% of fundamental capital value, is considered fairly priced

Market capital value >10% below fundamental capital value, is considered under-priced