SPAIN - Foreign investor interest in the Madrid office sector has increased significantly due to large sale-and-leaseback transactions revitalising the market, according to Savills.

A report from the real estate adviser shows cross-border transactions represented 31% of deals in 2010, up from 2% in 2009.

It cited SEB, WP Carey and Continental Property as being among the key international players leading the resurgence in the market, with the former two focusing on sale-and-leaseback deals.

Large portfolio acquisitions had also taken place with Moor Park Capital Partners' acquisition of Banco Sabadell's real estate assets, as well as RREEF's second round of acquisitions from BBVA.

Overall, the report recorded a 14% increase in investments transacted compared with 2009, totalling €700m.

Luis Espadas, head of capital markets at Savills Madrid, said: "The rising interest shown by foreign investors in Madrid is encouraging, although national investors continue to be active and dominate the market, both as buyers and sellers."

Despite concerns over the Spanish economy, tenant take-up in the Madrid office market improved in 2010, up 40% on the previous year.

However, despite an apparent increase in the demand for office space, the vacancy rate continued to rise.

Savills attributed this to companies taking less space in their new properties when deciding to relocate their headquarters.

The report records approximately 1.5m square metres of vacant office space in the market and a vacancy rate of close to 12% at the end of 2010.

However, the research showed significant variations, with Madrid's central business district's (CBD) vacancy rate currently standing at 5%, while other prime sub-markets outside of the M-30 ranged between 5% and 8%. Some outer lying periphery areas of the city had a vacancy rate of 25%.

This is reflected in rents, which, on the whole, have been slowly falling. Savills data shows that, at the end of 2010, rents in the CBD were €27-28 per square metre per month, 35% down on the maximum rent achieved over the past decade.

Gema de la Fuente, head of research at Savills Spain, said: "We are finally seeing a slowdown in the number of new projects being delivered as developers have become more cautious and the delivery of various buildings has been delayed.

"Excessive supply and a lack of demand continue to push rents downward, although in the CBD and prime areas outside the M-30, the negative year-on-year change has decreased for the fifth consecutive quarter."