Development finance to remain limited until 2017: JLL

With equity players and sources of debt finance targeting the same prime office buildings and lower-risk lending, normal speculative development completion patterns are not likely to return to Europe for the next five years, according to the latest research from Jones Lang LaSalle.

This will starve many core European markets of good-quality office space and exacerbate value polarisation between grades of stock. This is not just the case for major office hubs such as London and Paris, but also other key cities across Europe. For example, Warsaw and Lyon are forecast to see overall vacancy levels drop below 6% by 2016, with prime CBD supply much lower.

However, the vast majority of new equity players and sources of debt finance - such Asian and US institutions - will focus on the same type of prime office buildings in the most liquid markets of London, Paris and some of the major German and Nordic cities.

Bill Page, director of EMEA Research at Jones Lang LaSalle said: 'This sustained competition for the same building means the strongest returns will potentially lie outside the most liquid markets. Secondary space might also present more opportunities for cash-rich, entrepreneurial investors who have a long term view and are willing to ride out the economic risks across Europe.'

He added: 'In addition, pre-let agreements will increase in appeal in value to debt funds. In many cases, demonstrating you already have a tenant lined up may be the only way for developers to get schemes off the ground. The flip side is pre-lets will cost more for tenants who are paying to offset the developer’s risks.'