Most European logistics and offices markets are set for yield growth over the coming 12 months, supported by a severe lack of inventory, according to Savills.
Logistics investments in the EMEA region in Q1 2023 dropped by over 75% year-on-year, with the quarterly total of US$ 5.6 bn (€5.2 bn) being the lowest since Q3 2016.
Fully rebased markets like the UK are again supporting competition for the best assets, while some European markets, such as Germany, are set for further outward yield expansion over the next 12 months.
Transactions are still hampered by different pricing expectations between buyers and sellers, while trading of large volume properties and portfolios has declined.
Prime yields moved out by 40bps in both Île-de-France and Amsterdam to 4.4%, and by 30bps in Madrid to 4.8%, with Cologne holding steady at 3.9% following outward movement of 80bps in 2022.
The benchmark yield on a prime asset in London increased by 25 basis points to 4.75, a trends that should continue as investors are coming back to the UK after a 35% price decline.
The rest of the EMEA region's activity should ramp up in H2, driven by equity-rich buyers for smaller lot sizes, although specialised institutional investors remain committed.
Logistics take-up in Q1 in Europe and UK was 39% below Q1 2021, with requirements in the UK 74% ahead of Q4 2022, indicating an increase in take-up during H2.
Vacanty rates in the region remain low, with the UK at 5.4%, Madrid at 5.7%, and Amsterdam at 6.3%.
Marcus de Minckwitz, head of EMEA Industrial and Logistics at Savills, comments: ‘Investment criteria are becoming more stringent in the industrial and logistics sector, with a focus on best in class assets and price adjusted value-add opportunities. The market is in a state of anticipation, awaiting stability in the macroeconomic environment. Once there’s more clarity around pricing levels and interest rates, we anticipate an uptick in activity. This is already evident in the UK where the benchmark yield for a prime asset in London experienced a 25 basis point compression in Q1, settling at 4.75%. We look forward to the markets fully stabilising over the next 12 months and investment volumes returning.’
In the offices segment, CBD offices in Paris, Frankfurt, and Madrid have all seen capital values drop by 25% or more in the last 12 months, with rising interest in London, as yields are expected to stabilize, after an outward yield shift of 100bps to 4.75% in the last 12 months.
Investment volumes in Germany declined 80% y/y in Q1 compared to a decrease of 65% across EMEA.
Mainland Europe's take-up declined by 16% y/y in Q1, with leasing activity led by tenants upgrading to higher-quality buildings.
Occupancy levels continue to improve, with Paris and Madrid leading the way, while in Frankfurt the prevailing vacancy rate is just 8%.
New speculative space under construction for 2023/24 accounts for an average of just 2.6% of total office stock in Europe.
Rasheed Hassan, head of Global Cross Border Investment at Savills, adds: ‘Weak office investment volumes have been matched by equally sluggish fundraising activity. The fast rise in the cost of debt has created uncertainty and many investors are on pause while they wait to see an end in sight. We do expect to see some further upward pressure on yields over the next 12 months in a number of gateway markets as they require more time to adjust, but in London – often a bellwether for other markets due to greater levels of liquidity and transparency – yields are once again piquing the interest of global investors. We are starting to see some similar signs of stabilisation in Paris for best in class assets too.’
