Gap between prime and secondary yields widens

The average yield gap between prime and secondary office properties in European CBDs has widened to around 85 basis points at end Q2 2009, back to mid-2006 levels. This is one of the key conclusions of Savills European Quarterly data bulletin, which examines office, retail and industrial sectors. During the peak of the market, the gap narrowed to almost 60 basis points.

The widest gap is evident in Lyon, Oslo and London's West End markets, and the narrowest in the CBDs of German and Italian cities. The report also found that negative rental growth has slowed down on average compared to Q1 2009. However, annual rental growth fell further on average in Q2 by -12% compared to -7.5% at end Q208 for prime office locations across the survey area (CBD and non-CBD).

Eri Mitsostergiou of Savills European research said: 'A modest increase in investment activity in the second quarter has held back the significant upward yield shift experienced over the previous three quarters. On the other hand many markets are still at the early down-swing stage of the rental cycle.'

In terms of retail, rents continued to fall in Q2 and are now on average 4% (high street) to 9% (shopping centres) lower than a year ago albeit prime unit rental falls have been more modest, as they remain in demand. With regards to retail yield shift, overall yields have experienced significant upward movement over the past four quarters, recording a difference of 145 basis points on average for both shopping centres and retail warehouses in Q2 2009.

Above-average annual yield shift, ranging from 175 to 300 basis points has been noted in Dublin, Lisbon, Madrid and London. The gap has also widened between the average prime yields and the average secondary yields for both shopping centres and retail parks with shopping centre yields at more than 100 basis points higher than that applied on secondary properties, compared to less than 80 basis points two years ago.

In the industrial sector, Savills found yields are on average 83 basis points higher compared to last year, and there is renewed interest in the sector. The markets that continued to experience significant corrections in Q2 compared to Q1 were Ireland and Iberia. Rental growth dropped further in Q2 from -2.8% to -8.5% as warehousing rents experienced quarterly falls ranging from -4.1% (Warsaw) to -12.5% (Thessaloniki). Italian, French, Dutch and Nordic markets remained quite stable.