Global hunt for yields to continue, says Savills

The combination of a more positive economic outlook and investor’s global hunt for yield has led to a sharp recovery in the European commercial property investment markets, according to Savills' World Office Yield Spectrum.

According to the report, which was published in conjunction with Australia's Deakin University, there is a clear sign that investors are starting to look to value-add and opportunistic markets in Europe as they become more comfortable with the prospects of an economic and property market recovery, as well as in some cases becoming disenchanted with the low yields and strong competition prevalent in core locations

Average prime CBD office yield reached 5% in Europe at the end of 2014, 41 basis points below Q4 2013. Non-CBD yields for prime assets are also moving in, and the average is at 6.50%, 30 bps lower compared to the same period in 2013.

According to Savills, this yield shift is supported by an increasingly broad-based recovery in the European office leasing markets, with stable levels of take-up meeting low levels of development activity to deliver some prime rental growth.

The yield spread between the core and periphery countries have started to narrow and this is being followed by the spread between CBD and non-CBD locations. However, in both cases this gap remains wider than normal and Savills expects to see continuing investor demand for these markets as opportunistic investors bet on the likelihood of these gaps closing further in 2015 and 2016.

'Burgeoning amounts of sovereign debt coupled with impaired budgetary positions and an ageing population demanding more from governments is likely to keep interest rates low for years to come,' commented Savills National head of Research ,Tony Crabb. 'As the world population ages, a great deal of retirement saving can be expected to chase yield. This, when combined with low interest rates, can be expected to keep downward pressure on income returns into the foreseeable future.'

Europe - characterised by its largest markets of France, Germany and the UK - has very stabilised core market office investment yields which have reached historically low levels of between 3.5% and 4.5%. Given the extremely low interest rate environment in Europe it is hardly surprising these are the prevailing yields, Savills said.

'While London's office yields are now close to record lows, this is supported by the strong rental growth prospects across the market. Furthermore, the comparatively lower yields in parts of Asia Pacific will continue to be a key driver for international inward investors to London and the UK from that region. We expect that investors from Asia Pacific will remain one of the most active non-domestic investors in London over the next 12 months,' added Mat Oakley, director of research at Savills.

Rasheed Hassan, director of cross border investment at Savills London, noted that a key factor for global investors is relative interest rates in the target markets. 'Other key factors are ease of market access, asset liquidity, transparency, availability of quality stock, legal systems, tax etc. London scores very highly on all of these points, which is why it is consistently the most popular destination for cross border capital by a very significant margin.'