#MIPIM Capital and rental value gap swells as confidence returns - Savills

The gap between capital and rental values in Europe has widened to 37%, indicating that investor confidence in the market has returned, according to research by Savills.

In the past four years the gap has increased at an accelerating rate from 15%, based on a sample of major cities including London, Paris, Munich and Madrid.

Savills reports that low interest rates are boosting confidence in real estate as investors turn their attention away from low-yielding government bonds towards property.

The European Central Bank’s latest QE measures and the enhancement of liquidity in Europe have also improved the economic outlook, benefitting occupier markets and rental growth.

Both CBD office rents and capital values in the nine sample markets are around 8% below their 2007 peak, indicating there is potential for further growth.

Eri Mitsostergiou, director of Savills European research, said: ‘Over the past 15 years the widest discrepancy between capital and rental values was during periods of high investment activity, notably 2007, at 36% and 2014 at 37%. The investment market is driven not only by economic fundamentals and the anticipation of rental growth but mainly by the weight of capital in property.

‘High allocations into real estate are driving fast yield compression, which outpaces the rate of rental growth in the occupier markets.’

Savills noted an apparent disconnect between gateway markets such as London and Paris and non-core peripheral markets. In London’s West End the gap between the capital value index and the rental value index for offices is 54%, compared to only 22% in Madrid’s CBD.

It expects stronger investor interest in non-core markets to increase the gap for secondary assets. Savills predicts total investment volumes will rise by 7% in the area surveyed to more than €172 bn, while prime CBD rents are forecast to rise by 2%.

Mitsostergiou said: ‘Unlike the peak of 2007, the current cycle is equity driven, as opposed to investors with high levels of debt who are highly leveraged. Additionally, we are at a point in the cycle where policies and regulations are in place to support the financial system and underpin economic growth.’

The nine markets surveyed for Savills’ research were Brussels, Paris, Frankfurt, Munich, Amsterdam, Warsaw, Madrid, London West End and London City.

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