Prime office yields in Europe’s principal central business districts (CBDs) reached record lows in the first three months of the year, dropping for the first time on record to below 4%, according to international real estate advisor Savills.
The new data shows that office yields continued to harden on a quarterly basis in Paris La Défense (-50bps), Amsterdam (-40bps), Vienna (-25bsp), London City (-25bps) and in the ‘big six’ German cities (-10bps). However Savills suggests that prime office yields remained stable in most other markets. Overall, their level is 90bps below the long term average.
'Despite the fact that the gap between core and peripheral office markets has been closing over the past few years, in the last quarter it has slightly widened as yields have stabilised in most markets, except the core ones where they continue to harden due to high investor demand,' commented Eri Mitsostergiou, director of European Research at Savills.
The data backs up a trend reported by JLL last month, when the advisor noted that prime yields in Paris, Munich and Berlin were all moving towards 3% for Q1 2017.
The long view
In Q1 this year Savills observed that the real estate market in Europe saw little change in terms of transaction volumes, compared to the same period last year. The volume of circa €44.5 mln was however one third above the 10-year long term average, with countries such as Greece (+ 130%), Austria (+50%), Netherlands (+41%), Norway (+35%) and Germany (+34%) showing the biggest increase.
Furthermore, rising cross border investor interest in the Nordic countries and the high volume of cross border investment in Germany, France, Italy and the UK have squeezed the share of domestic investment in these countries.
According to Savills, 48% of the overall investment activity in Europe can be attributed to domestic capital, compared to 52% which came from international investors. Their share was highest in Italy (81%), Spain (63%) and Netherlands (61%).
International interest
Focusing on the core markets, Savills observed that American investors favoured Germany in the first three months of this year compared to Q1 16 (79% y.o.y.), while they invested less in the UK (-56%) and France (-96%).
France was however favoured by investors from the EU (+15%) and Asia Pacific who invested €290 mln compared to €45 mln in the first quarter of last year. The UK is the preferred market of Asia Pac investors, where they invested over €3 bn just in Q1 17.
'Higher liquidity and the diminishing supply of quality product in the core markets has led to increasing capital flows into non-core markets such as Spain, the Nordics and the Netherlands,' said Mitsostergiou. 'As a result, the share of investment activity in the core markets has dropped from 70% in 2007 to 65% in Q1 2017.'
Growth markets
Savills forecasts that the European average annual office rental growth in the prime CBD locations will be 3.6%, driven by Oslo (28.2%), Stockholm (8.3%), Amsterdam (8.0%) and Paris CBD (7.6%). Only a decrease of about 5.5% p.a. is anticipated in prime London office rents.
'With the threat of anti-EU parties now eliminated in both France and the Netherlands this year, our projection for the total investment volume for our survey area is that it will remain broadly in line with last year’s levels, in the region of €200 bn,' added Marcus Lemli, Savills head of European Investment.
Savills also predicts some modest further yield compression during the course of the year in Frankfurt, Hamburg, Amsterdam and Milan, and some softening in La Défense and London, with the average CBD office yield projected to remain slightly below 4.0%.
