Prime yields stabilising across Europe: C&W

Average prime yields across Europe now stand at 7.52%, with Western yields (excluding the UK) averaging 6.65%, according to new research from Cushman & Wakefield. This compares to average yields of 6.97% in the UK, 8.63% in Central Europe and 12.86% in Eastern markets.

As a result, the yield differential between west and east has widened to 621 basis points (bps) versus 423 bp a year ago. Despite the opening of this yield differential, investor activity in Eastern markets remains very subdued, the adviser noted. Across the sectors, investors are still very much focussed on core Western markets with demand most evident in markets such as the UK which have seen the most extensive pricing corrections.

This is not a universal trend, however, and is not yet evident in Spain and many of the Nordic markets for example, where, despite a greater than average shift in yields, increased interest over recent months has yet to translate into deals, as investors await evidence that pricing is set to stabilise.

Investment volumes in the second quarter rose 2.5% on the first three months of the year, driven by increased activity by foreign buyers (up nearly 16%), in core Western markets. At EUR 11.97 bn, volumes were nonetheless just 41% of the average for 2008 and only 19% of the average for the market’s peak year in 2007.

'The numbers on the market make for better reading than they did earlier this year,' commented Michael Rhydderch head of the European Cross Border Capital Market Group at Cushman & Wakefield. 'Although there remains a fundamental mismatch between what many buyers want and what is available for them to buy, the allure of historically high income yields is tempting increasing numbers back into the market.'

Across Europe, prime yields rose just 7 bp in the second quarter, the smallest increase since the final quarter of 2007. All sectors enjoyed a greater degree of stability, but retail more than most, with just a 4 bp increase. Offices meanwhile saw a 7 bp increase, while the industrial sector was hit by a more significant shift of 15 bp. Since the onset of the credit crunch, this takes the all-sector prime yield shift to 146 bp, led by industrial (180 bp), offices (168 bp) and retail (106 bp).

The average yield increase across Europe was held down by falls in some markets, notably the UK (in all sectors) and Norway (offices), but a number of other markets saw yields stabilising, ranging across emerging markets such as Russia and Turkey, to more mature markets such as Sweden and Germany. Those markets which saw the most marked outward shift were largely to the East however, including Bulgaria, the Baltics and the Ukraine but while Central & Eastern Europe saw a more marked increase overall than the West (17 bp vs 6 bp), this was still a significant improvement on the average 100 bp increase seen in each of the previous two quarters.