Rental growth continues in select European markets: Knight Frank

The majority of Europe's commercial property markets are continuing to either stabilise or recover at a modest rate, according to Knight Frank's Summer 2011 European Market Indicators research report. In the past three months, rental growth has been observed in a number of key European markets. However, little movement in prime yields has been seen over the last quarter across most of Europe.

Knight Frank's weighted average European prime office rent, calculated from the cities covered by the report, rose by 2.6% in the three months to June, taking year-on-year growth to 5.6%. The three-month increase was driven by rental rises in Moscow (+8.0% in $), London (West End) (+5.9% in £), Stockholm (+4.7% in SEK), Paris (+4.0% in EUR) and Frankfurt (+2.9% in EUR). There was a pause in rental growth in the London (City) market, as prime rents remained unchanged following a strong recent uplift.

In local currency terms, Lisbon (-2.6% in EUR ) and Madrid (-1.8% in EUR) were the only office markets to see prime rents fall in the last three months. The Iberian markets are among the few in Europe where prime rents remain under downward pressure. For the majority of European markets, however, the outlook for the rest of the year is one of either continued stability or mild rental growth for prime property.

In the investment market, there were very few changes to prime yields during the quarter, with Knight Frank's weighted average European prime office yield dropping by just two basis points, on the back of minor yield compression in Milan and Munich. Year-on-year, the weighted average prime yield is down by 31 basis points. The London and Paris markets, which led the re-pricing of European property in 2009-10, have seen prime yields remain flat so far in 2011. There appears to be scope for some limited yield compression over the rest of the year, particularly in Central and Eastern European markets such as Warsaw, which currently appear well-priced in comparison with much of Western Europe.

Matthew Colbourne, senior international research analyst, said: 'Our latest report confirms a picture of continued stability in most European commercial property markets. Rental growth, albeit at a relatively modest level, has been maintained in those cities which are either benefiting from an improved economic environment or experiencing a squeeze in supply. Following a significant hardening of yields in many major cities last year, the lack of recent yield movement suggests that the market is pausing for breath, as investors remain cautious about the general economic outlook and find it difficult to identify value at the prime end of the market.'