Q1 2024 analysis of the European office market suggest yields began to stabilise during the quarter but expectations of an early eurozone interest rate cut faded, thus dampening spirits.
Savills said European prime office yields moved out by an average of +5 bps to 4.90% during Q1 2024, compared to +17 bps the previous quarter, as yields begin to stabilise.
Copenhagen (+25 bps), Manchester (+25 bps), Barcelona (+15 bps), Milan (+15 bps), Madrid (+15 bps), Berlin (+10 bps), Cologne (+10 bps) and Hamburg (+10 bps) all moved out during Q1 2024. Since Q1 2022, prime yields have moved out by an average of 155 bps, indicating an average yield impact on capital values of -31%.
The research said European offices remained in ‘fair-value’ territory.
However, the minor outward prime office yield movement has been offset by higher government bond yields in Q1 2024 and, therefore, a further capital value adjustment of -8% would be required for average prime European offices to be in line with their fundamental values.
Buyer/vendor gap
Buyers are pointing to the higher levels of US inflation and caution from the ECB over rate cuts as an opportunity to buy at a discount. But vendors counter that interest rate cuts are imminent.
This divergence of opinion means the bid-ask spread widened in Q1.
Savills added: ‘As banks are not calling on their debt, some landlords are sat on losses and are waiting for the market to recover. We have seen some examples of receivership sales in the UK and Ireland, although distress is limited.’
‘However, we can expect to see more non-domestic sales of core-plus office stock, from investors who are unable, or unwilling, to commit to capex programmes. Likewise, German and French open-ended real estate funds continued to record net outflows during Q4 2023, which is likely to add pressure on institutional sales.’
In terms of the quality of stock, core buyers are seeking to buy the best 10% of stock, although sellers only want to sell the bottom 90% of the market, so where do values sit for the ‘best’ and the ‘rest’?
Occupier fundmentals
Meanwhile, offices continue to perform well.
Savills data for Q1 2024 indicates that average European vacancy rates remained stable at 8.4%, prime rents rose by 3.6% YoY, and take-up rose by 2% YoY, buoyed by a stronger Southern European market.
