Slowing yield decompression may hint at improving sentiment, says JLL

The weighted average European prime office yield moved out 20 bps from 5.8% at the end of 2008 to 6.0%, a much smaller increase than the 50 basis point movement between Q3 and Q4 2008, according to JLL's Q1 2009 European Office Yields Report. The yield range across Europe continued to widen both between core and emerging markets and within core markets.

Jones Lang LaSalle believes that some markets, typically core markets which have already seen large price corrections, are now within touching distance of their prime yield ceilings in the current cycle, and expects many of those markets to reach that point by the end of the year, including London and Paris.Yields could even move in marginally in some cases.

Looking ahead, Tony Horrell, head of European Capital Markets at JLL, said: 'This view that some markets are close to their prime yield ceilings is largely based on improving buyer sentiment for the best quality product, where investors believe yields have reached a level where they feel confident to transact. It also represents investors seeking to secure the very best assets before the bottom of the market on the assumption that the best assets are typically traded before markets begin to pick up again.'

In core western Europe JLL is now starting to see early signs of prime office yields stabilising in some markets as sentiment has begun to improve. German and Italian markets have continued to show the smallest outward yield movements since the start of the market decline moving by around 50-60bps on the year; all German markets remained stable over the quarter with Milan moving out by just 15 bps and Rome also remaining stable. Bucharest, Dublin, Moscow and St Petersburg saw the largest outward movement on the quarter, all moving by 50 bps.

Improving investor sentiment is most obvious in Central London markets where JLL has begun to see increased transaction activity and a higher level of bidding. Prime yields in London City remained stable in the quarter after having moved 125 bps year-on-year (Q1 2008 - Q1 2009). London's West End moved out 25 bps on the quarter and 100 bps between Q1 2008 - Q1 2009.