Yields convergence points to deeper downturn, says Savills

Prime Central Business Disitrct office yields have already exceeded levels at the bottom of the previous investment cycle in 2003, and currently stand at 50 basis points higher in London (West End), Paris and Madrid, with Dublin at 150 basis points higher, according to new research issued by Savills on Monday. According to the broker, this indicates a deeper downturn than the previous cycle and could signify the bottom of the market is close.

The research states that the higher comparative yields to 2003 are a reflection of the economic fundamentals being more unstable and the outlook uncertain. The fact that there is evidence of renewed investor interest in these markets could be a signal that the majority of yield decompression has been covered. Despite this, Savills suggests this is not the case across all European markets as Frankfurt, Amsterdam, Brussels and Stockholm are still recording yields that are lower compared to 2003 levels with the prime office CBD yield gap between current and previous slumps ranging from -2 to -125.

Eri Mitsostergiou of Savills European research said: 'Although market fundamentals vary from one market to another, the strong convergence of economic and business cycles justifies the convergence and correlation of yields. Unless economic conditions or bank’s appetite for lending changes, the markets that are lagging behind should see significant price corrections this year.'

The yield gap between the lowest and highest achievable prime yield across all markets and sectors ranged between 300 and 500 basis points at its highest level in 2007, by year end 2008 the level did not exceed 300 basis points.