Catella Research has again analysed the European office real estate market at 37 locations in 18 countries, with Italy, Portugal and Ireland being added this time.
The European real estate investment market is currently struggling with a weakening economic mood at the beginning of the third quarter of 2019, political uncertainty, high prices and a lack of properties, especially in the core segment. Nevertheless, the analysis of our most recent investor survey showed that value-added investment strategies are structurally replacing traditional core investment styles and that many investors will only invest around 4% less in office properties. Despite this subdued status quo, investments in office real estate are still the most sought-after asset class in Europe and attract the most capital compared to other asset classes.
The transaction volume in the countries analysed by Catella fell in the first half of 2019 by around 4 % to EUR 43.1 billion. In detail, however, it can also be seen that some markets with an attractive risk-return ratio and good growth potential have strong investment activity compared with "larger markets" such as Germany, France and the UK.
Here are further important results of our analysis:
- In Spain, Norway and Poland, the volume of office transactions almost doubled compared with the first half of 2018. The Baltic States, Portugal and Luxembourg are the countries with the lowest transaction volumes and even the strongest declines.
- Germany is the largest office investment market this year (EUR 11.65 billion) and is attracting almost one quarter of the total office volume in Europe. Great Britain and France follow with around EUR 9.0 billion.
- The average prime office rent of all 37 markets rose to EUR 34.40 per m² compared to EUR 32.65 per m² in the first half of 2018.
- London Westend remains the most expensive office market at EUR 102.50 per m², with prime rents falling by around 2 % compared with the first half of 2018. The lowest prime rents are in Vilnius, Riga, Rotterdam and Lisbon.
- The strong compression in yields in recent years is cooling off. The average prime yield of all markets is 4.23 %, which corresponds to a decline of only -21 basis points in 12 months. The prime yield in Berlin also fell by only 10 basis points to currently 2.80 %.
- The lowest yields below the 3 % mark can only be found in Berlin, Frankfurt and Munich, followed by the other German A-markets as well as Paris, Amsterdam and Stockholm with yields of up to 3.25 %. The Finnish cities of Lahti (7.75 %) and Oulu (7.50 %) have the most attractive opportunity/risk profile.
- The majority of all markets will show a stable prime yield and rental development by the end of the year. We assume that yields in 8 and prime rents in 12 locations will fall or rise. Nevertheless, the rate of change for both will be rather moderate.
Despite all external macroeconomic influences, the European office markets remain stable and have shown robust market development in recent years. Due to the very good diversification potential and a heterogeneous yield and rental structure, investors continue to see good prospects in this asset class. Deal by deal transactions are increasingly replacing a classic core or value-add focus.