France, Germany and the United Kingdom remain the dominant forces
In London, despite some economic uncertainty, occupier sentiment remains staggeringly high, and in fact continues to increase. Strong demand and competition for the best stock is keeping prime yields stable.. Rents peaked in 2015–16 and have since been on a downward trend – however, positive rental growth is expected to resume in the City of London by 2020. My opinion is to be cautious of London’s West End – a shortage of stock is leading many investors to focus on the City instead – but to keep an eye open for Crossrail, the new London Underground line linking Central London with commuter towns in Berkshire and Essex.
London’s influence has now spread far beyond the South-East of England, and Birmingham is now on a firmly upward trajectory. The development pipeline looks healthy with just over 130,000m² expected in the next few years. A big development is HS2 (High Speed 2), the high-speed railway connecting London and Birmingham, which is driving long-term interest in England’s second city.
Across the Channel, France’s capital Paris continues to attract strong interest. Strong rental increase in 2018 has helped cement consistently high prime yield returns of 3% – and while the vacancy rate is set to increase slightly in 2019, it remains comparatively low at 6.1%. Central Paris remains by far the favourite market for investors, attracting 70% of all investment in France – of which three-quarters is in office space – but the situation in La Défense is still positive. With a recent decrease in vacancy rates, prime rents are expected to increase through 2019, while prime yields are expected to stabilise at 3.9%. Big things are on the horizon for the capital – the 2024 Paris Olympics and Grand Paris – the largest transport infrastructure in Europe right now – are among the many drivers that will continue to support the Parisian economy
Further south, French investors may also like to look at Lyon. This is the first market in France, outside of Paris, in terms of take-up and investment volume. Strong economic growth and job creation are increasing the demand for office space, prime rents recently reached a record high, and prime yields are expected to remain stable until 2020. The total return will be driven by the capital growth for 2018 and should be higher than the European average.
And when it comes to Germany, there is plenty to pique investors’ interests. In Berlin, the market has reacted to the shortage of space by building up the project pipeline. Around 662,000 sq m of space is under construction, and vacancy rates are expected to hit a trough at just 1.7% in 2019. Despite the shortage, rents are on an upward trajectory – in fact, they are expected to grow 6% per annum until 2022. 2017 was an amazing year for Berlin, with huge rental returns – and while 2019 is not expected to achieve such lofty results, investors can still ride the wave of consistency that was established.
It’s not just Berlin that has plenty in the pipeline: following a quiet period for construction, demand is growing in Frankfurt, and activity increased by 87% in 2018 to 592,000 sq m. Vacancy rates are also on the way down, and are expected to trough at 7.5% in 2020, while average rents are set to increase by 7%. 2019 could also be a great year for prime rents in Frankfurt, and I believe they could reach as high as 7.3% growth, while yield compression is expected to remain at 5bps until 2022.
And it’s a similar story in Hamburg. Here, a shortage of supply and consistently high demand are pushing rents of 5% per annum, while vacancy rates are at their lowest since 2001 at just 4.8% and expected to decline again to 4% in 2020. Construction is firmly underway – 2018 saw a 46% increase to 354,000 sq m – but until it’s finished, expect healthy returns of 6.2% in Hamburg.
And it should come as no surprise that Munich is also undergoing a period of great development. In 2018, it saw development increase by 85%, exceeding one million sq m of development space, and increasing space on the market by 63% to 450,000 sq m. Once more, high demand and low supply are pushing rents up, and a steady growth is anticipated until 2022, with an increase of 4.3% per annum until 2022. The vacancy rate is, of course, sinking too, and this year could see a trough of 2.7%. With yields stabilising and still very low bonds, the situation in Munich is strong, and investors can look forward to a 7.3% return per annum.
Look out for the rising stars of Europe: Netherlands, Spain and Italy
With two key markets – Milan and Rome – on their way up, Italy is set to become a potential market, despite some uncertainty. Milan’s market is being driven by an increase in national investment and strong take-up in 2018. All the positive signals are there, with vacancy rates on the way down and rents stable but bullish. Rome, similarly, has been boosted by a huge cash injection of €9 billion in 2018, while still riding high from a historic 2017.
Spain, too, is one to watch. Madrid and Barcelona show positive upwards trends. In the capital, Madrid, vacancy rates are on their way down while prime rents are increasing at a slow but steady rate. Prime rents, meanwhile, rallied to a strong finish in 2018. Meanwhile, in Barcelona, a strong take-up in 2018 saw H1 become the second-best historic semester behind 2007. As in Madrid, vacancies are down while prime rents are up..
And in the Netherlands, where the economy is focused on the capital city of Amsterdam, the trend continues: significant decreases in vacancies and higher-than-anticipated growth in rents are only the start of a strong trend in Holland. Look for a 4.5% increase in prime rent, stable prime yields at 3.7% and continued high investment rates.
In general, we have seen the real prime yields begin to stabilise across Europe. In the office market, yields in some areas are low, but there’s still a good deal of interest across the whole of Europe, plus strong rental growth and very low vacancy rates.
With a 17% increase in investment, Sweden is one to watch
With the economy in a fantastically strong state – GDP growth in 2018 was 2.7% – now is the perfect time to look to Stockholm, Sweden for rising yields, low vacancy rates and increasing prime rents.
A strong labour market has driven both home and office building as more people head to the Swedish capital to take part in its blossoming technology industry. While office supply is low at the moment, rental levels are rising slowly but consistently – but with total returns expected to be driven primarily by income growth, it’s a good time to take advantage of low interest rates, an optimistic spread on yields and an expected increase in occupier demand.
An important time to invest in Central and Eastern European capitals
The past two years have been very good for Prague, Czech Republic, with over €3 billion in transactions recorded, and the majority of these transactions being for office spaces. Prime yield has accordingly compressed by about 100bps. However, with supply now lower, we are likely to see a reduction in transactions over the next two years.
Across the border in the Polish capital, Warsaw, a recent spate of construction has spurred demand for new and prime buildings, while occupiers are choosing to renegotiate and stay in their current buildings. If these trends continue, prime and secondary rents are likely to remain stable with an average growth of around 1% per annum. The near-term prospect for demand should remain stable and net absorption could easily reach 500,000 sq m by 2020, meaning vacancy rates will stay stable.
Another city on the verge of an acute boom is Bucharest, Romania. Office take-up surged in 2016–17, while in 2018 there was both an upturn in prime rent and a fall in vacancy rates. Prime yields are currently stable and have recently been on a downward trend, but with 2018 investment almost five times higher than 2017, there is plenty to be optimistic about.
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