While weak economic indicators from around much of Europe continue to affect market activity, CBRE’s quarterly survey of rents and yields for Q4 2012 showed a degree of resilience at the prime end of the market.
During Q4 2012, rents rose in the retail sector and were effectively flat in the office and industrial sectors, while yields for retail and office property saw some downward movement. For the survey as a whole, more locations recorded rental increases than declines, and more saw a drop in yields than an increase.
Improvements were most evident in locations with stronger economic fundamentals, or those that are proving most attractive to real estate investors. By contrast, many of the weaker signals were concentrated in southern Europe, smaller CEE markets and regional UK.
At aggregate level, yield movements in Q4 2012 were moderate – as has been the case for some time now – but the direction of movement was notable. The office yield for the EU-15 dropped by four basis points following four consecutive quarters of increase, while the retail yield fell by five basis points after a small rise in Q3. Yields for industrial property were effectively unchanged. Yield improvements were highly concentrated in markets that attracted increased investor interest in Q4, notably Germany, but also France and Ireland. Conversely, Spain, Portugal and several regional UK markets were the focus of yield increases over the quarter.
Economic uncertainty is restricting user demand and, as a result, office and industrial rents were virtually unchanged during the quarter. Where rents did rise in these sectors, it was mainly in Germany and the Nordics. The prime retail market is the main area of rental momentum and a 2.1% rise in Q4 took the year-on-year growth rate to 5.0%, its highest level since 2008. Increases in both London and Paris contributed strongly to this rise.
Richard Holberton, Director of EMEA Research at CBRE, said: “Occupier market activity and rental movements remain constrained by the expectation that 2013 will be a year of faltering economic recovery. The prime end of the retail market is showing stronger rental momentum as retailers remain very discerning over location selection for store network expansion. Investor interest is still predominantly focused on the prime end of the market and the evidence of the final quarter of the year is that this is driving pricing changes in some of the larger and more popular investment markets such as Germany and France.”
Key highlights from the report include:
YIELDS
Office yields across Europe fell during Q4 2012. The CBRE Prime Office Yield Index for the EU-15 dropped by four basis points in the quarter, but remains 11 basis points above its level of a year ago. Eleven of the 53 markets surveyed saw downward yield movements this quarter, 34 remained unchanged, and eight saw an increase. The largest decreases, of 25 basis points, occurred in a range of locations including Paris, Dublin, Milan and Moscow. Most of the increases were of 25 basis points, but the largest was a 50 basis points rise in Oporto (to 10.0%).
Retail yields also fell in Q4 2012, with the CBRE EU-15 Prime Retail Yield Index down by five basis points, leaving it nine basis points lower than a year ago. Yields rose in two markets, Glasgow and Oporto, both up by 25 basis points. Eleven markets saw yields move lower and 36 remained unchanged. The largest yield reductions (-50 basis points) were recorded in Moscow and Kyiv.
Industrial yields were broadly unchanged over Q4 2012, with the CBRE Prime Industrial Yield Index for the EU-15 rising by one basis point to 7.75%, which is nine basis points higher than a year ago. Only one of the 43 markets surveyed (Istanbul) saw downward yield movements this quarter, 35 remained unchanged, and seven saw an increase. Most of the increases were of 25 basis points, with the largest rise (50 basis points) occurring in Glasgow.
RENTS
Prime office rents across Europe were effectively unchanged during Q4 2012 and the same is true in year-on-year terms. Over the quarter, five of the 53 markets in the survey saw increase in prime rents, 40 remained unchanged, and eight fell. The largest increase occurred in Dusseldorf, up by 4.0% over the quarter, while the largest fall was in Kyiv, down by 8.6% in the quarter.
Prime rents in the retail sector were up by 2.1% in Q4 2012, leaving the CBRE Prime Retail Rent index for the EU-15 5.0% higher than its position a year ago. Six of the 49 markets surveyed registered an increase, 41 remained unchanged, and two fell. The largest increase was in Istanbul up by 33% over the quarter, (but still down 7.7% over the 12 months when compared to 2011), however the most significant were rises of around 10% in both London and Paris. The largest drop was in Oporto, down by 16.7% in the quarter.
European industrial rents were flat in Q4 2012, as a result of which the CBRE Industrial Rent Index for the EU-15 was 1.5% lower than it was a year ago. Four of the 43 markets in the survey showed an increase, 38 remained stable and only one fell. The largest riser in Europe was Munich, up 4.8%, while the only faller was Istanbul, down 3.6%.