Europe’s occupier markets continue to benefit from positive economic indicators according to new research from Cushman & Wakefield.
In its latest Q3 2017 The DNA of Real Estate, rental growth in the European office sector accelerated to an annualised 2.7% from 2.1% in the previous quarter following a 0.5% quarterly increase in rents. Logistics rental growth turned positive (+0.9%) in the third quarter following four quarters of negative growth, but this was not enough to arrest the annual decline in rents (-0.4%). Rental growth was negative (-0.4% q-o-q) for high street shops with 43 of the 45 markets reporting no growth over the quarter.
Across Europe, there are similar trends in many segments of the market, with rents broadly accelerating, with the Nordics and Germany also benefitting strong growth, especially across the office sector in the third quarter.
Nigel Almond, Head of Data Analytics, EMEA Research at Cushman & Wakefield, said: “Positive demand and limited supply of prime space is placing upward pressure on rents in a number of office markets, especially across Northern Europe. Over the third quarter, Brussels (+7%) and Luxembourg (+6.4%) recorded the strongest quarterly growth leading to double digit growth on an annualised basis.
“Of the major markets, the German cities of Berlin (+3.8%) and Frankfurt (+2.6%) continue to benefit from positive rental growth with annualised growth of 10% and 8.1% respectively. Prime rents in Stockholm’s CBD rose a further 3.8% over the quarter reflecting strong demand and limited supply as more stock converts to residential. This pushed annualised growth in the city to 15.4%, the strongest annual rate across key markets in Europe.”
Markets in the periphery which have lagged the recovery this cycle continue to post positive growth in rents. Prime office rents grew 1.6% over the quarter in Madrid with a 1.1% increase in Barcelona, pushing annualised growth in these cities to 10.2% and 8.3% respectively over the third quarter.
Liz Troni, Head of EMEA Research and Insight at Cushman & Wakefield said: “At the other end of the spectrum, rents in London’s West End fell a further 2.2% to an annualised fall of 6.3% as rental levels softened in the wake of Brexit. Istanbul (-2.4%) was the only other market to register falling rents over the quarter. Looking to year end, two of the three office markets on negative outlook are the key London submarkets – West End and City – as softer demand and a rising supply pipeline – especially in the City – is expected to place downward pressure on rents. Warsaw is also expected to see some downward pressure where availability remains high and political uncertainty is impacting business confidence.”
Across high street retail, rents were flat over the quarter in the majority of European cities causing annual rental growth to slow across Europe to 0.1% from 3.8% last quarter. Only two markets saw movement with a 5.9% fall in Warsaw and 4.5% fall in Istanbul. Logistics benefitted from some stronger growth rising 0.9% over the quarter. In part this has been supported by stronger rental growth in the UK with prime rents in London and Manchester up 7% over the quarter. Continued growth in on-line sales supports demand for warehouse space, including smaller urban logistics facilities in many locations across the UK and driving rents higher.
Investor demand remains equally strong, especially for prime assets maintaining downward pressure on yields. For major cities across Europe, the prime office yield fell 2bps over the quarter to 4.16%, its lowest on record. Prime logistics yields were 41bps low at 6.29%, also setting a new low since records started in 2000. Prime high street yields were just 1bp lower at 4.28%, though still above their previous low of 3.9% in Q1 2007.
