di Thomas Beyerle
Catella Research has again analysed the European office real estate market in a total of 37 locations in 18 countries.
Despite the ongoing corona pandemic, the transaction volume in office real estate in the countries analysed by Catella has remained relatively stable at a total of approximately €39.7 billion. Compared to the previous year, this represents a decline of only approx. 9%. The transaction volume in Luxembourg and Belgium rose disproportionately strongly with an increase of 119% and 115% respectively. In contrast, countries such as Portugal (-74%), Great Britain (-46%) and Ireland (-41%) recorded the sharpest declines.
Here are other important results of our analysis:
• The transaction volume is declining, especially in the countries with long “lockdown phases”, which were heavily affected by COVID-19. These include above all countries such as France, Spain and the United Kingdom.
• Italy and Germany were also hit particularly hard, but the transaction volume increased by 19% and 15% respectively compared to the previous year. The main reasons for this are the high sales volume in the first quarter and numerous large transactions with long lead times or due diligence phases.
• The average prime office rent for all 37 markets rose to currently €34.90 per sqm compared to €33.40 per sqm in the first half of 2019, which corresponds to an increase of almost 5%.
• London West End remains the most expensive office market, at €111.00 per sqm, and was thus able to increase by 8% year-on-year due to major BREXIT uncertainties. The lowest top rents are still found in the Baltic cities of Vilnius, Riga and Tallinn.
• The strong yield compression of recent years has now clearly lost momentum. The average net prime yield for all markets is currently 4.12%, which represents a decline of only -12 basis points. In the comparable prior-year period, the decline was still 21 basis points.
• The lowest yields and thus the most expensive investment markets in Europe, with yields below the 3% mark, are the German Top 5 markets and Paris. By contrast, some Finnish markets and the Baltic States offer very attractive yield opportunities.
• Due to the current COVID-19 pandemic, with still high uncertainty about the further course of the infection, a 6-month trend reversal can be observed in many markets. While in our analysis of the previous year none of the 37 office markets showed a decline in prime office rents (less than 3%), we see slightly declining forecast figures for a total of 17 office markets by the end of 2020. However, the majority of the markets will thus stagnate at the same level.
• A similar reversal can also be observed in the majority of cities with regard to net prime yields. In 20 of the total of 37 markets, an increase is forecast by the end of the year (> 5.0 basis points), while stable yields are expected to continue in the remaining markets.
The development of office rents and yields shows that the European office markets continue to offer good prospects for investors despite the major changes caused by the Corona pandemic, due to the very good diversification potential and a heterogeneous yield and rental structure. Office properties with the rating “Core” or “Trophy” will become even more in focus for investors with long-term investment perspectives due to COVID-19. The quality of the tenant structure in terms of creditworthiness and sector is also becoming increasingly important. Nevertheless, secondary locations should be considered in a strategic portfolio investment due to lower volatility and stronger regional and local market relevance.