European office market shows most promise in 4Q 2010

LONDON: The European office sector stood out in an environment of broadly flat rents in 4Q 2010, recording the largest yield reduction and highest year-on-year (y-o-y) rate of rental growth of the three main sectors, according to CB Richard Ellis (CBRE) latest Europe, the Middle East and Africa (EMEA) Rents and Yields Indices.

The office rent index rose 2.7% y-o-y while the retail and office markets saw increases of over 0.5%. Even so, fewer than 30% of locations saw any growth, said CBRE.

Meanwhile, prime yields continued to fall across the region but the pace has slowed, marking a period of transition for investors of European commercial property. Falls of seven bass points or less were recorded across the office, retail and industrial sectors.

The pace of adjustment to European commercial property prime yields slowed in 4Q 2010, contrary to larger shifts in prime value measures seen in previous years, said CBRE.

"We have reached a point where investors are assessing the combined impact on future returns of the value gains already made, and the effect of government austerity measures on the shape of any rental recovery. While there is no shortage of capital targeting the real estate market, it remains predominantly risk-averse and focussed on core, prime assets in the most liquid markets," said Richard Holberton, director of EMEA research.

Holberton noted that in recent years, the final quarter has often seen the largest shifts in prime value measures but not in 2010.

"In fact, the scale of yield change in the market over the past three quarters had been far lower than that seen towards the end of 2009 and the early part of last year. We are still seeing some adjustments in the level of prime yields across European markets, but the scale of the changes is now very slight," added Holberton.

The CBRE office yield index for the EU-15 fell by seven basis point in 4Q 2010, down 35 basis points from 4Q 2009. Of the 56 locations in the surbey, 23 saw downward yield movement while 31 remained unchanged and two saw an increase.

Bucharest saw the largest yield reductions, down 50 basis points to 9%. Budapest, Oslo, Bratislava, Barcelona, Madrid and Gothenburg all saw yield reductions of 25 basis points.

The largest increases were in Thessaloniki and Dubai, where yields rose by 25 basis points to 8.25% and 8.75% respectively.

In the retail market, its yield index for the EU-15 fell by five basis points in the quarter under review and 26 basis points from the same period in 4Q 2009. Of the 50 locations, 18 saw downward yield movements, while 31 remained unchanged and just one saw an increase.

Oslo and Bucharest registered the largest yield reductions of 50 basis points, falling to 5.5% and 10.5% respectively. There were also 25 basis point falls in Paris, Brussels, Budapest and the City of London.

On the industrial front, the CBRE industrial yield index for the EU-15 fell by just one basis point in 4Q 2010, some 21 basis points on the year. Seven of the 47 locations in the survey saw downward yield movements, 40 remained unchanged and there were no upward movements, said CBRE.

The largest yield reductions of 25 basis points were in Brussels (down to 7%), Prague (8.5%), Bucharest (10.25%), Edinburgh (7%) and Glasgow (7.25%).

Meanwhile, the CBRE office rent index for the EU-15 rose by 0.7% in the quarter under review, registering a y-o-y increase of 2.7%. Of the 56 locations in the survey, 15 saw increases in the level of prime rent, nine fell and 32 remained unchanged.

Kiev recorded the largest increases with rents rising by 14% over the quarter to €287 (RM1,164) psm per annum, while Durban rents increased by 9% to €163 psm per annum. The largest falls were in Dublin (down 8.2% to €345 psm per annum) and Dubai (down 5.7% to €716 psm per annum).

In the retail sector, the CBRE retail rent index for the EU-15 increased by 1% in 4Q 2010 but fell by 0.2% over the year. Only 9 of the 50 locations in the survey registered an increase, 38 remained unchanged and three declined.

Edinburgh recorded the largest falls of 5% in 4Q 2010 to €1,641 psm per annum and Athens is down 3.7% to €1,466 psm per annum. The largest increases were in Birmingham, where rents increased by 14% to €1,888 psm per annum and Stockholm, up by 4% to €1,336 psm per annum.

European industrial rents saw minimal change in 4Q 2010, the CBRE industrial rent index falling by 0.1%, taking the y-o-y rate of growth to -0.1%. Of the 47 locations in the survey, 39 saw stable prime rents, four declined and four showed an increase.

The largest falls were in Lisbon, down 7.9% to €42 psm per annum, and Dublin, down 7.3% to €76 psm per annum. The largest increases occurred in Istanbul, where rents increased by 9% in the quarter to €53 and in Helsinki, where rents rose by 7.8% to €123 psm.