Offices and logistics the main engines of growth in European real estate in 2018

Richard Brooke, Associate in Cushman & Wakefield’s Capital Markets team in Leeds

Europe’s commercial real estate markets maintained their positive trend across most markets and property types during the fourth quarter of 2018, according to Cushman & Wakefield’s latest DNA of Real Estate report.

Nigel Almond, Head of Data Analytics at Cushman & Wakefield, commented: “The office and logistics sectors were the main engines of growth during the fourth quarter – as they were across 2018 as a whole. At the European level, office rental growth accelerated by an annualised 2.6%; its strongest annual rate in over five years. Rental growth in the logistics sector also experienced its strongest annual rate of growth in over a decade, by 2.3%.

“Meanwhile, the retail sector across Europe was more subdued, with rents falling 0.1% over the quarter. Nonetheless, it was an improvement on the 0.4% fall in Q3 and was just about enough to push annual rental growth into positive territory over 2018.”

Yields also continued to compress across Europe, with the strongest movement remaining in logistics; down 20bps in Q4, driven by the strong investor demand and rental growth. Office yields compressed a further 6bps, with retail down just 2bps.

Richard Brooke, Associate in Cushman & Wakefield’s Capital Markets team in Leeds said: “2018 has been a huge year for the Yorkshire and Humberside region with total transaction volumes approximately 40% up on 2017, with much of that increased activity being centred in Leeds.

“In the industrial sector, 2018 has provided not one but two of the largest funding deals the city has ever seen totalling over 720,000 sq ft, both of which are sited at Logic Leeds. Aberdeen Standard Investments (ASI), advised by Cushman & Wakefield, are forward funding both industrial/distribution units. The popularity of this sector remains underpinned by the strong occupational fundamentals; driven by the continued ascent of online retailing. Prime rents for Leeds stand at £6.25 per sq ft and we are expecting to see further rental growth, in line with the majority of UK regional markets. Prime yield are stable at 5.0% for the region although where tenants are committing to longer leases we have seen transactions showing yields of below 5.0%.

“It has also been a standout year for the Leeds office market in terms of investment transaction activity. 2018 saw nine transactions involving office assets of £20m+ which is well above the 5-year average. Achieved yields range between 4.4% and 8.3% with the strongest yield being achieved on Evans’ sale of 1 Park Row to CCLA. Prime yields have trended inwards over the last 12 months to currently stand at 5.0% and whilst the yield achieved at 1 Park Row is well below this level, this particular asset is considered reversionary as prime rents in the city centre have now reached £30 per sq ft.

“The retail market has been a little more subdued over 2018 with limited transaction activity. Prime yields currently stand at 4.5% but as we move into 2019 there are a number of key sales being launched to market which will demonstrate where retail yields are settling. With continued strong performance in the industrial and office sectors, it will be interesting to see if the yield gap to retail is reduced further and possibly even reversed over 2019.”