European offices have recorded eight quarters of continuous rental growth by achieving a 0.7% increase in Q3 2018, according to Cushman & Wakefield’s latest DNA of Real Estate report.
On an annual basis, European offices have posted the strongest rental growth, at 2.5%. European logistic rents, meanwhile, grew by an annualised 1.8%, in line with the 1.9% last quarter and is the strongest rate of growth since 2008.
In contrast, while retail rents have recovered strongly since the financial crisis and are more than 30% above 2008 levels, supported by strong growth across Western Europe, more recently the performance has been much weaker and has reported a fall of 0.4% in Q3 2018 and a fall of 0.5% on an annualised basis.
Nigel Almond, Head of Data Analytics at Cushman & Wakefield, commented: “Across all property types, the core European markets of France, Germany, Nordics, Benelux and the UK have largely recovered since the financial crisis with rents now at or above pre-crisis levels. Semi-core markets – including Ireland, Italy, Portugal, CEE and Spain – were hit harder post crisis, but high street rents have generally now recovered any losses; underscoring demand for prime units in key cities across Europe.”
Peter Atkinson, Partner, Capital Markets at Cushman & Wakefield in Newcastle said: “The North East is proving a key target for both UK and overseas capital. With the region seeing a severe lack of development for almost a decade, supply is highly constrained in both the office and industrial sectors, which is driving both strong rental growth and capital appreciation. Despite structural change in the retail sector, Newcastle is reinventing itself with experienced based retail and leisure offer and is proving resilient as the region’s capital.
“With several deals in legals, prime office rents will be established at £24.50 psf before the year is out, which marks 14% growth in the last 24 months alone and this is trending upwards with the only new development committed not to be delivered until Q4 2019. Similarly, the industrial sector has an even more constrained supply of modern accommodation and has delivered 20% rental growth in the same period. These factors combined with modest pricing comparative to other UK and European markets, makes the region very well placed to continue to attract investment capital despite current economic and political uncertainty.”
Annual growth in European office rents was above 2% for a fifth consecutive quarter, yet it is still 1.4% off its pre-crisis level in Q3 2008.
Rental growth was recorded in 12 out of the 47 monitored markets and the main drive remained in Germany (Munich 4.1%, Hamburg 1.9% and Berlin 1.6%). Elsewhere regional UK markets also showed some upward movement (Bristol 6.2%, Edinburgh 4.5% and Newcastle 2.1%) on the back of solid demand and low availability.
Logistics continues to show strong performance in both leasing and investment markets with the strongest quarterly rental growth, on a par with offices and by far the strongest yield compression, as the prime European logistics yield was 5bps lower over the quarter and 41bps year-on-year to 5.9%.
UK regional markets contributed the most to the 0.7% overall rental growth in Europe, including Leeds (8.7%), Cardiff (8.3%) and Bristol (3.6%). This is driven by strong demand from occupiers absorbing new supply in a tight market. Pockets of growth were also found in Moscow (6.6%), Dublin (4.4%) and Budapest (3.8%).
High Street Retail
Only four of the 41 retail markets monitored posted growth this quarter – Prague (4.5%), Stockholm (3.7%), London (2.3%) and Helsinki (1.4%). This limited growth was offset by the double-digit drop in Istanbul to result in an overall 0.4% fall in Europe. In contrast to its blooming office and logistics sectors, German retail rents in the leading five cities have remained static in the past 18 months.
Meanwhile retail yields moved outward in more markets than those that moved inward for a second quarter in a row, and the first time sinceQ1 2012. UK regional markets saw yield softening by 25bps in Cardiff, Manchester and Newcastle. Istanbul and Zurich also saw high street yields rise leaving the overall European prime weighted average yield up 3bps to 3.25%, the UK is now shifting further away from its all-time low yield of 3.12% recorded in Q2 2016. All other major markets are now at their 10-year low.