Prime rents soften again as long-term Eurozone economic challenges remain un-resolved according to Jones Lang LaSalle
Prime office rents across Europe reduced marginally for the second successive quarter according to the Q2 2012 Jones Lang LaSalle European Office Clock Report, with the overall index down -0.2%. This follows a fall in rental values in Q1 2012 of -0.1%, which was the first reduction in rents on a quarterly basis since Q4 2009.
The fall was driven by changes in Western European office rents as Central and Eastern European office rents remained unchanged: The prime rental increases in Dusseldorf (+4.2%) and Berlin (+2.3%) were offset by decreases in Dublin (-6.5%), Madrid (-2.0%), Barcelona (-1.4%) and Paris (-1.2%).
Polar opposites
The Jones Lang LaSalle Office Clock, which visually represents how prime office market rental values sit within their individual rental cycle demonstrates increased polarisation of European markets, with large groups of cities being clustered at 12 o’clock and 6 o’clock.
Bill Page, Head of UK & EMEA Offices Research, Jones Lang LaSalle said:
“Markets that experienced strong recovery in early 2010 like London, Paris and Moscow are now moving towards 12 o’clock which means rental growth is slowing or has stopped. Markets that have experienced difficult times over recent years like Athens, Lisbon, Barcelona and Madrid are still in the doldrums and are set to remain before 6 o’clock for some time yet.”
Leasing activity picks up
On a quarterly basis, leasing activity increased by 5%, but the total volume of 2.4 million sq m remained 12% below the five year average due to underlying economic uncertainty. This was despite strong levels of activity across the CEE markets of Moscow, Budapest, Prague and Warsaw which saw levels rise by 15%.
Chris Staveley, Head of EMEA Office and Industrial Capital Markets, Jones Lang LaSalle added:
“Occupier sentiment is hovering around the cautious to negative outlook. People continue to think twice about taking new or more space, which is why demand remains low. This means any prime rental growth is being driven mainly by supply on the market and vacancy rates remain static.”
Sluggish development activity
Completions increased by 44% in Q2 2012 compared to Q1 2012, but this is still 35% below the 10 year average due to low confidence levels and difficulty sourcing development funding.
Office investment transactions hit €15bn in Q2 2012
Office transactions accounted for almost €15bn of Q2 2012 investment volumes (€27 bn), up 11% on Q1 2012. Interest and equity remains focused on core European markets of the UK, France, Germany and the Nordics. The largest increase was recorded in France, where volumes doubled due to strong interest in Paris. Volumes in the UK increased by 43%, driven by strong performance in London, which included the £500m+ Hammerson office portfolio deal. There are still limited transactions in Southern Europe due to a reluctant investor outlook.
The weighted European office yield is 5.25%. The strong interest in prime product meant yield compression was notable in German markets (-25bps in Dusseldorf and Munich, -10bps in Hamburg) as well as Stockholm (-25bps). This contrasts with yields moving out in less liquid markets such as Spanish markets (+25bps), Edinburgh (+25bps) and Lyon (+10bps). Despite a slight overall rental decline, yield performance means capital values have increased modestly by 0.4%.
Chris Staveley, Head of EMEA Office and Industrial Capital Markets, Jones Lang LaSalle added:
“There is potential for increased investor activity in Europe. Low government bond yields and a lack of alternative investments have increased the attractiveness of real estate as an asset class. Capital from different parts of the world also continues to flow into safe havens with high levels of security and transparency.”