Economic growth in 2010 provided the necessary platform for a general improvement but overall, investors remain cautious with demand concentrated on prime buildings in core markets, the latest European Office Property Market report from King Sturge shows.
Whilst regions such as the Nordics and Central Europe recorded much stronger investment activity compared to 2009, they remain relatively small investment destinations at approximately 11.4% and 2.3% of total office investment in Europe in 2010, it says.
Looking forward, the company expects investment activity in the office sector to strengthen towards the end of 2011, following a buoyant 2010. The first signs are good with preliminary figures indicating around €11 billion being transacted in the office sector in the first quarter of 2011.
‘Prime office yields are expected to remain stable in the short term in most Western European markets with rental growth likely to be the main driver of capital growth in the short term,’ said King Sturge European Research Associate, Alexander Colpaert.
‘This is particularly the case for centres where a supply squeeze is imminent such as London, Paris, Moscow, Warsaw as well as Stockholm and Oslo. Some further downward movement in yields is expected in Central and Eastern European centres as the perception of risk in these markets declines,’ he added.
According to Emma Jackson, senior research analyst at King Sturge, modest economic forecasts in 2011 should support continued, but unspectacular growth across the majority of markets and could keep occupiers focused on consolidation and lease renegotiation.
Top performing European office markets include London, Paris, Berlin, Warsaw and Moscow which all recorded double digit rental growth in 2010. However, rents have fallen in other markets such as Dublin, Athens and Prague.
The report shows that Moscow recorded the strongest rental growth over the year at just over 40%, followed by the City of London and Paris at 24% and 15% respectively. In Moscow, prime rents have seen a strong recovery from their trough in late 2009 on the back of rising demand for Central Business District (CBD) office space coupled with an increasing shortage of grade-A space and limited pipeline development. Take up in London and Paris in 2010 and the first months of 2011 has also been robust, particularly for large floor plates.
The analysts point out that a number of factors should ensure a reasonable outlook for office occupier markets in 2011 including an intensification of the supply/demand imbalance in some core markets as the supply pipeline remains limited and vacancy rates are set to reduce in most markets over the next year or more.
‘Speculative development is unlikely to return in the short term, with rents low and banks still reluctant to lend. This will result in prime rental growth in the most affected markets. Economic recovery is expected to continue, though at a slow pace in most of Europe,’ the report says.
Western European core markets, such as Germany, the UK and France are forecast to achieve modest growth in 2011, with stronger economic growth forecast in the emerging economies, such as Russia, Poland and Turkey. But the outlook remains weak in Spain, Portugal, Ireland and Greece.
The outlook for 2011 is generally better than it was last year and this will support office floor space demand over the medium to long term, although there remain patches of weakness, including Portugal, Italy, Greece, Spain and parts of the CEE where the revival in output is not matched by jobs, the report also says.
Potential hotspots in the short to medium term include German cities, Bucharest, Budapest, and Central London where the highest level of jobs growth is forecast.