Madrid set to outperform other European office property markets

There has been good news for the residential market in Spain with sales steadily increasing and now the country’s commercial property market, particularly in Madrid, is striding ahead.

Over the next couple of years, Madrid is forecast to be one of the best performing European office markets, after staging a strong recovery, according to the latest analysis from Knight Frank.

This change reflects the much improved economic backdrop, providing occupiers and investors with renewed confidence and optimism. Historically, the Madrid office market has correlated closely with corporate performance and employment levels.

Prime rents reached their floor in 2013 and increased by 14% in the first half of 2014, to currently stand at €28 per square meter per month. Office investment has risen sharply, with volumes amounting to €700 million in the first half of 2014, compared with €400 million for the whole of 2013. 

The report points out that there has been limited development over recent years, which has helped to stabilise the vacancy rate at 11.5%. With limited development in the pipeline, a shortage of good quality stock is expected in the medium term, which is expected to lead to further rental growth.

An increasing number of companies are looking at relocating; having delayed their expansion plans throughout the recession which adds weight to the view that increasing demand will further boost take-up over the coming months.

At a recent investor breakfast hosted by Knight Frank, a live opinion poll of the 200 attendees showed that Spain was year’s top target country for investment, chosen by 26% of the audience, knocking the UK off the top spot. 

Knight Frank says this is unsurprising given the strength of the rebound currently being seen in the Spanish market. However, the UK and Germany again featured strongly on investors’ radars, gaining 25.3% and 19.2% of votes respectively.

‘Overall office vacancy stands at 11.5%, however, Grade A supply in Madrid’s centre stands at just 2%. This, coupled with a 25% increase of take up year on year, will lead to significant rental growth in the capital,’ said Humphrey White, head of commercial, Knight Frank Madrid.

‘We are also seeing a polarisation of the office market as tenants become more demanding, leading to a flight to quality, the best within the CBD dramatically outperforming others in the immediate surroundings,’ he added.

According to Darren Yates, global head of capital markets research, Knight Frank, as 2015 approaches, the combination of a more active occupier market, limited development pipeline and low rents offers a realistic prospect of strong rental growth.

‘In turn, this will further increase Madrid’s appeal to investors, leading to yield compression and enhanced growth in capital values. The investment case for Spanish property is compelling,’ he said.