Risk Premium Rental Growth Inflation - Savills
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European Commercial - Q1 2021
S P OT L I G H T
European Office
Savills Research
Value Analysis
Risk Premium Rental Growth Inflation
European Office Value Analysis- Q1 2021
Bond yields rise
Eurozone inflation to rise in 2021 before easing back in 2022.
Economic Overview continuing to divide opinions, investor speculative development projects remains
The European Central Bank (ECB) left few demand for Europe’s prime CBD offices limited. Nevertheless, the overall debt
surprises holding policy rate unchanged has remained resilient. However, Q1 2021 finance environment is healthy with a
in its April meeting. In previous meetings, office investment activity was down 32% variety of traditional and alternative
the bank hinted at increasing government against the Q1 five year average due to providers covering the entire risk curve.
bond purchases, although any evidence a shortage of vendors openly marketing
thus far has been limited. With money prime assets. Prime Brussels offices have remained
supply increasing at a lower than stable at 3.25%, with some resilient
anticipated rate, German 10 year bond Focussing on the core markets, Paris CBD demand for ultra-long income outside non-
yields rose from -0.6% to -0.3% during Q1 yields remained stable at 2.75% during the core markets trading around the 3% mark.
2021. first quarter, while Berlin hardened by 10
bps to 2.6% as German investors remain in Across Southern Europe, prime yields
A first quarter spike in new Covid cases the market for long term income. remain unchanged over the course of
across Europe and the subsequent negative the pandemic and insurance companies
impact on Euro Area GDP in the first half are still bidding aggressively for strong
of 2021, is likely to temper any chance of covenants, although product remains hard
an interest rate rise over the near future. to find. Non CBD stock is subsequently
Indeed, Oxford Economics anticipate Core European taking longer to transact.
Eurozone inflation to undershoot the 2% bond yields have
target over the five year period, and are risen throughout Investors remain in search for long income
not scheduling in a rate hike until at least Q2 2021 but remain within the non-core markets, and are more
in negative
2023. However, a rise in energy prices in price sensitive to the tenant covenant
territory.
2021 is likely to raise the headline rate of strength. Since Q3 2020, Warsaw prime
Eurozone inflation to 1.6% this year before yields have moved out 10 bps to 4.6%,
easing back to 1.3% in 2022. although Prague (4.10%) and Bucharest
(7.00%) have held stable.
In the offices sector, governments are still London still remains at a discount to
generally advising to work from home mainland European core markets, as West Rising energy prices are forecast to impact
where possible, although we are seeing End yields remain at 3.50% and City yields the Nordics markets more heavily, lifting
more restrictions lifted across Europe in at 4.00%. UK debt rates remain more inflation forecasts. Prime stock in Oslo
the second quarter of the year as vaccines expensive than other core markets, with and Stockholm office stock has not traded
are gradually rolled out. UK sovereign bonds currently yielding as actively over the last 12 months, with
0.7% pa, providing a similar yield spread to prime yields remaining stable at 3.25%.
Vacancy rates have increased by an that of core German and French markets.
average of 170 bps to 7.1% across European London’s global liquidity and rental
markets in the year to Q1 2021, due to growth expectations will continue to
the level of grey space returning to the attract cash-rich buyers.
market. Occupier sentiment has however
improved in the first quarter of 2021, and Lending to European offices increased
into Q2 2021, we are seeing more examples towards the end of 2020 after a difficult
of occupiers removing grey space from six months, although securing debt for
the market. We expect this to gather non-core markets has become more
momentum throughout the rest of H1 2021 costly as credit committees have become
as businesses begin to contemplate life more sensitive to location. Indeed, banks
beyond the pandemic. appear more cautious on core plus/ value
add properties, with a maximum 60%
Investment Markets LTV ratio on offer for offices in need of
Despite the role of the future of the office capital expenditure. Lender appetite for
savills.com/research
2European Office Value Analysis- Q1 2021
Office value analysis
London West End continues to offer attractive pricing.
Methodology Analysis pandemic, we expect rental prospects to pick
Savills European Office Value Analysis Savills Q1 2021 European Office Value up again. Milan’s index linked office rents
compares the fair-market (calculated) yield Analysis indicates that of the 23 European hedge inflation risk, while investor demand
relative to current market pricing across 23 office markets, one market appears for offices with WAULTs above five years
European markets, covering London-City, undervalued, 16 markets are fairly priced and continue to outstrip the limited supply.
Stockholm, London-WE, Manchester, Lisbon, six markets now appear fully priced.
Oslo, Berlin, Paris, Copenhagen, Dublin, However, Savills latest market evidence
Amsterdam, La-Defense, Prague, Hamburg, The big shift since our last derivation suggests that prime headline rents are
Madrid, Barcelona, Helsinki, Munich, has been due to softer rental growth holding up relatively firmly as we begin to
Warsaw, Brussels, Frankfurt, Milan and assumptions, factoring the potential see some evidence of resumed occupational
Bucharest. downside of lower office occupancy, which decision-making and that rental discounts
has raised the calculated market yields. and incentives are more visible on secondary
An investor must be compensated for Capital Economics’ European five year stock.
bearing the risk of investing in real estate prime rental growth forecasts have fallen by
over sovereign bonds. The calculated yield is an average of 50bps pa to 0.9% pa between Occupiers’ behavioural changes and the
derived as the current risk free rate plus five Q3 2020 and Q1 2021. Coupled with rising speed of return to the workplace will act as
year average office risk premium, factoring inflation forecasts, this has reduced real the main determinants for rental growth
in real rental growth, inflation and expected rental growth prospects from -0.1% pa to prospects across the major European
depreciation costs across each market. -0.9% pa since our last derivation. markets. Despite an increase in vacancy rates,
high quality vacant office space remains
Calculated market yield pricing > 50 basis London West End remains attractively limited in the core Western European
points above market pricing we consider priced relative to the majority of European markets. Should rental growth prospects
under-priced markets due to its positive prime rental improve in the coming months as we expect,
Calculated market yield pricing within 50 growth prospects and given investor appetite then the markets currently shown as fairly-
basis points of market pricing we consider from non-European capital, we see further priced will become under-priced. However,
fairly priced opportunity for yield compression. interest rates appear to remain at a standstill
Calculated market yield pricing > 50 basis Towards the other end of the spectrum, and landlords who are able to unlock rental
points below market pricing we consider fully Hamburg and Berlin feature as fully priced, value uplift through reversionary leases
priced although this can be explained by the and active asset management will stand to
investor demand for ultra-core assets, and benefit.
given lower levels of remote working pre-
Chart 1: European Office Value Analysis, Q1 2021 (bps)
Calculated/ Current Yield spread (bps) Calculated Yield (bps) Current Market Yield (bps)
900
800
700
600
Yield/ spread (bps)
500
400
300
200
100
121
- 2 -1 -5 -8 -10 -14 -16 -23 -23 -27 -33 -34 -35 -40 -40 -41 -43 -59
-61 -67 -70 -73
-100
-200
Source Savills Research
3Savills Commercial Research
We provide bespoke services for landowners, developers, occupiers and investors across the
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Valuation Investment Research
Nick Harris Chris Gillum Mike Barnes
Head of European Cross Head of European Offices European Commercial
Border Valuations +44 (0) 207 409 5918 Research
+44 (0) 207 409 8185 cgillum@savills.com +44 (0) 207 075 2864
nharris@savills.com mike.barnes@savills.com
Savills plc: Savills plc is a global real estate services provider listed on the London Stock Exchange. We have an international network of more than 600 offices and associates throughout the Americas, the UK,
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