Catella Property Management has presented its latest European Offices Market report. The report offers an overview of the developments in the office and investment markets of 14 European cities.
Main conclusions
- The global economic recovery is being driven by the US and Asia, however, economic growth within the Euro Zone will be more modest this year and next with the latest consensus forecast predicting real GDP growth of 1.9% in 2004 and 2.1% in 2005. The UK, the Nordic Region and Spain are forecast to be amongst the best performing countries in terms of economic growth, whilst Germany, Italy and the Netherlands are predicted to continue lagging behind.
- With the exception of markets in Germany and Amsterdam we expect that all office markets featured in our report have either bottomed out or are expected to do so during the next six months.
- European office take-up has gained momentum in the first-half of 2004, compared to the same period in the previous year, with the strongest increases in letting activity being recorded in London and Barcelona.
- Apart from Brussels and London, prime rents have seen further declines or have remained stable in all markets. Prime rents in Paris, where market fundamentals remained relatively healthy, fell by an annualised 10% in 1H2004.
- Vacancy rates in summer 2004 ranged from just under 7% in Paris to 20% in Amsterdam. The average European vacancy rate (for the 14 Catella locations) stood at 10.6%. We expect vacancy rates to rise further in some markets during 2H2004, but at a slower pace as development activity has weakened and due to stronger take-up. The sharpest fall in vacancy has occurred in Central London where the vacancy rate has fallen to 10%, from 13% at the beginning of 2004.
- Prime office yields in all our featured locations, with the exception of Berlin, have edged lower or remained stable during the past 12 months. Prime yields have come under downward pressure due to strong competition amongst investors for the best assets. The largest falls have been in London, Madrid, Barcelona and Oslo. The yield premium over the cost of capital remains attractive, however, it has narrowed, especially in the UK.
- Although office market fundamentals across Western Europe are still unbalanced, real estate investment activity remains very strong. Despite lower net inflows, the German open-ended funds remain the largest source of investment capital and have continued to acquire numerous properties. Institutional investors and debt-driven private investors are the other dominant players. The investment market continues to be supported by the low cost of debt capital, which for highly leveraged players can increase returns significantly. Investment volumes in 2004 are expected to be somewhat higher than those of 2003 with the weight of capital again outstripping the amount of suitable investment product.
Source: Catella
