Weak economic conditions across Europe continued to subdue rents across all property sectors in the second quarter (Q2) of this year, according to CB Richard Ellis' latest review of rents and yields in Europe. Economists' short-term expectations of activity in most European markets have weakened further in recent months, and this is reflected in occupier market conditions and rental movements.
Summarizing the key trends, Richard Holberton, Director, EMEA Research, CBRE, said: "The downturn in real estate values across Europe has so far been predominantly driven by increases in yields. However, we have now clearly entered a period in which rents are the driving force behind the property value corrections.
"This quarter's European yield data is particularly interesting. It is too early to signal the end of the period of rising yields, but equally the scale and incidence of yield increases are now a lot more patchy than they have been for a while. While investment turnover remains relatively low, there appears to be growing interest in several areas of the market, supported by the repricing that has already taken place."
The CBRE EU-15 index of prime office rents fell by 2.9% in Q2 2009, taking the decline of the past year to 8.6%. Across the full list of 49 office locations surveyed, 26 saw falls in prime rents, none increased and 23 remained unchanged. The largest falls occurred in Kyiv (down 25% to US $360/m²/annum) and Moscow (down 16% to US $1000/m²/annum). Several other Central and Eastern European (CEE) markets also saw downward pressure. Among the major western European office markets, notable quarterly falls occurred in London, Madrid, Dublin and Oslo, while rents remained relatively stable in Germany and the Netherlands.
Rent movements in the other two sectors were more muted. The EU-15 retail rent index was effectively static in Q2, and has seen very little change over the past year. Nevertheless 14 of the 42 individual locations saw some downward movement in Q2, most notably a number of UK centers but also several CEE markets including Budapest, Bucharest and Belgrade which all posted double-digit falls. Frankfurt was the only market which saw an increase in retail rents in Q2.
The EU-15 industrial rent index fell by 1.5% in the quarter, and by 5.3% for the past year. This disguises the fact that 25 of the 41 locations in the survey saw no change in the level of prime rent. Among the 16 locations that saw a decline, Spain, Belgium and Ireland saw notable falls.
Having seen near-universal increases over the past year, yield shifts in Q2 were more mixed across Europe, with the EU-15 industrial and retail yield indices seeing increases of no more than 10 basis points (bps) and the office yield index effectively unchanged. The CBRE EU-15 all-property average prime yield index rose by just two bps in Q2 2009 to 6.13% - bucking the recent trend that had seen the average yield increase by 103 bps over the previous four quarters.
The EU-15 office yield index fell by two bps in Q2 2009, but remains 80 bps higher than a year ago. 11 of the 49 locations in the survey saw upward yield movements, five saw yields move lower and 33 remained unchanged. Most of the major Western European office markets saw no movement in prime yields; in fact, Paris recorded a 25 bps reduction, along with Glasgow and Edinburgh. The largest rises occurred in Kyiv (up 100 bps to 15%) and Moscow (up 50 bps to 12%).
Retail yields rose marginally during Q2 2009. The CBRE retail yield index for the EU-15 area increased by five bps in the quarter, leaving it 74 bps higher than it was a year ago. In most cases (32 of the 42 retail locations in the survey), yields remained unchanged over the quarter. Of the remaining 10 that recorded increases, the largest rises (100 bps) occurred in Budapest and Sofia, which reached 7.75% and 8% respectively. Several other CEE markets also saw higher retail yields, including Moscow, Prague and Bratislava.
The CBRE industrial yield index for the EU-15