According to the latest Property Times Europe report from DTZ Research, prime rents continued to rise in Q3 2010, driven by robust rental growth in Europe's major markets on the back of a demand/supply imbalance for grade A stock. Accordingly, DTZ Research has upgraded its forecast for average rental growth in Europe to 6.8% in 2010 and 4.7% in 2011.
Rental levels were up 2% in Q3 compared to Q2. On an annual basis, rental growth turned positive for the first time since Q3 2008 as more markets returned rental increases, including London West End, London City, Paris CBD, Moscow, Milan, Stockholm and Amsterdam.
Rental growth is being driven by a shortage of new supply and relatively stable take-up. The availability ratio was virtually unchanged in Q3, falling from 11.3% to 11% over the quarter, reflecting the downward trend in new supply. Leasing activity fell marginally in Q3, with aggregated take-up reaching 1.4 million m² as occupiers looked to downsize. However, rolling annual take-up indicates that the underlying trend is positive.
Magali Marton, Head of DTZ CEMEA Research, said: "Across Europe take-up was stable in Q3, but is becoming more subdued as occupiers consolidate. However, from its lowest point of 4.5 million m² in Q3 2009 rolling annual take-up increased to 5.8 million m² in Q3 2010. The lack of speculative development, in addition to increased demand for grade A space, will limit the volume of new supply being brought onto the market. This will be offset by the release of secondary space being sub-let as occupiers downsize and move into better quality alternatives. However, we expect the gradual reduction in availability to continue."
DTZ has revised its forecast upwards for average rental growth in 2010 to 6.8% from 4%, after expectations for London, Moscow and Stockholm were upgraded. In 2011 prime rents are forecast to rise by a further 4.7%. This is an upward revision from the previous estimate of 3.7%.
Tony McGough, Global Head of DTZ Forecasting & Strategy Research, said: "We have revised our prime rental growth forecast upwards to reflect a more positive outlook for European offices. While growth is forecast in 13 of the 21 cities we cover in Europe, our revision is anticipated to be most keenly felt in London's West End and City office markets, where high demand for a decreasing supply of grade A space is forecast to drive rental growth. Also, a more robust economic outlook in Central and Eastern Europe markets is expected to filter through to stronger rental growth in markets such as Warsaw, Moscow and Kyiv."