Prime Yields Under Downward Pressure Across Europe (EU)

Widespread falls in prime yields were seen across the main European real estate markets in the final quarter of 2009, according to the latest data from CB Richard Ellis. Almost none of the locations covered by CBRE's European yield index saw upward movement in any sector in the fourth quarter, and the incidence of downward movement is spreading.

These features were particularly marked in the office sector, in which nearly half of the monitored locations saw yields fall, and the downward movement in the yield index as a whole was more than twice that recorded in the previous quarter. This change is all the more notable given that the office market is also the sector experiencing the most significant rental decline, with nearly a third of the locations seeing a drop in prime office rents in the final quarter.

Commenting on these changes, Richard Holberton, Director, EMEA Research, said: "The strengthening in investment appetite for core, prime assets that we saw towards the end of last year is clearly pushing prime yields lower across an increasing number of markets. The UK continues to stand out in a European context as the focus of the largest yield movements, but prime office yields are now also under downward pressure in many of the major urban centres including Paris, Frankfurt, Milan and Madrid. Given current investor preferences, it is no coincidence that yields are being driven lower mostly in the large, mature, liquid markets."

Office yields across Europe fell in the fourth quarter. The CB Richard Ellis office yield index for the EU-15 area fell by 22 basis points in the quarter, a significantly larger change than in either of the previous two quarters in 2009. Of the 46 locations in the survey, 22 saw yields move lower and 24 remained unchanged. Most of the yield reductions occurred in Western European markets, with the largest yield reductions in Glasgow (falling 115 basis points to 5.85%), and Birmingham and Manchester (falling 110 basis points to 5.75%). "The Hungarian office market is among the unchanged ones – yields are still at 8 %" – said Gábor Borbély, Senior Analyst of CBRE Budapest.

Retail yields also fell during the fourth quarter. The CB Richard Ellis retail yield index for the EU-15 area fell by seven basis points in the quarter, but remains five basis points higher than it was a year ago. Of the 39 locations in the survey, 28 remained unchanged and 11 moved lower, eight of which were in the UK or France. The largest falls were in Birmingham and Manchester, which both fell 75 basis points to 5.75% and 5.50% respectively. Budapest retail yields remained stable at 7.75%, compared to last year.

Industrial yields also fell. The CB Richard Ellis industrial yield index for the EU-15 area fell by 11 basis points for a second successive quarter, but is still 24 basis points higher than in Q4 2008. Seven of the 37 locations in the survey saw downward yield movements, 28 remained unchanged, and two rose. The largest yield reductions (of 75 basis points) were in Birmingham and Manchester (both falling to 7%). The two yield increases were in Barcelona (up 25 basis points to 8.25%) and Helsinki (up 15 basis points to 7.4%). In the last quarter of 2009, yields in the Hungarian market were still at 9.5%.

Prime office rents across Europe fell in the third quarter of 2009. The CB Richard Ellis office rent index for the EU-15 area dropped by 1.1% in the quarter, reducing the year-on-year rate of growth to -8.7%. Sixteen of the 46 locations in the survey saw falls in the level of prime rent, two saw increases, and 28 remained unchanged. The increases were in the City of London where rents rose 3.5% to £43.50 per sq ft and in Tel Aviv, rising 2.2% to €188/m². The largest falls occurred in Dublin, down 12.5% to €376/m², and Lyon, down 8% to €230/m². In Budapest, rents are still at €240/m²/year.

Prime rents in the retail sector also fell during Q4 2009, with the CB Richard Ellis retail rent index for the EU-15 area falling by 1%, leaving it 2.5% lower over 2009 as a

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