Investors will do well to target the three- to five-year lease market this year, according a report from international real estate advisor Savills, as opportunities for return on investment arise from rental growth potential at lease break. In addition, the report suggests the Brussels office market in 2011 will be buoyed by large lettings, in particular from the EU, which will inspire confidence.
Savills research shows that the 2010 market was dominated by Belgian investors who represented 64% buyers, while Germans accounted for 12.6% and French 9%. Average yields dropped to lows of 5% for 12-year leases, and 5.4% for 9-year leases but three- to five-year lease yields remained unchanged at 6.25-6.5%. Despite an overall slowdown in investment activity at 1.3 billion, caused by 'eurozone gloom' as well as a lack of prime product, the firm suggests that the spread that has developed between short-term and long-term yields today has widened so significantly that there is a definite opportunity for investors.
Sheelam Chadha, Head of Savills research in Brussels, says: "Rental growth is forecast from 2013 onwards once the burgeoning pipeline is absorbed and a real lack of grade-A space becomes an issue. Investors who believe in this should consider buying three to five year leases today while capital values are low and offer good value. Renegotiating these breaks around 2013 will offer great upside once rental growth kicks in".
Savills 2010 leasing data shows some outstanding transactions in the Leopold District with an increase in prime rents back at 300/m²/year levels and average deal size at 999 m², compared to 907 m² in 2009. However, overall there was a slow down in activity resulting in a 330,000 m² take up for the year, equating to a 30% drop year on year and 68% decline over five years. Including own-occupation and renegotiations, total take-up amounted to 540,000 m².
Chadha adds: "Although the average top rent achieved increased, the majority of power remains with tenants as landlords prioritize reducing vacancy rates. The EU is tipped as one of the biggest tenants for 2011 having increased its share by 90% in 2010."
Savills states that stock levels grew 2.9% in 2009 and are now 13.47 million m², but that growth will slow with only 170,000 m² new space set to be delivered in 2011, half of 2009-2011 year average. The challenge, Savills suggests, is for landlords to reduce vacancy rates (currently 12%) before new development returns.