According to Savills European market in minutes, the destabilization in the European economy has resulted in a CBD office yield gap of up to 550 basis points when comparing strongest and weakest markets resembling pre Euro market characteristics.
The firm finds that markets that converged following the introduction of a common currency, which spurred a rise in cross border investment across Europe, have diverged with a significant pricing difference between core and peripheral markets.
However, according to Real Capital Analytics data the share of domestic versus cross border investment is back on par this year, suggesting some confidence is returning, particularly in the strongest markets of London, Paris and German cities, which monopolize investor activity.
The international real estate advisor notes that annual outward yield shifts have been recently recorded for Athens, Lisbon and Madrid CBD office markets at 50 bps to triple net yields of 8.6%, 7% and 5.9% respectively between Q112 and Q113. Core markets of London’s West End, Munich and Paris were recorded at 3.50%, 4.25% and 3.95% (triple net yields) respectively in the same time frame. The yield gap today between the most stable or expensive core markets and the least stable periphery markets therefore represents 225 bps. This compares to peak of the market yield gaps of just 14 bps in 2007 and 110 bps in 2001, shortly after the introduction of the Euro.
Eri Mitsostergiou of Savills European research says: “The divergence today reflects the underlying difference of the economic fundamentals which existed before the introduction of the Euro. These differences were harmonized for some years but have returned following this period of economic crisis.”