News Article Property yields continue to fall across Europe
by Ákos Budai | Report

European commercial real estate markets saw further yield contraction in Q3 2015 across all property sectors, reflecting growing investor demand and very low bond yields, according to the EMEA Prime Rents and Yields survey from global property advisor CBRE. Across the total of 162 sector/city combinations throughout the EMEA region, 71 saw prime yields moving lower and none saw any increase over the quarter.


European commercial real estate markets saw further yield contraction in Q3 2015 across all property sectors, reflecting growing investor demand and very low bond yields, according to the EMEA Prime Rents and Yields survey from global property advisor CBRE. Across the total of 162 sector/city combinations throughout the EMEA region, 71 saw prime yields moving lower and none saw any increase over the quarter.

Prime yields fell across all main sectors, and are now generally 40-50 basis points lower than they were a year ago. The most marked shift was recorded in the industrial & logistics sector where prime yields fell by 20 basis points in the quarter, and nearly 60 basis points on the year, reflecting very strong investment appetite for the sector with nearly €12bn of assets traded in the past two quarters. Many of the major strategic European logistics hubs saw yields moving lower over the quarter, including Paris, Frankfurt, Rotterdam, Milan and Brussels.

The office sector saw slightly less pronounced changes (prime yields down by 18 basis points on the quarter; 47 basis points year on year) but did attain a notable milestone with yields dipping below their previous low of 2007, to stand at just under 5%. Retail yields also edged lower, though only marginally so in the high street sector.

By contrast, the retail sector led the way in terms of rents, with prime high street rents up 6.7% compared with a year ago. Prime London West End retail rents rose by over 7% Q on Q. Further notable rental increases were recorded in the German and Spanish office markets, and UK regional cities across all sectors. Across the survey as a whole, rental increases were rather sparse, with 30 of the 162 sector/city combinations recording higher rents and ten declining, several of them in the CEE region where there is more availability which is inhibiting rental growth.

“Falls in prime yields have been a feature of the market for three years now, and this quarter’s data gives every indication of the trend continuing, or even accelerating. This is linked with strong investment demand for real estate and a supportive capital markets environment characterized by low bond yields, low real interest rates and continued quantitative easing. On the rental side, while the pattern is certainly not clear-cut, there are indications that some of the early-cycle growth markets such as London and Dublin are heading into a period of slower growth, while some of the later-recovery markets notably Spain are beginning to pick up speed", Richard Holberton, Senior Director, EMEA Research at CBRE, added.

Higher rents and declining yields in Hungary

The general yield compression around the globe can be felt in Hungary as well. High-street retail (6.50%) and industrial prime yields (8.75%) dropped by 50 bps year-on-year and 25 bps on the previous quarter, whilst office (7.25%) and shopping centre (7.00%) yields remained stable in the past one year; however, they are under immense pressure to correct downward.

In line with the declining availability and the lack of new supply across all sectors, a general rental increase can be experienced. Retail assets (especially high-street units in Budapest downtown) registered the largest rental increase. Asking rents in the office and industrial sectors moved up slightly, whilst incentives (mostly rent-free periods) continued to decrease further.

“Going forward we expect the absolute investment volume and its concentration by buyers to increase further as foreigner activity is on the rise. Hungarian investment volume is still only quarter the level it was at the peak of the market. Budapest offers the strongest return profile in CEE with an expected return of over 11% p.a. This is driven by expected yield compression and a decent but solid annual rental growth on the back of low development pipeline", Gábor Borbély, Head of Research and Consultancy at CBRE Hungary commented.

Declining yields

Office yields across EMEA fell in Q3 2015. The CBRE EMEA Prime Office Yield Index fell by 18 bps in the quarter, and is now 47 bps lower than a year ago. 29 of the 58 markets surveyed saw downward yield movements this quarter, and 29 remained unchanged. A number of markets saw falls of 50 bps or more including Milan, Lisbon and Belgrade.

Retail yields also moved lower in Q3 2015, with the CBRE EMEA Prime High Street Retail Yield Index down by 7 bps, and the Prime Shopping Centre Yield Index down by 12 bps in the quarter, leaving them respectively 41 bps and 39 bps lower than a year ago. Yields fell in 19 of the 54 locations, and remained stable in the remaining 35. The largest change occurred in Manchester, down 50 bps to 4.5%.

Industrial yields fell sharply in Q3 2015, with the CBRE EMEA Prime Industrial Yield Index down by 20 bps in the quarter, and 60 bps over the year. Yields fell in 23 locations, and remained stable in the remaining 27. A number of markets saw falls of 50 bps or more including Milan, Brussels and Warsaw.

Higher rents

Prime office rents across Europe remained flat in Q3 2015, up by 0.6% in the quarter and 2.1% year-on-year. Office rents rose in 15 locations, fell in three and remained static in the remaining 40. Among the major markets the most significant increases were in Dublin and Stockholm (both up over 5%). The largest fall was in St Petersburg, down 16%, with Warsaw also declining.

Prime retail rents were flat in Q3 2015, with the CBRE EMEA Prime High Street Retail index up 0.5% and the Shopping Centre Rent index unchanged. Retail rents rose in eight locations, fell in three and remained static in the remaining 43. The largest rise was recorded in London’s West End (up 7.7%). Amsterdam, Stockholm and Lisbon also recorded increases. The most significant declines were in Russia, with rents in both Moscow and St Petersburg falling.

Prime industrial rents remained stable in Q3 2015, with the CBRE EMEA Prime Industrial Rent Index up by 0.5% in the quarter, and 1.4% in year-on-year terms. Seven of the 50 sample locations rose, four fell and the remaining 39 stayed unchanged. The risers included Dublin, Brussels, Glasgow and Lyon. The major fallers were again Moscow and St Petersburg.