Savills’ Impact: global office prime yields and leverage have decoupled

Global office prime yields have dropped to record lows in most major CBD markets around the world, according to Savills, adding this is unlikely to rise even when interest rates rise.

In its disruption-themed Impacts global markets report, Savills forecast that the decline in leverage against commercial property will dilute the cyclical correlation between office yields and lending, as investors’ profiles maintain thinner financing.

Savills argues that investors should worry less about eventual rate rises prime office yields are more likely to remain stable or continue to fall in many markets.

Mat Oakley, head of commercial research for UK and Europe at Savills, explains:

“While the link between real estate yields and base rates has become less strong, it is by no means broken. Investors who look across a multitude of asset classes, particularly those searching for long-term secure income, will reach a point where the yield on sovereign bonds becomes attractive enough to prompt them to choose them above real estate. For the foreseeable future, however, prime offices in the world’s global cities will remain attractive, with competition fierce for the best assets.”

According to Savills, global CBD prime office market yields are now:

  • Hong Kong (2.43%)
  • Frankfurt (2.9%),
  • Tokyo (2.9%)
  • Berlin (2.9%)
  • Melbourne (-1.74%)
  • Beijing (-1.32%)
  • Berlin (-1.2%)

In addition, Savills forecasts that the Paris (3%) and Amsterdam (3.5%) prime CBD office markets could see market yields harden to under 3% by the end of 2019.

Big Smoke will remain third most resilient city for a decade

London is expected to remain world’s third most resilient city for the next decade, according to Savills.

As part of Savills’ Impact research programme, the global real estate broker reports that London has retained its position as third in the Savills Resilient Cities Index, below leader New York and Tokyo in second place.  London and Paris were the only European cities ranked within the 20 most Resilient Cities Index.

A dozen of top 20 – including London and Paris – are dubbed “resilient cities” because they have the top 20 for at least the last decade and are forecast to remain so over the next 10 years. Savills says: “They are well-placed to withstand or embrace the many disruptive forces facing global real estate today, and in the future.”

Simon Hope, head of global capital markets at Savills, explains:

“The list of the world’s top global cities may feel like it’s almost set in stone, but, as is becoming apparent, disruption is on the menu and we are set to see some sweeping changes to the way society functions and how businesses operate in the next 10 years.

“For real estate investors, our Resilient Cities Index shows that the long-established global cities will withstand much in the next decade, which is why they’ve seen high levels of investment as they are perceived as ‘safe havens’ for capital, with the top 10 global destinations for both domestic and cross-border capital in 2018 reflecting this old-world order. However, as a result, their real estate assets have become correspondingly expensive and highly sought after.”

james.wallace@realassetmedia.com