This is the first time since Q2 2012 that the average prime office CBD yield has moved out. However, looking at quarterly yield movement by city, only London WE, London City and Amsterdam moved out by 25 bps. Duesseldorf and Cologne office yields moved in by -10bps, while the rest remained stables, according to Savills.
More broadly, the prime CBD and non-CBD office yield gap continued narrowing to 89bps, from 99bps in Q1 2018, due to tight supply in CBD markets and strong investor demand outside of CBDs. However, the gap between prime and secondary CBD office is stabilising at 109bps (110bps in Q1 2018), reflecting risk aversion among investors as well as an increasing focus on quality.
Overall prime retail yields moved out regardless of the retail format. The average prime high street yield (3.41%) softened by 1bp yoy and by 5bps qoq with quarterly outward movements recorded in Prague (50bps), Luxembourg (30bps) and Helsinki (10bps) and inward movement recorded in Dusseldorf (-10bps), whilst it remained stable in all other cities.
The average prime retail warehouse yield (5.16%) hardened by 6bps yoy but softened qoq notably due to downward price correction in London and Paris. The format remained resilient in the top six German cities where prime yields kept moving in (-10bps qoq). The average prime shopping centre (4.58%) moved out by 9bps annually and remained broadly stable on a quarterly basis, only London moved another 25bps out qoq and Warsaw -25bps qoq.
The picture is quite different in the logistics sector. Strong investors’ appetite for logistics assets keep putting downward pressure on prime yields. Year on year the average prime logistics yield was -43bps down at around 5.15%. The contraction of the spread between logistics yields and retail yields has no precedent. Only 57bps separates the average prime logistics yield (5.15%) and the prime SC yield (4.58%), compared to the 10-year average of 157bps.
Marcus Lemli, Savills Head of European Investment & CEO Savills Germany, explains:
“For the coming 12 months, we still expect some yield compression in the logistics and the office sectors. Prime retail yields will remain stable in most European countries; it will soften in the UK, Ireland, Belgium, Norway and Finland.
“Investors’ demand for retail assets is becoming increasingly picky, targeting prime assets of the right size with strong grocery and food presence and less fashion. Still, divergent price expectations often leave negotiations between buyers and sellers deadlocked. Investor demand remained mainly focused on offices, accounting for 41% of the total, followed by alternative assets (30%). The share of logistics investment (14%) remained relatively unchanged compared to last year.”