Yield gap makes some office markets look cheap: Savills

The office markets in Stockholm, Oslo, Lisbon, both London’s City and West End, and Manchester, appear underpriced according to Savills research.

The firm said the average yield spread between prime European offices and Eurozone government bonds has reached 325 bps, over 100 bps above the historic average.

Source: Savills.

Although the firm points out that its European Office Value Analysis research examines these markets from a pan-European perspective to assess the relative attractiveness of their office pricing based on macro fundamentals, it does not cover local market drivers such as vacancy rates.

However, Savills said that London and Manchester appear cheap, even compared with respective pre-Global Financial Crisis (GFC) prime yields. Meanwhile, falling Portuguese and Norwegian bond yields over the last 6-12 months are increasing the appeal of office investments there

Mike Barnes, Associate European Research, Savills, says: “The majority of European office markets appear fairly priced at end Q2 2020, despite more limited rental growth prospects, but there are opportunities to be had for those willing to look to the Nordics, Portugal and the UK.”

Low bond yields make prime offices appealing

He added that that record low sovereign bond yields in Europe and elsewhere will continue to maintain the appeal of prime offices to investors, as multi-asset managers seek to increase their exposure to real estate.

“Investors will be paying particular attention to the liquidity risk premium associated with each office market. Despite the constraints due to tighter lending criteria, liquidity of global capital remains high and is mostly in search of safe havens amidst the uncertainty caused by the Covid-19 pandemic,” said Tris Larder, Joint Head of Savills Regional Investment Advisory EMEA.