Yield shifts leave some office markets over-priced: Savills

Shifts in the yields on European offices have left assets in some cities such as Madrid underpriced relative to pricing during 2017-21, while Berlin, Amsterdam, Munich and the Paris CBD are fairly priced according to research from Savills.

Bucharest and Copenhagen are, however, in “fully priced territory”, the firm stated. Savills’ European Office Value Analysis for the first quarter of 2024 indicates that European prime office yields moved out by an average of 5 bps to 4.9% in Q1 2024, following a 17 bps increase in the previous quarter.

Yields softened in a range of cities including Copenhagen (+25 bps), Manchester (+25 bps), Barcelona (+15 bps), Milan (+15 bps), Madrid (+15 bps), Berlin (+10 bps), Cologne (+10 bps) and Hamburg (+10 bps).  Consequently yields of European prime offices have moved out by an average of 155 bps in the two years since Q1 2022. The average impact of yields on capital values was -31%.

“After a painful outward shift in yields we are starting to see some stabilisation. As valuations play catch up we expect the bid ask spread to narrow and buyers will begin to dip their toes back in the water. Volumes should then tick up, albeit from a low base,” said Tristam Larder, head of European capital markets at Savills.

Larder said the occupational markets in core locations continue to perform well underlining the continued bifurcation between prime and secondary and the occupational and investment markets.

“The H2 2024 investment rebound may be weaker than previously expected, as investor demand will remain cautious, even though, from an occupational standpoint prime offices continue to perform well and rents have risen 3.6% year-on-year, and that historically the strongest period of capital growth comes immediately after the nadir in capital values,” Larder added.

Mike Barnes, Associate Director in Savills European commercial research team said: “European offices in general remain in fair-value territory. However, the minor outward prime office yield movement in Q1 2024 has been offset by higher government bond yields and therefore, a further capital value adjustment of -8% is required for average prime European offices to be in line with their fundamental values, although the picture is more nuanced when you consider individual cities.”