Industrial Sector Leads Yield Improvements Across European Commercial Property Market

European commercial real estate markets saw further yield improvements in Q3 2014 across all property sectors reflecting growing investor demand, according to the EMEA Prime Rents and Yields survey from global property advisor CBRE.

The industrial and logistics sector stood out, with prime yields falling by 14 basis points (bps) due to yields moving lower in well over half of the industrial markets sampled including virtually all major locations in France, Germany, the Netherlands and Belgium, as well as Spain and Italy.

More widely, CBRE’s EMEA Prime Yield Indices continued to edge down across all sectors, with the all-property yield down by seven basis points in the quarter. Overall rental performance remains patchy, with almost as many locations falling as rising this quarter.

James Markby, EMEA Capital Markets, CBRE commented:

“Investment allocation for industrial and logistics property is running at much higher levels, with absolute and relative growth evidence compared to every other sector. This cycle is marking a strategic change and acceptance of the sector as a core portfolio component by the largest institutions. These capital demands mean that nearly €14bn has transacted in the first three quarters of this year. This compares with just over €16bn in the full year 2013, and is higher than any other full year total since 2007. Germany and the Nordic markets feature strongly in this year’s figure, but southern Europe, notably Spain and Italy, is also seeing a resurgence.

“In addition, in 2014 we have seen the rapid increase of larger scale portfolio sales, such as Schroders’ Benelux sale to Prologis for €195 million, Tristan’s VGP sale in the Czech Republic to P3 for €523million, and SEB’s sale across eight countries for €350 million. Appetite for a new Nordics portfolio opportunity has also been exceptionally strong.”

In the office and retail sectors, yields also improved, but by smaller increments. Among the major office markets, prime yields dropped in Paris, Amsterdam, Stockholm and Madrid. Retail yields also moved lower in some of the same locations but the most notable shift was in Dublin where a 75 bps shift leaves yields 150 bps lower than this time last year.

The incidence of rental increases has been thinner over the quarter, with the CBRE All-Property EMEA Rent Index up by just 0.5% and only 16 of the 153 locations seeing an increase. In the office sector the most notable of these was a 2.5% increases in prime City of London rents to £60.00 per sq ft, reflecting accelerating demand for City space. Office rents also rose in Dublin and Hamburg, and retail rents in Hamburg and Munich. The impact of geopolitical tensions is evident in declines in office rents in Moscow and Kyiv.

Commenting, Richard Holberton, Senior Director, EMEA Research at CBRE, added:

“Recent economic indicators have been somewhat mixed across the eurozone and, while we continue to expect stronger numbers to come through in the second half, this is acting as a constraint on occupiers’ expansion appetite, with many remaining cautious. On the supply-side, low vacancy rates in some markets, particularly in CBD areas, and the more general weakness in development activity will serve to limit occupiers’ choice and should underpin more widespread rental growth from the second half of 2014.”

Office yields across EMEA decreased in Q3 2014. The CBRE EMEA Prime Office Yield Index fell by four bps in the quarter, and is now 28 bps lower than a year ago. Thirteen of the 58 markets surveyed saw downward yield movements this quarter, 43 remained unchanged and two rose. A number of markets saw yields drop by 25 bps including Stockholm, Budapest and Istanbul. The two increases occurred in Moscow and St Petersburg.

Retail yields also moved lower in Q3 2014, with the CBRE EMEA Prime High Street Retail Yield Index down by 10 bps, and the corresponding Prime Shopping Centre Yield Index down by 11 bps, leaving them respectively 35 bps and 40 bps lower than a year ago. Yields fell in 16 locations, rose in three and remained static in the remaining 35. Dublin saw the largest downward shift (75bps). The main increases occurred in Moscow and St Petersburg.

Industrial yields fell sharply in Q3 2014, with the CBRE EMEA Prime Industrial Yield Index down by 14 bps in the quarter, and 46 bps over the year. Yields fell in 29 locations, rose in two and remained static in the other 20. The largest downward move occurred in Dublin (75bps). The major markets in France, Germany and Benelux saw yields move 25 bps lower. The largest increase was recorded in Moscow, up 25 bps to 11.25%.

Prime office rents across Europe rose slightly in Q3 2014, up by 0.4% in the quarter and 1.3% year-on-year. Among the eight markets where rents moved higher, the largest increase was in Dublin (+12%). Kyiv saw the largest fall (-10%) of the five markets in which rents declined.

Prime retail rents rose slightly in Q3 2014, with the CBRE EMEA Prime High Street Retail index up 0.8% and the Shopping Centre Rent index flat. Three of the 54 markets surveyed registered an increase, 50 remained unchanged, and one fell. Rents in Munich, Hamburg and Dubai all rose by around 6%, and Kyiv fell by 8.5%.

Prime industrial rents were largely unchanged in Q3 2014, with the CBRE EMEA Prime Industrial Rent Index up by just 0.1% in the quarter, and 1.0% in year-on-year terms. Five of the 51 sample locations rose, five fell and the remaining 41 stayed unchanged. The largest increase was in Dublin at nearly 5%, while the largest decline was in Bratislava (down 14%).