London City and West End, Stockholm, Manchester, Lisbon and Oslo’s office markets all appear underpriced, as average yield spread between prime European offices and Eurozone government bonds has reached 325 bps, over 100 bps above the historic average, according to Savills European office value analysis Q2 2020 research.
London and Manchester appear cheap, even compared with respective pre-GFC (global financial crisis) prime yields, whilst many of mainland Europe’s office yields remain below their pre-GFC nadirs, says the international real estate advisor.
”This trend is particularly evident since the UK voted to leave the EU in 2016; Europe (excluding the UK) average office yields have moved in an average of 76 bps, whilst UK office yields have remained stable during this time. London also offers the best rental growth prospects as highlighted above.”
Lisbon and Oslo appear underpriced partly due to falling Portuguese and Norwegian bond yields over the last 6–12 months. Lower levels of future inflation in Portugal will also maintain real rental growth over the forecast period, Savills notes.
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. Record low sovereign bond yields in Europe and beyond will continue to maintain prime offices’ investor appeal, as multi-asset managers seek to increase their exposure to real estate.”
Tris Larder, Joint Head of Savills Regional Investment Advisory EMEA, says: “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. Core European cities including London, Paris and Frankfurt stand out as the most transacted office markets over the last ten years and will pique investor interest.”