Rental growth in the European office market reached its highest point since the beginning of 2012 in the first quarter of the year, according to Cushman & Wakefield’s latest DNA of Real Estate report.
The sector’s strong rental growth is supported by continued positive performance across German, Nordic and so-called semi-core markets - Ireland, Italy, Portugal and Spain - which pushed weighted growth across Europe to 0.8% quarter-on-quarter. This was more than the logistics sector (0.4% q/q) and high street retail which returned to growth with a modest 0.2% (q/q).
Growth over the quarter was led by Milan at 5.6% q/q supported by strong demand, especially in central locations. Germany again performed positively, as prime rents in Berlin grew by 5.2% q/q and by 16.2% y/y while both Dusseldorf (3.7%) and Munich (1.4%) also registered continued rental growth.
'We continue to see solid growth in the German office leasing market, supported by strong demand and low vacancy rates,' said Nigel Almond, Cushman & Wakefield’s head of data analytics. 'Berlin has one of the lowest vacancy rates globally, at 2.2%, which has driven up prime rents in the city. This has also been the case in other key German cities with further growth expected over the course of 2018.'
Following six quarters of falling rents, the UK registered a modest 0.1% q/q growth at a national level, although with rents on an annual basis still negative, Cushman & Wakefield said it was evident that a lack of clear direction on Brexit talks is delaying investment and occupier decisions.
Yield movements were more modest in the first quarter with both retail high street and logistics moving in 5bps to 4.15% and 6.1% respectively. Office yields edged in a modest 1bp to 4.46%. According to Cushman & Wakefield, this means European prime weighted yield for both offices and logistics are now at their lowest on record.
However, the advisor noted that pockets of movement are still evident. UK regional markets stand out in the quarter with 25bps inward movements recorded in Cardiff, Bristol and Glasgow, and 50bps recorded in Edinburgh. This was offset by the 25bps outward movement in London’s West End, with the weighted UK prime yield 7bps higher at 4.08%.
Further compression has been evident across Germany (down 6bps to 3.1%) supported by strong leasing markets, with yields across CEE 8bps lower at 5.48%.