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More Positive Signals for European Office Markets

Occupier markets display increasing signs of optimism according to Jones Lang LaSalle’s Q2 2010 European Property Clock


London, 30th July, 2010 - Whilst austerity measures and concerns surrounding sovereign debt in European economies triggered a new wave of economic uncertainty and volatility in financial markets; positive signs increased in the office markets during Quarter 2 (Q2) 2010 according to Jones Lang LaSalle’s Q2 2010 European Property Clock.
 
Office take-up in Europe for Q2 2010 increased marginally to 2.6 million sq m, up 6% on the previous quarter and 34% on Q2 2009.  Take up for H1 2010 is now 38% higher than for the same period in 2009, having improved in both Western Europe and CEE up by 32% and 73% respectively over the same period.
 
Prime rental levels stabilised in the majority of locations in Q2 and the Office Index, based on the weighted performance of 24 markets, increased by 2.6% q-o-q, building upon the growth seen during Q1 and showing the first positive growth (+2.1%) on an annual level since Q3 2008. The biggest rise in rents was seen in London’s West End (13.3%), Paris (7.1%), City of London (5.3%) and Dusseldorf (2.3%).  Quarterly rental falls were however recorded in Dublin (-5.3%), Frankfurt (-2.9%), Madrid (-2.6%), Barcelona (-2.4%) and Hamburg (-2.2%).  Incentives offered by landlords also stabilised with some markets seeing incentives reducing such as London City, London West End, Bucharest and Hamburg.
 
Chris Staveley, head of Pan-European Office and Industrial Capital Markets at Jones Lang LaSalle, said: “Signs of economic recovery are beginning to feed through into office demand, but occupiers still remain cautious and we expect annual volumes to be slightly below the five year average of 11 million sq m.”
 
Approximately 1.4 m sq m of new stock was added in Q2, a 25% increase on the first quarter. Despite this new stock, tightening supply of quality space is driving rental stability and even growth, but there are significant differences in current total supply levels – and sentiment - across the region which has led to differences in outlook.
 
The average European vacancy rate remained stable in Q2 at 10.2%, despite these additions, the same level as in Q1 10 and Q4 09. The vacancy rate increased slightly to 9.8% in Western Europe but fell substantially in CEE from 16.4% to 14.6%. This decline was particularly driven by decreases in Moscow and Budapest, whilst increases where recorded in both Prague and Warsaw.
 
Chris Staveley added: “Though half of the markets analysed saw vacancy rates increasing, the overall pace is easing and we believe most markets have reached or passed their peak.  High vacancy rates, of over 15%, can still however be found in Amsterdam, Dublin, Budapest and Moscow and there remains a significant spread across Europe with Paris now showing the lowest vacancy rate at 6.8%.
 
“Given the large number of projects that were postponed during the credit crunch, a shortage of new supply is anticipated as early as 2011 in some markets. Conversely, the supply of second hand space is likely to increase further in some markets during 2010 as occupiers seek to rationalise or even upgrade their space.  As a consequence Grade A supply is likely to continue to decline but the overall vacancy rate will remain above average until after 2014.  Over the short to medium term we anticipate the rental differential between prime and secondary locations to widen.”
 
European real estate investment transaction volumes increased 19% over Q2 compared with Q1. Following a phase of yield compression, prime office yields remained broadly stable across Europe in Q2, with only eight of the 24 markets covered in the Prime Capital Value Index seeing yields compressing, led by Moscow (-50bps). Prime office capital values increased on a weighted average by 4.3% for Europe on the quarter with Paris and London’s West End markets witnessing by far the strongest growth at 12% and 13% respectively.  Whereas Capital Value growth in London’s West End was entirely based on the rise in rents, values in Paris rose on a combination of a 25bps drop in yields and a prime rent increase of 7%. However, nominal capital values in these locations remain significantly below the levels seen in summer 2007 (Paris 40% below peak, London 36% below peak).
 
Chris Staveley concluded: “Further movements in capital values will largely be driven by the recovery in office rental levels, highlighting the importance of understanding local market conditions and thus identifying markets of outperformance. Our capital growth forecasts to 2014 do not currently project parity with 2007 at a regional level although certain markets could surprise on the upside.”