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Prime office yields hold in major markets

Jones Lang LaSalle publishes Q2 2009 European Office Yields Tracker


European office market yield decompression continues to stabilise with yields in many markets holding according to Jones Lang LaSalle’s Q2 2009 European Office Yields Tracker.  Yields held in around half of Europe’s office markets, although many markets saw yields stabilise in Q1 2009 only to move out again in Q2 2009.

Nine markets have now experienced two consecutive quarters of stable yields (Berlin, Munich, Stuttgart, Edinburgh, Birmingham, Leeds, Manchester, Rome and Oslo). Added to this group are the City of London and Glasgow, which have seen prime yields edge inwards by 25bps (Basis Points) and 50bps respectively—these two markets had seen some of the largest outward movements in prime yields since the peak in Q2 2007. Thirty out of the 46 markets have since seen outward yield movements in at least three out of the last four quarters.

Jones Lang LaSalle’s blended European prime office yield now stands at 6.10%, 10bps higher than in Q1 2009 and 100bps higher than in Q2 2008. The Western European component remained stable over the quarter at 5.70% whilst the Central and Eastern European component moved out 70bps to 10.40%.

Tony Horrell, Head of European Capital Markets at Jones Lang LaSalle added: “The relative stabilisation of prime yields has reflected an improvement in investor sentiment. London and Paris have seen high levels of investor interest for the best assets in prime locations and with secure income in terms of lease length and covenant strength.  Despite continued restrictive new lending in the market, the weight of capital targeting this narrow band of prime assets now outweighs available product, putting downward pressure on prime yields.”

Tony concluded: “Stabilising or even hardening of yields has occurred in parallel with weakening occupational markets. Take up levels continue to be down on historic averages, headline rents are under continued downward pressure and incentives are increasing. Investors’ focus on long leases and strong covenants means that competitive bidding for these assets may not fully recognise the extent of weakness in the occupier base. Time will tell if further signs of weakness in occupational markets will translate into continued yield movements in the second half of the year.”