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The office property market: European rental market reaches a record level in 2017

June 6, 2018

Large European cities are benefiting from the dynamics of the office property rental marketplace. In a context of strong rental demand, prime rents are on the rise and investments are at record levels.

Office rent’s demand across Europe continues unabated, in fact, all indicators are green. From Paris to Berlin and London, all major European cities are benefiting from the dynamics of office property rental market, which in 2017 was at its highest point in ten years. This excellent performance is mainly due to the particularly vigorous activity of the hypermarkets market. The market place was up 12% compared to 2016 with 13,000,000 m² sold last year.

These are the conclusions of the latest report on the European office property market published by BNP Paribas Real Estate on the occasion of MIPIM, the world trade fair for property professionals. Among the forty cities studied, the four main German markets (Frankfurt, Munich, Berlin and Hamburg), driven by the German economic growth, hold the top spot. They alone account for a 23% increase in sales of hypermarkets compared with 2016. Central London also posted an 11% increase in transaction volume, as did Central Paris (+9%). Other smaller European markets followed suit, such as Dublin (+ 45%), Warsaw (+ 30%) and  Madrid (+ 29%).

"Prime" rents on the rise

As a result of the enthusiasm for the office rental market, the vacancy rate continues to decline in many European countries. To the point of reaching historically low levels, notably in Bucharest (-410 bp), Amsterdam (-230 bp), Warsaw (-200 bp), Lisbon and Madrid (-160 bp). In Germany, vacancy volumes also decreased in the four largest markets (-16% compared to the fourth quarter of 2016). And to a lesser extent in Paris (-30 bp compared to 2016). Following the Brexit referendum, however, central London saw its vacancy rate increase (+50 bp compared to last year). Overall, the fall in vacancy rates has led to an increase in prime rents over the past 12 months, particularly in Berlin (+16%, €396 / m² / year) and Brussels (+13%, €310 / m² / year).

Investment reaches a new record

On the European investment market, the dynamic is just as strong. With € 253 billion committed in 2017, an increase of 10% compared to 2016, European corporate property, all sectors combined, posted a new record. "This is an all-time market record, surpassing even the previous high of € 245 billion reached in 2015. The market benefited from a combination of several factors: a favourable economic environment, falling vacancy rates and the availability of liquidity. The recovery of the European economy and the performance of end-user markets have made real estate an attractive investment product," explains Larry Young, Head of International Investment Group at BNP Paribas Real Estate.

Continuing to seek out offices, investors injected €123 billion last year in this business segment, which accounts for 43% of the amounts committed in 2017. Mega transactions of over € 100 million, such as Cœur Défense in Paris, are still popular. Last year, the British capital took first place in the European investment market ranking with € 16.8 billion invested (+45%), relegating Central Paris to second position (-1%). Today, the prospect of Brexit no longer frightens foreign investors who continue to dominate this market.

Against this still buoyant backdrop, rates of return continues to contract in all European markets. Prime rates declined 30 basis points in the fourth quarter of 2017 to an average of 4.66%. Among the most affected cities, Berlin saw its prime rate fall below 3.0%, to 2.90%, the lowest rate on the European market.

 

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