The FINANCIAL -- JLL’s 2017 European Office Investment Perspective is encouraging investors to be more creative in order to access Europe’s office real estate markets in the current increasingly competitive environment, including looking beyond prime locations for the best rental growth.
Peter Hensby, head of offices capital markets, EMEA, JLL, says: “Real estate continues to attract significant capital because of its solid performance relative to the alternative asset classes in the current low interest rate, low growth, low yield climate, but competition is tough and investors cannot just sit back and wait. They are having to become more creative in their movements to access the market, whether it’s understanding urban transformation through infrastructure, looking at development activity on the continent, or considering M&A activity or non-strategic divestments.”
European office investment excluding the UK rose 8% to a record €81.3 billion in 2016, with international capital playing an increasingly important role, accounting for 25% of all transactions. Preliminary transaction volumes for Q1 2017 reached €15 billion, matching a strong Q1 in 2016. Demand for European offices is expected to remain strong for the rest of the year, although a lack of supply remains a challenge, says JLL report.
Competition has pushed prime yields to record lows with Paris, Munich and Berlin all moving towards 3% in Q1 2017, well below previous record lows. In Berlin, the prime office yield now stands 175bp below its previous peak of 4.75% in Q4 2006.
“Investors are willing to pay current pricing if they can underwrite rental growth. We are seeing investors not only adjusting their returns expectations but also becoming more focused on the strength of future income streams as the main driver for returns. They’re looking closer than ever at tenant quality, location ‘future-proofing’ and other critical bottom-up asset characteristics that will lead to enhanced building performance,” added Hensby.
Rental growth hotspots
The report identifies ten office hotspots in continental Europe where those investors willing to look beyond more traditional markets can expect above average rental growth in the next two years. Located outside prime areas, each submarket offers a combination of solid property fundamentals, strong occupier demand and a catalyst that differentiates the market.
Germany is home to four of the ten hotspots expected to see strong rental growth: the city centre and city centre edge in Stuttgart, Hauptbahnhof-Europacity, Mediaspree & Mitte in Berlin, East Munich, and the banking district and City in Frankfurt. Two Spanish submarkets also feature, with Mendez Alvaro in Madrid and Placa de les Glories in Barcelona. Other submarkets are found in Amsterdam, Paris, Luxembourg and Stockholm.