RESEARCH
EUROPEAN
QUARTERLY
COMMERCIAL PROPERTY OUTLOOK
Q1 2017
OCCUPIER TRENDS
INVESTMENT TRENDS
MARKET OUTLOOK
EUROPEAN OUTLOOK
In Q1 2017, Germany consolidated its position
as the most active investment market in Europe.
Following a strong end to 2016, European
commercial property investment volumes
eased to €44.2 billion in Q1 2017, an 8.3%
decrease compared with the corresponding
quarter of 2016 (Figure 1). However,
contrasting trends were observed in the
continent’s largest markets.
UK investment activity continued to be
influenced by uncertainty following last
year’s Brexit vote. However, the overall
decrease in UK volumes belied an upturn
in the London office sector, driven by
overseas buyers from Hong Kong, China
and Germany.
On a year-on-year basis, Q1 investment
activity was down in both France (-33.2%)
and the UK (-22.1%). The slowdown in
France reflected investor caution in the
run-up to the presidential election, while
The German investment market maintained
the strong momentum which has seen it
overtake the UK as Europe’s most active
market in recent quarters. Q1 investment
volumes increased by 27.3% year-on-
FIGURE 1
European commercial property investment volumes
80
Q1 2017 TRENDS
Quarter-on-quarter change: -38.3%
Year-on-year change:
-8.3%
70
€ billion
60
50
40
30
20
10
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2010
2011
2012
2013
2014
2015
2016
2017
Source: Real Capital Analytics / Knight Frank Research
FIGURE 2
FIGURE 3
European weighted average prime
office yield
European prime office rental index
140
8
120
6
100
5
3
2
Q1 2017 TRENDS
Quarter-on-quarter change: -4 bps
Year-on-year change:
-28 bps
60
40
Q1 2017 TRENDS
Quarter-on-quarter change: +0.2%
Year-on-year change:
+1.3%
20
1
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
0
Source: Knight Frank Research
2
80
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
%4
Index, Q1 2002=100
7
Source: Knight Frank Research
year, and were boosted by Blackstone’s
completion of its acquisition of the €3
billion OfficeFirst portfolio.
A strong start to the year was also
observed in Spain, where an improving
economy and rental growth prospects
fuelled international investor demand.
Unusually, Madrid overtook Paris to
be the second most active European
city investment market in Q1, behind
only London.
Regardless of the decrease in overall
European investment volumes in Q1,
investor demand for European real estate
remains strong and it continues to drive
yield compression. The Knight Frank
Weighted Average Prime Office Yield
hardened by four basis points in Q1 (Figure
2), on the back of inward yield movements
in markets such as Amsterdam, Budapest,
Prague and Stockholm.
Recent economic and political
developments will have buoyed investor
sentiment. The Eurozone recorded robust
GDP growth of 0.5% in Q1, while election
results in the Netherlands and France
have calmed fears that the series of major
European elections in 2017 would result in
a lurch towards politicians with disruptive
populist agendas.
Occupational activity remained robust
across a range of European markets in
Q1, with Paris, Milan, Munich and Warsaw
being among the cities to make a strong
start to the year. Aggregate office take-up
in the markets monitored by Knight Frank
was up by 8% year-on-year.
Despite the strong level of occupier activity
in Q1, only modest prime rental growth
was recorded across Europe during the
quarter. This is reflected in the Knight Frank
Prime Office Rental Index which increased
by just 0.2% (Figure 3). However, there is
the potential for rental growth over the rest
of the year, as the diminishing availability
of prime space in European CBDs is
creating increasingly landlord-favourable
markets. Prime rental growth prospects are
strongest in key cities in France, Germany,
Ireland, Spain and Sweden.
Please refer to the important notice at the end of this report
MARKET HIGHLIGHTS
1
BERLIN
The German capital continues to record heightened levels
of occupier activity, with Q1 seeing large-scale transactions
involving the Institute for Federal Real Estate (BIMA)
(47,000 sq m) and Zalando (34,000 sq m).
DUBLIN
LONDON
MUNICH
3
PARIS
Demonstrating the current dominance of Far Eastern
investors in the London market, Hong Kong’s CC Land
has agreed to buy the Leadenhall Building skyscraper for
UK£1.15 billion (c. €1.3 billion).
4
MADRID
US investors remain very active in the Milan investment
market, with Hines and Blackstone both making sizeable
office acquisitions in Q1.
2
The TMT sector remains a key driver of occupational
market activity in Dublin, and notable recent deals have
included Facebook’s lease of around 100,000 sq ft (c.
9,300 sq m) at the Beckett Building in Dublin 3.
UK-based Intu Properties acquired the Xanadú shopping
centre in Madrid for €530 million in Q1. This is Intu’s
third shopping centre acquisition in Spain.
5
MILAN
6
The largest leasing transaction of an extremely active Q1
saw Deutsche Pfandbriefbank pre-lease approximately
14,000 sq m in a building to be constructed at the Business
Campus München in Garching.
7
Île de France office take-up reached 638,800 sq m in Q1,
making it the strongest opening quarter since 2007. There
was one exceptionally large deal, which saw Natixis Bank
pre-lease 88,500 sq m at the Tours Duo skyscraper project,
which is scheduled for completion in 2021.
8
WARSAW
Gross take-up reached 194,000 sq m in Q1, a 40%
year-on-year increase. The largest deal of the quarter saw
AstraZeneca renew a lease of 7,000 sq m, and take an
additional 6,200 sq m, at Postepu 14.
Europe is in the midst of a series of major elections. What impact will these
have on real estate markets?
RESULT Prime Minister Mark Rutte's VVD Party was
returned as the largest party, beating the far-right
PVV into second place. It is likely to be some months
before a government is formed, as initial
negotiations aimed at creating a four-party coalition
collapsed in May.
IMPACT The election had little impact on the
buoyant Dutch real estate market, and the failure
of the far-right to make significant gains will have
reassured many investors. However, uncertainty
remains with the composition of the
coalition to be confirmed.
UK General election,
June 2017
OUTLOOK Conservative Prime Minister Theresa
May has called a surprise snap election for 8th
June. Opinion polls suggest that it is highly likely
that the Conservative party will be returned to
power with an increased majority.
IMPACT With a Conservative victory widely seen
as an inevitability, the election is unlikely to provide
many surprises for investors. Sentiment towards
the UK market will be more greatly influenced by
the progress of ongoing Brexit negotiations.
€0.2 bn
DENMARK
€0.4 bn
-67.3%
-15.6%
IRELAND
ELECTION WATCH
NETHERLANDS
General election, March 2017
BELGIUM
€0.5 bn
2
-35.7%
FRANCE Presidential election,
April/May 2017
RESULT The pro-EU centrist Emmanuel Macron
beat the far-right candidate Marine Le Pen by a
66% to 34% margin in an election run-off.
IMPACT Investment activity slowed significantly in
the run-up to the election, and clauses to be enacted
in the event of a Le Pen victory were placed into
some real estate contracts. The decisive result has
eased investor uncertainties, and a post-election
surge in activity is now anticipated.
FRANCE
€3.6 bn
-32.2%
4
SPAIN
GERMANY Federal
election, September 2017
OUTLOOK Chancellor Angela Merkel’s
centre-right CDU party will face a challenge from the
centre-left SPD, with which it currently forms a coalition
government. After making gains at regional elections in
2016, support for the anti-immigration AfD party
appears to have slumped.
IMPACT With the CDU making a strong showing in
2017 regional elections and support for the AfD
receding, it now seems unlikely that the federal election
will deliver a seismic shift in the German political
landscape. Although investors may show some caution
around the time of the election, Germany should retain
its current popularity as a safe haven market.
€3.5 bn
+79.2%
PORTUGAL
€0.5 bn
-13.8%
3
EUROPEAN QUARTERLY Q1 2017
RESEARCH
FIGURE 4
European commercial property investment volumes, Q1 2017
NETHERLANDS
EUROPE
€1.7 bn
€44.2 bn
FINLAND
-13.5%
NORWAY
€1.9 bn
+20.7%
€0.9 bn
Commercial investment,
Q1 2017
-23.5%
-8.3%
Change on
Q1 2016
SWEDEN
€2.3 bn
UK
GERMANY
€10.8 bn
-20.1%
€11.3 bn
-22.1%
+27.3%
3
1
7
8
RUSSIA
€0.4 bn
+121.0%
POLAND
€0.6 bn
-66.1%
CZECH
REPUBLIC
€1.4 bn
6
+157.6%
ROMANIA
€0.2 bn
5
AUSTRIA
+37.4%
€0.4 bn
-33.9%
SWITZERLAND
HUNGARY
€0.8 bn
€0.5 bn
-26.4%
+228.5%
ITALY
€1.6 bn
-37.9%
Source: Real Capital Analytics / Knight Frank Research
Investment volumes comprise office, retail, industrial and hotel transactions
4
EUROPEAN QUARTERLY Q1 2017
RESEARCH
EUROPEAN MARKET INDICATORS
Although Berlin saw a pause in rental growth in Q1, prime office rents in the
German capital are 25% higher than a year ago.
Commercial property prime rents and yields
Offices
Logistics
Shopping centres
Retail warehousing
City
Prime rents
Prime yields Prime rents Prime yields Prime rents Prime yields Prime rents Prime yields
(€/sq m/yr)
(%)
(€/sq m/yr)
(%)
(€/sq m/yr)
(%)
(€/sq m/yr)
(%)
Amsterdam365
54.25
685
55.25
61,000
45.25
4135
45.75
4
Barcelona 26154.25
672
56.00
6600
54.50
4129
45.75
4
Berlin360
53.50
669
45.25
61,380
43.90
6150
45.50
6
Brussels300
45.00
655
46.00
61,800
44.75
4185
45.50
4
Bucharest216
47.50
448
48.75
4720
47.25
4120
49.50
4
Budapest 26456.25
642
58.00
61,140
56.00
696
47.50
4
Copenhagen249
54.00
477
45.75
6726
54.50
6165
46.25
4
Dublin 64644.50
480
45.25
43,500*
54.50
4290
45.25
4
Edinburgh 41855.25
4100
46.50
42,747*
45.00
4378
46.00
4
Frankfurt 46244.00
680
44.75
61,560
43.90
6170
45.50
6
Geneva 70043.00
6187
45.50
61,065
44.00
4168
45.00
4
Hamburg300
43.50
672
45.00
61,650
43.90
6150
45.50
6
Helsinki396
44.00
6120
45.75
61,200
44.50
6120
56.00
4
Lisbon 22245.00
445
46.50
41,170
55.00
4120
47.00
4
London 1,311 (WE) 6874 (City) 4 3.50 (WE)44.25 (City)4175
44.50
45,556*
44.25
4587
44.50
4
Madrid 33653.90
466
56.00
6600
54.50
4156
45.75
4
Milan500
44.50
450
47.00
4850
45.50
4300
47.00
4
Moscow 726410.00
N/A
N/A
475
611.50
43,260
410.50
4
Munich432
43.30
685
44.75
61,900
43.90
6180
45.00
6
Oslo469
43.75
4133
45.50
61,310
44.25
4143
45.75
4
Paris 77053.00
458
45.50
62,500
43.75
6180
45.00
6
Prague 24054.75
648
46.25
61,380
45.25
6120
47.50
6
Stockholm 65953.50
6110
45.50
4830
44.25
4220
45.50
4
Vienna309
44.00
672
46.50
61,320
44.95
4168
45.85
4
Warsaw276
65.25
460
47.00
41,800
45.50
4132
47.50
4
Zurich747
43.00
4233
45.50
61,401
44.00
4187
45.00
6
Indicative prime yields, as quoted locally, based upon a hypothetical Grade A unit. Office rents are for prime city area Grade A space, 2,000 sq m. Shopping Centre rents are based on prime covered
shopping malls, quoted on best position, 100 sq m units. Retail Warehouse rents are for units of 1-5,000 sq m located in purpose built parks. Typical Retail Warehouse schemes vary between countries.
Logistics rents are for prime industrial space of units over 5,000 sq m. The data above is provided for general reference purposes only. Local market conditions will vary. *Zoned/weighted figure. Arrows
provide a broad indication of recent movements and the short-term outlook for prime rents and yields. London office data is quoted for the West End (WE) and City (C) submarkets.
Source: Knight Frank Research
FIGURE 5
Prime office rental cycle
London (West End)
Warsaw
Rents Bottoming
Geneva
Helsinki
Moscow
Oslo
Prague
Zurich
Amsterdam
Barcelona
Budapest
Lisbon
Madrid
Milan
Paris
Stockholm
Rental Growth – Accelerating
Berlin
Brussels
Bucharest
Copenhagen
Dublin
Edinburgh
Frankfurt
Hamburg
Munich
Rental Growth – Slowing
London (City)
Vienna
Rents Declining
The above diagram is intended to provide a comparative guide to the current positions of European prime office markets in their rental cycles. Markets will move through their cycles at different speeds and, sometimes, in
different directions. The positions indicated in the diagram do not constitute formal forecasts of future rental trends.
5
EUROPEAN RESEARCH
Lee Elliott
Partner, Head of Commercial Research
+44 20 7629 8171
[email protected]
Matthew Colbourne
Associate, International Research
+44 20 7629 8171
[email protected]
Vivienne Bolla
Senior Analyst, International Research
+44 20 7629 8171
[email protected]
EUROPE
Chris Bell
Managing Director, Europe
+44 20 7629 8171
[email protected]
Andrew Sim
Head of Global Capital Markets
+44 20 7629 8171
[email protected]
Nick Powlesland
Head of European Valuations
+44 20 7629 8171
[email protected]
Colin Fitzgerald
Head of International Occupier Services
+44 20 7629 8171
[email protected]
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