Economic backdrop: office-based jobs continue to grow
Despite the need for continued Quantitative Easing across the continent, and some pockets of weak-to-negative economic growth, 2015 was another favourable year for the EU-economy and wider office-market. GDP rose across the EU-board by 1.8% with countries such as Ireland, the Czech Republic and Sweden posting much GDP growth rates of 5.8%, 4.4% and 3.3%, respectively. Office-based jobs continued to grow by around 900,000, driven by continued private sector expansion - particularly in the TMT and Professional Services sectors.
Occupational market: activity increases throughout the region
The growth in office-based jobs had a very positive impact on office demand during 2015. Over 4.2 million sq m of transactional activity was recorded during H2 2015 in the ten cities which form Colliers International EU Occupier Demand Index - this is the highest level of demand recorded since 2007. Demand growth was witnessed across the majority of markets, and in many instances new supply is failing to play catch-up leading to falls in vacancy levels.
In the UK markets, notably London, this is most obvious, leading to upward pressure on rents. Similar trends are also visible in other key European, growth cities such as Berlin, Stockholm, Copenhagen, Madrid, Milan and Dublin.
Capital markets: office investment volumes record growth for the sixth-year running
Total European office volumes grew by 12% in 2015 to reach €116 billion, according to figures produced by Real Capital Analytics (RCA). This represents the sixth year in row that office investment volumes have increased, as it continues to be the most popular sectoral pick amongst investors.
As per tradition, three countries continued to be responsible for the majority of office investment volumes in 2015: the UK, France and Germany. Overall, the price per sqm increased to €4,304, the highest recorded value since Q4 2007. Volumes in Italy doubled as the total volume increased from €2.1 billion in H2 2014 to €4.8 billion in H2 2015, as a lack of suitable product in other European markets and improved economic conditions has attracted foreign investors to Italy.
The popularity of European office markets is also illustrated by widespread yield compression, notably for CBD-located assets. Virtually every market in EMEA witnessed some form of yield compression over the year, bar those already at the bottom.
The sharpest yield compression was seen in Italy where prime Rome yields decreased from 6.2% to 5.0%, and in Milan from 5.6% to 5.0%. This trend was also seen in Barcelona (down 50 bps to 4.75%). Berlin (down to 4.0%) and Stuttgart (down to 4.3%) also saw lower yields amidst increasing interest from occupiers for these German cities, which has stimulated investor demand - both cities recorded record high investment volumes in 2015.
As our recent Global Investment Outlook pointed out EMEA remains one of the top destinations for cross border investors, and the office sector remains the most popular pick. The outlook for prime CBD yields remains positive in the majority of markets, where a healthy finance gap and competition for product will
continue to compress yields further, or keep them at low levels, as suitable investment supply dries up.
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