Square Mile’s office market leads Europe’s value correction
The City of London’s office market has seen a faster pricing correction than any other European city, according to new research from Savills.
The agency analysed the difference between fundamental yields – a hypothetical yield based on a liquid market and the average risk premium for office investments – and current market yields. Savills said a market had achieved “fair pricing” if the difference between the two was less than 10%.
The City of London had fully corrected as of April, the agency said, with Hamburg requiring a 3% drop in capital values to achieve fair pricing, and Amsterdam requiring 5%. Savills said those cities were likely to see investment transactions pick up pace in the coming months. Other major markets close to fair value included Paris’s La Défense district, Frankfurt, Oslo and Berlin.
The City of London’s office market has seen a faster pricing correction than any other European city, according to new research from Savills.
The agency analysed the difference between fundamental yields – a hypothetical yield based on a liquid market and the average risk premium for office investments – and current market yields. Savills said a market had achieved “fair pricing” if the difference between the two was less than 10%.
The City of London had fully corrected as of April, the agency said, with Hamburg requiring a 3% drop in capital values to achieve fair pricing, and Amsterdam requiring 5%. Savills said those cities were likely to see investment transactions pick up pace in the coming months. Other major markets close to fair value included Paris’s La Défense district, Frankfurt, Oslo and Berlin.
London’s West End market would require capital values to fall by a further 10% to reach Savills’ estimation of fair value. At the far end of the spectrum was Copenhagen, where values would need to fall by almost a third. At current pricing, the European prime office capital values would require a 15% fall on average to meet fair value.
Mike Barnes, associate director in European research at Savills, said: “Overall, we appear to be nearly two-thirds of the way through the price correction in Europe, although this varies significantly by market, and we expect that price discovery for average prime stock is likely to have completed by Q4 2023.
“Our analysis of MSCI UK capital values indicates we are observing the fastest correction of any recent downturn, twice as quickly as during the global financial crisis.”
Tristam Larder, head of European capital markets at Savills, added: “We are seeing the majority of transactional activity at the value-add end, with cash investors seeking to refinance at more favourable rates next year.
“Average lot sizes are significantly smaller, as buyers become more selective on building specifications and sales are withdrawn. As it stands, some private equity investors are adjusting their business plans from a buy-fix-sell to a buy-fix-hold strategy and are only likely to launch sales when buyer sentiment improves.”
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