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News Release

London

More European Office Markets Close in on Prime Rental Growth

Jones Lang LaSalle Publishes Q3 European Office Clock


​London, 25th October 2010 Jones Lang LaSalle’s Q3 European Office Clock highlights that prime office rents continued to grow during the quarter, albeit at a slower pace. The Jones Lang LaSalle Office Rental Index rose by a modest 0.7% over the quarter, driven by London, Moscow and Stockholm.  Chris Staveley, Head of Pan-European Office and Industrial Markets at Jones Lang LaSalle, said: “The research also shows that demand for office space decreased slightly over the quarter, but stands 36% higher than a year ago with net absorption remaining positive.  Further yield compression pushed capital values higher; the capital value index increased 4.7% over the quarter. Yield compression was witnessed in 13 out of 24 markets with Paris and Moscow both experiencing compression of 50 basis points.”
 
European Office Occupational Markets
The majority of Europe’s economies continue to recover - albeit with substantial differentials. This is reflected in the Q3 2010 rental clock. This quarter, 14 of the 34 “clock markets” are now at or beyond 6 o’clock with the majority moving further through the “bottoming out” quadrant. Prime rents across the region increased modestly, with the Q3 Office Index, based on the weighted performance of 24 markets, increasing by 0.7% over the quarter. This continued the growth seen since the beginning of the year, albeit at a slower pace. The increase was driven by Moscow (+6.3%), Stockholm (+5.4%) and London (+2.9%). Rents were unchanged for the rest of the Index markets with the exception of Spanish Cities with rents in Madrid decreasing by -2.7% and by -2.5% in Barcelona. Hefty incentives remained a feature of many markets and net effective rents were on average 17% below prime face rents, with the largest spread reported in the UK, Ireland and some Dutch markets. There also remained a clear differential between prime and secondary space with rents for secondary space remaining under downward pressure.
 
As economic growth returns, occupiers are increasingly committing to deals, although much activity remains driven by consolidation and churn.  With 2.5 million sq m transacted in Q3 2010, office take-up decreased by 8% over the quarter. This is not unusual given the summer season and, compared to this time last year, take-up was 36% higher and only 5% below the five year average. And comparing the first nine months of 2010 with the same period last year, take-up was already 39% higher. The European Commission’s economic sentiment indicator illustrated further improvement in September to reach its highest level since March 2008. However, the public deficit across Europe is likely to drive cost cutting and austerity measures which could reduce occupier confidence to deal and lead to negative net absorption from the Public Sector. Take-up is expected to be broadly in line with long term averages although it should be noted that an “average” outcome to 2010 would be much better than expected at the start of this year.
 
The average European vacancy rate remained double-digit but was stable over the quarter at 10.3%. It has remained at between 10.2% and 10.3% since the end of 2009. Whereas vacancy continued to decrease in CEE, mainly driven by further reductions in the Moscow and Prague markets, levels in Western Europe increased slightly - by 20bps to 10.0%.  The vacancy rate remained furthest away from the five year average in Barcelona, Madrid, Luxembourg and Moscow. Conversely, rates in Berlin and Frankfurt were within a few percentage points of their five year average levels.  Rates of over 15% could still be found in Amsterdam, Dublin and Budapest and there was a significant spread across Europe with the lowest rate at 6.4% in London West End. Although vacancy only decreased in 8 of the 24 Index markets, we believe most markets have reached, or passed, their peaks.
 
On the supply side, completions are declining.  Around 1.2 million sq m completed in the third quarter across Europe.  This reflected a fall of 16% in comparison to Q2 and 15% compared to the five year average.  A lack of prime space will be an increasing trend across many markets as a meaningful return to speculative development is unlikely in the medium term. With most investors remaining risk averse and speculative development finance still largely absent, the repositioning of Grade B space to Grade A via refurbishment remains a lower cost and lower risk option.  As supply is absorbed we should see successive declines in the vacancy rate from its current level.  That said, releases of second hand space by occupiers following recent deals may keep overall supply relatively high - while Grade A space erodes more quickly.
 
European Office Capital Values
The economic recovery continued to be reflected in office investment markets. While overall transaction volumes decreased slightly by 12% in Euro terms to EUR 21 bn during the quieter summer months, activity is expected to increase again towards the end of the year fuelled by low interest rates and increasing lending activity. Yields for prime assets compressed further in 13 of the 24 Index markets led by Paris and Moscow who both saw yields compressing by 50bps over the quarter as well as compressions of 25bps in London West End, Stockholm, Madrid, The Hague and Budapest. Across the region, capital values grew by 4.9% over the quarter on a weighted average and now stand 17.3% higher than a year ago. With rental levels comparably stable over the quarter, capital value growth in Q3 was largely driven by yield compression and this continued to result in positive growth in markets where occupational performance remained relatively weak - in Madrid for instance capital values increased by 0.4% despite further falls in rents. In Moscow, Stockholm and London capital values were driven by both rental growth and yield compression. Elsewhere growth was entirely based on yield compression. It should also be noted that capital values for secondary assets remain under pressure given the lack of both rental growth and yield compression. Chris Staveley, concluded: “Yields in many markets are now expected to trend more stable meaning rental growth will be the main driver of performance in the short to medium term. Capital values remain well below the record levels of mid-2007 and are 70% lower in Dublin, 62% lower in Moscow and still 53% and 49% lower in Madrid and Barcelona respectively. In the Luxembourg market, given the lower volatility overall, capital values remain only 3% lower than at the last peak – another example of the wide range in performance which characterise the European market.”