Catella Market Indicator...ation in Europe’s real estate markets that office real estate remains...

Catella Market IndicatorOFFICE | EUROPE

SPRING 2017

2 CATELLA MARKET INDICATOR | EUROPE | SPRING 2017

Contents

MARKET OUTLOOK

3 Foreword

4 Growth in Europe – value for investors

6 Invitation for investors – diversification & stability

12 The rise of the European markets – deals & pricing

14 European office market map overview 2017

REGIONAL MARKETS

16 Baltics

17 Belgium

18 Denmark

19 Finland

20 France

21 Germany

22 Luxembourg

23 Netherlands

24 Norway

25 Poland

27 Spain

28 Sweden

30 United Kingdom

OTHER

31 Contacts research

Prime yieldsThe yield for a property of the highest quality specification in a prime location within the area. The property should be 100% let at the market rent at the time, to blue-chip tenants, with leasing term typical for prime property within that market. The yield should reflect net income received by an investor, expressed as a percentage of total capital value.StockTotal volume of existing office floorspace in net sq m. of a defined location/area. Office floorspace includes completed, let and vacant office buildings/spaces.

Prime rentPrime rent represents the top open-market rent that can be achieved for a notional office unit (sq m.) per month. The unit itself has to feature highest quality and is to be situated in the best location of the local market. SourcesThe main sources are Catella local branches and the inhouse research team. Additional sources are indicated where used.

Definitions and Sources

CATELLA MARKET INDICATOR | EUROPE | SPRING 2017 3

Catella is a leading specialist in property advisory services, property investments, fund management and banking, with operations in 12 European countries. The group has sales of approximately SEK 2 billion and manages assets of approximately SEK 150 billion. Catella is listed on Nasdaq Stockholm in the Mid Cap segment.

Catella provides high-end market analysis products and services for the property market. We use our perspec-tives from the financial markets and experience from investment banking to create truly forward-looking research.

Read more at catella.com

Catella – Providing high-end market analysis

Europe – a powerful invest-ment spectrumDEAR READERS,

Europe and its real estate markets are changing – not just due to the effects of the Brexit decision, but also, and indeed primarily, because of the exceptionally positive prospects for the coming years: In terms of economic policy and perfor-mance, the future currently looks bright for European companies – from the manufacturing industry to the services sector.

However, this melange should also be looked at in more detail: On the one hand, there have been positive rental trends, an overall increase in the rental volume and a large number of transac-tions in recent months in the office segment. These trends are also partly due to a situation which we have rarely seen to such an extent before. Hardly any new projects have been initiated. As is widely known, supply shortages and rising demand lead to price increases. The number of exclusive office developments is low throughout Europe. However, high rents in existing properties caused by supply shortages in the local market are rarely economically sustainable. Although the office segment will conse-quently continue to be regarded as the number one investment vehicle in inves-tors’ portfolios, the yield compression in existing space and the increasing supply shortages are prompting investors to turn their attention to project develop-ments. Throughout Europe, the demand is there; however, lenders and investors are hesitant about getting involved in office developments, with their cyclical reputation, in what appears to be a very positive market environment.

In the new-build segment, and even more so in the refurbishment segment, the market situation is changing in many countries: Co-working models, evolving office work practices, digitalisation and pay-per-use concepts are likely to prompt faster rather than slower changes in what is required of office concepts in the com-ing years. The new requirements are still sporadic, but current observations pro-vide a good indication of how the future will be. While there may be significant changes in office concepts, this will have no effect on the importance of location as a factor for office real estate. In this regard, a sustainable location primarily means CBD areas and – as can be seen throughout Europe – areas close to transport facilities such as train stations, urban rail interchanges and airports.

It nearly seems as if the capital mar-ket is already anticipating these trends. The majority of major European project developments are almost entirely for mixed use. Office space, but only in com-bination with retail and/or residential use.

Our analysis of 32 office locations in Europe identified these trends in the clear majority of cases. So, if we can ascertain rising rents in 19 out of 32 locations – in other words, 19 locations where yields are declining – the markets are in a very strong position purely from a market perspective. Vacancy rates are continuing to fall, and rents are increas-ing across the board.

In terms of the transaction volume, we have just seen an historic develop-ment: For the first time, Germany has knocked the UK off its traditional top spot, with France following in third place. The Nordics are also performing extraordinarily well at present, in par-ticular Sweden and Finland. In southern Europe, Spain recently recorded its best ever quarter.

It is due to this extremely positive situ-ation in Europe’s real estate markets that office real estate remains the top preference for investors. Depending on the level of risk appetite, the investment range in 2017 stretches from London’s West End to – at least in theory – Moscow.

We hope you enjoy reading this issue!

Thomas BeyerleHead of Group Research


Growth in Europe – value for investors

Norway and Italy have registered growth of under 1%, the economies of Spain and Ireland are currently recovering strongly. Along with Sweden and Luxembourg, the rate of growth in those two countries is currently above 3%. Above-average growth is also evident in the Nether-lands, Germany, the UK, Poland, the Czech Republic and Hungary.

Unemployment in Europe has been falling constantly since 2013, and accord-ing to estimates, it will reach a rate of almost 8.1% in 2022. The figure for the USA outperforms this level by coming in at just over 5%. There are significant differences between national rates of unemployment across Europe as well. In Germany, just 4.2% of people of working age are currently out of work, while Denmark is currently experienc-ing something close to full employment with an unemployment rate of 3.9% (due to economic fluctuations, there is, in practice, always a base level of around 3%). In Spain, however, many people are still registered as out of work despite the recent annual declines in unemployment. In the past three years, the figure has gone from over 26% to the present level of 19.9%, and observers expect this number to fall further in the coming decade to ultimately dip below the 10% mark.

Europe’s population is on a similar tra-jectory: in the immediate term, migra-tion will provide a temporary boost, but in the long run, Europe is ageing. Against this backdrop, it is necessary to take a close look at the continent’s differ-ent regions, as the current urbanisation trend is not a uniform development everywhere.

The ECB continues to keep the main refinancing rate at zero, and it has resorted to some unconventional monetary policy instruments in its fight against low inflation and the economic weaknesses of some eurozone countries. Its multi-billion government bond-buying programme (quantitative easing) has seen it support the markets with money since the start of 2015, and it plans to stick to this strategy until the end of 2017 at least.

It is a policy that not only poses a threat to the retirement provisions made by consumers, but a negative interest rate for deposits also has the effect of a special tax on Europe’s businesses.

At the same time, doubts are growing about the benefits of expansionary mon-etary policies. In the normal scheme of things, falling yields for risk-free invest-ments spur a higher level of consumption and rising inflation.

However, this is not what is currently happening in Europe. Instead, several

Europe – macroeconomic condi-tions for real estate investmentWith phrases such as “Brexit”, Italian banking crisis or “Greece’s debt dilemma” on everyone’s lips, it is safe to say that the conditions for investing in European markets have been better. But when read-ing the headlines, the important things are often lost. Nevertheless, Europe’s economy is growing, and continuously at that. Average predicted growth in GDP for the coming five years is forecast at 1.5%, with 1.8% growth expected for this year. While the up-and-coming nations of Brazil and Russia are currently in difficulty, the USA has returned to a trajectory of stable growth. However, US economic growth could easily run into trouble if the Trump government is able to put the ideas for a protectionist economic policy into practice. Every eco-nomics student who has heard a lecture on the Ricardian model, David Ricardo’s study of the comparative cost advantages in foreign trade, knows that trade imped-iments in the form of customs levies ultimately have a negative impact on all market participants. A stronger focus on the Asian countries, especially China, can be expected in this case.

Within Europe, the performance of different countries reveals consider-able disparities: while Russia, Greece,

GROWTH RATE OF GDP*

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2021

2019

2020

2022

GDP growth Brazil (y/y, %) GDP growth China (y/y, %) GDP growth India (y/y, %)

%

GDP growth Russia (y/y, %) GDP growth USA (y/y, %) GDP growth Europe (y/y, %)

-9

-6

-3

0

3

6

9

12

15

Source: Oxford Economics, IMF

0

2

4

6

8

10

12

2000

2002

2004

2006

2008

2010

2012

2014

2020

2022

2018

2016

%

USA Europe

UNEMPLOYMENT RATE IN EUROPE AND IN THE USA*


* estimates after 2016 * estimates after 2016


countries’ gross investment levels have been falling for years. Companies are not basing their investment decisions only on the interest rate.

In the US, the central bank (Fed) has reduced its expansive activities and at the same time carried out the first minor interest rate hike. It is simply a matter of time before the ECB follows suit, but we do not agree when the moment will arrive.

While the eurozone’s inflation level has crept up slightly in recent months, this is more due to the rise in food and energy prices. Despite this change, core inflation as defined by the ECB, i.e. the rate of infla-tion excluding food and energy prices, has been stagnating for years.

The dilemma for the ECB is that it can only follow an interest rate policy designed for the entire eurozone, and there is no way of addressing the specific situation in any individual country. By now, it is high time that Germany and the Scandinavian countries saw their interest rates adjusted upwards, but such an increase would pose threats to the economies of other states such as Italy and Greece.

Looking at inflation in 2016, a large number of countries are far below the ECB’s target figure of 2%, and only the Czech Republic and Hungary exceed it. The other central banks of European member states have set similar inflation targets.

The countries in this report were an average of approximately 21 basis points below the target level of 2% in 2016.

Along with the interest rate, other issues such as the individual sales quantities, economic growth and confidence in overall economic development are also of impor-tance. The last of these factors is reflected in EuroStat’s business climate index.

While expectations regarding further economic development saw no major changes in 2016 as a whole, the last quarter of the year saw a significant improvement in the economic outlook of the eurozone, with a 3% increase in the index.

As a result of these positive expecta-tions, demand for company loans rose.

Europe United States

%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2021

2019

2020

2022

POPULATION GROWTH RATE IN EUROPE AND IN THE US*


-1

0

1

2

3

4

5

6

7

820

00

2002

2004

2006

2008

2010

2012

2014

2016

%

10 year government bond yields

CPI Inflation rate Europe

Main refinancing rate (EUR)

Main refinancing rate (USD)

MONETARY POLICY AND FINANCIAL CONSEQUENCES

Source: Property Market Analysis (PMA)

ECONOMIC SENTIMENT & BUSINESS LENDING

Economic sentiment

Change in business lending (%)

96

98

100

102

104

106

108

110

08/2

014

11/2

014

02/2

015

05/2

015

08/2

015

11/2

015

02/2

016

05/2

016

08/2

016

11/2

016

02/2

017

Economic sentiment

Change in business lending (%)

-3

-2

-1

0

1

%Source: EurostatSource: Property Market Analysis (PMA)

-70-60-50-40-30-20-10

01020304050

Aus

tria

Belg

ium

Den

mar

k

Cze

ch R

epub

licFi

nlan

d

Fran

ceG

erm

any

Gre

ece

Irel

and

Hun

gary

Spai

nSw

eden

Uni

ted

Kin

gdom

Nor

way

Net

herla

nds

Pola

ndPo

rtug

al

Luxe

mbo

urg

Italy

%

DEVIATION FROM TARGET INFLATION RATE OF ECB

* estimates after 2016


Invitation for investors – diversification & stabilityThe office market in Europe – basic information and portfolio strategiesStudying the macroeconomic conditions of a country or economic area is not merely a pleasant side job to investing in real estate: analysing macroeconomic parameters is, instead, essential for making a strategy regarding commercial property a success. It is necessary to keep an eye on market cycles as economic growth and rising office property prices are positively correlated. This top-down development requires a further addition to the real estate property view in the case of reduced capital growth expectations.

Looking and analysing growth rates for office costs in different countries and

comparing these figures against national GDP results in an average correlation efficient of 0.5. Particularly Germany (0.57), Sweden (0.66) and Finland (0.69) display very high correlations. The value of the national markets fell by an average of almost 34% in the two years 2008–2009, with Ireland (-89%), Spain (-58%) and Norway (-47%) coming under tremendous pressure, while Germany (-17%), the Netherlands (-16%) and Austria (-19%) display comparatively restrained losses.

Between 2010 and now (as of 31 December 2016), most countries once again returned to stable growth, with office property registering an average

growth of 5.5% per annum. This recov-ery is exceptionally marked in Ireland, as the average annual rise in prices there comes to over 17% since 2010. Above-average increases are also evident in Germany (6.7%), Norway (10.7%) and Sweden (12.2%).

If the ECB does actually switch to a more restrictive monetary policy at the start of 2018 and lower the amount of money available to commercial banks via the tender procedure, this move will have a knock-on effect on office real estate markets around Europe, with average growth instead coming to around zero until 2021. However, a toler-ance range of +1% to -4% is expected.

PRIME OFFICE CAPITAL GROWTH OF SELECTED COUNTRIES

GDP GROWTH OF SELECTED COUNTRIES

Finland France Germany

%

Spain Sweden

-10

-8

-6

-4

-2

0

2

4

6

8

2000

1993

1994

1995

1996

1997

1998

1999

1992

1991

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2021

2019

2020

2000

1993

1994

1995

1996

1997

1998

1999

1992

1991

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2021

2019

2020

%

-60

-50

-40

-30

-20

-10

0

1020

30

40



Before analysing the oppor-tunities and risks connected with Europe’s different cities, it is necessary to look at the markets’ relative size in order to assess their impor-tance within the European context and show the wide spectrum of investment destinations.

Within the group of 35 major cities across the continent, London and Paris alone account for almost 24% of the entire total of office space (in 2016) with 70 million sq m.

By way of comparison, the German cities of Munich, Berlin, Frankfurt, Cologne and Dusseldorf make up just under 18% of the total market.

yields in Munich, Stockholm, Berlin and Hamburg come to just 3–3.5% for the following few years.

Similarly, the yields in many other cities around the continent are below 4%.

The conventional (classic) model of the yield-to-risk profile compares the expected yield, normally postulated as total returns, against changes in volatil-ity over time.

The Sharpe ratio puts a value on the excess yield earned by an invest-ment relative to the risk, and it permits both components to be combined. By juxtaposing the Sharpe ratio with the expected growth in rents for office prop-erties, it is possible to rate the opportuni-ties present in specific markets.

To make a practical assessment, it is also important that it is possible to invest in a market, i.e. investment opportuni-

ties must actually be available. Here, market size is a good indicator.

Generally speaking, comparatively large markets obviously have a lower Sharpe Ratio when looked at in the long term.

Amsterdam and Oslo are two very interesting markets for office property as both cities have high expected relative rent growth and a positive Sharpe ratio.

Berlin proves itself to be a very dynamic market, as expected future growth in rents reaches a value of almost 4% per annum. However, the Sharpe ratio of 0.29 is due to volatility in the city, and this low figure means that returns in Berlin are not commensurate to the risks involved. Obviously, the capital market rates the investment loca-tion of Berlin higher than it would be fundamentally justified


0

1

2

3

4

5

Mun

ich

Stoc

khol

m

Mad

rid

Berli

nH

ambu

rg

Paris

Stut

tgar

t

Oslo

Dus

seld

orf

Fran

kfur

t

Mila

nV

ienn

aBa

rcel

ona

Cop

enha

gen

Col

ogne

%

PRIME NET YIELDS (TOP-15 CITIES) (AVERAGE; 2017–2021)

International investors continue to show great interest in Europe’s major cities, something reflected in the low purchase yields. For example, purchase

1 London 11.84%

2 Paris 11.69%

3 Berlin 5.92%

4 Munich 4.58%

5 Moscow 4.57%

6 Brussels 4.45%

7 Hamburg 3.90%

8 Stockholm 3.83%

9 Vienna 3.57%

q Frankfurt 3.43%

EUROPEAN REAL ESTATE MARKETS (OFFICE) – SIZE STRUCTURESSource: Catella Research, Property Market Analysis (PMA)

0.65% Edinburgh n0.80% Birmingham b0.82% Glasgow v0.94% Budapest c0.95% Prague x0.96% Lisbon z1.00% Luxembourg ;1.08% Lille l1.12% Dublin k1.20% Marseille j

1.22% Rotterdam h

1.24% Manchester g

1.39% Barcelona f

1.59% Warsaw d

1.68% Lyon s

1.98% Cologne p

1.98% Stuttgart a

2.00% Amsterdam o

2.51% Rome i

2.52% Dusseldorf u

2.58% Milan y

2.81% Madrid t

2.87% Helsinki r

3.05% Copenhagen e

3.29% Oslo w

Nordics

Continental Europe

UK/Ireland


Applying a “buy and hold strategy” view of the selected elements, we recommend against investing in London’s office property sector. Though the Sharpe ratio is in the lower mid-range, we expect top-end real estate to return, on average, negative growth rates for rent in the future.

Leaving this assessment of the oppor-tunities aside, the conventional yield-to-

risk profile proves its value in the form of a μ-σ calculation. Catella Research has augmented the comparison of expected yields and volatility by incorporating the beta risk factor (beta factor/β factor).

The beta factor indicates the link between the yield development of one location and the overall market. If higher than 1, this means that an investment in a specific market displays greater volatil-

ity than the market as a whole. If equal to 1, the level of volatility in the market is exactly the same as the volatility of the larger market, while a factor below 1 means that the market in question is less volatile than the aggregate market.

According to the capital asset pricing model (CAPM), a high beta factor is reflected in a high yield and, conversely, a low factor is reflected in a low yield.

5

4

3

2

1

0

-1

-2

Copenhagen

ParisBarcelona|

RotterdamFrankfurt

Rome

DusseldorfMoscow

London

Munich

— Brussels

Berlin

Hamburg

Amsterdam

Lyon

MarseilleLisbon

Luxembourg

Warsaw

Oslo

Manchester

Lille

Vienna

— Cologne

Dublin

Helsinki

0 20 40 60 80 100 120

Investment matrix – Forecast 2017–2021

Expe

cted

ave

rage

rent

al ch

ange

(201

7–20

21)

Standardised sharpe ratio

Note: the size of a bubble reflects the market size of a specific location.

Nordics Continental Europe UK/Ireland


Madrid

MilanStockholm

Prague

StuttgartGlasgowBudapest

Edinburgh — Birmingham


The size of the bubbles in the chart cor-responds to the beta factor: the larger the bubble, the higher the given market’s underlying beta factor.

Dublin, Moscow, Barcelona and Madrid are relatively risky markets. However, the investment risk derived from the beta risk in the four markets is

made up for by the commensurately high yields expected for 2017.

Direct investment in Dublin’s office property market can generate a top total return of 15.8%, a figure surpassed only by Madrid’s 18.7%.

In contrast, there are no high yields to compensate for the beta risks values of Paris and London.

Investment managers overseeing large real estate portfolios should not make their decisions solely on the base of a specific investment option’s favourable yield and risk factors.

Volatility in %

Risk-Return Profile 2017 Source: Catella Research, Property Market Analysis (PMA)

Tota

l Ret

urn

(201

7) in

%

Dublin|

—Barcelona

Madrid—

0 5 10 15 20 25

|Manchester

Paris Central—

—Stockholm

— London West End and Midtown London Central —

— London Docklands

— London M25 West

— London City

Copenhagen—

Vienna—

—Oslo

Stuttgart—

|Warsaw

—Lyon

Rotterdam——— |Paris

La Défence

Munich —

ParisCBD —

Berlin |

Frankfurt|

—Paris Western Business District

Cologne——

— MilanLuxembourg—

Lisbon—

Birmingham—

—European Portfolio*

— Edinburgh— Glasgow

— HamburgAmsterdam—

— Marseille

Brussels—

Dusseldorf——

Helsinki —

— Budapest

Rome|

—Prague

20

15

10

5

0

-5

Note: the size of a bubble reflects the beta risk of a specific location.

Nordics

Continental Europe

UK/Ireland

European Portfolio: average ideal Portfolio

Lille—


Instead, an investment which looked rather uninteresting at first glance can actually be of considerable interest for the portfolio as a whole if the option in question offers potential for diversifica-tion.

The matrix of correlation coefficients shows if an investment does in fact offer such potential or not.

European integration and the crea-tion of an internal market spanning the continent means that the economic links between different cities are growing all the time.

It therefore comes as no surprise that all major cities in Europe reveal positive correlations. As these correlations range from 0.03 to 0.87, investment managers

have access to options for diversifying their overall portfolios.

Barcelona and Madrid score 0.87 in this context, a fact that we feel needs no further explanation.

Stuttgart and Prague have a correla-tion coefficient of 0.03. With an average correlation of 0.33, Warsaw is particu-larly suitable for portfolio diversification.

Portfolio selection is far more than just “not putting all your eggs in one basket”. Similarly, it is more than putting together a risk- and yield-optimised portfolio based on expected performance figures.

Returning to CAPM, it can be used to identify fair prices for office markets by applying the yield construction in the theoretical model.

Taking into account the fluctuation risks present in all local markets, a European property portfolio should generate an overall yield of 6.7% in 2017.

Looking at the 35 different local markets, we can see that the model yield as per CAPM is below actual yield for nine of them. Insight which suggests that these markets are actually overpriced and that yields do not adequately reflect risks, i.e. market risks.

This applies in particular to the above locations London and Paris that, from a capital market approach, they have an average of 700 bp overvaluation.

In contrast, Germany’s markets return yields are too high, making them undervalued within the European

CORRELATION COEFFICIENT OF EUROPEAN OFFICE MARKETS (1994-2021) Source: Catella Research

Vienna Brussels Prague Copenhagen Helsinki Paris Berlin Dusseldorf Frankfurt Munich Stuttgart Budapest Dublin Rome Amsterdam Oslo Warsaw Barcelona Madrid Stockholm London

Vienna 1.00 0.65 0.26 0.53 0.13 0.72 0.79 0.72 0.70 0.69 0.67 0.42 0.54 0.22 0.51 0.57 0.32 0.56 0.65 0.47 0.21

Brussels 0.65 1.00 0.40 0.58 0.28 0.66 0.51 0.42 0.51 0.46 0.29 0.59 0.48 0.50 0.44 0.38 0.26 0.69 0.62 0.45 0.24

Prague 0.26 0.40 1.00 0.54 0.67 0.47 0.13 0.26 0.27 0.36 0.03 0.78 0.32 0.17 0.16 0.71 0.69 0.34 0.39 0.48 0.54

Copenhagen 0.53 0.58 0.54 1.00 0.31 0.58 0.39 0.22 0.39 0.41 0.27 0.75 0.52 0.27 0.44 0.55 0.36 0.67 0.78 0.47 0.37

Helsinki 0.13 0.28 0.67 0.31 1.00 0.38 0.17 0.11 0.29 0.36 0.14 0.63 0.40 0.33 0.46 0.64 0.57 0.37 0.37 0.68 0.61

Paris 0.72 0.66 0.47 0.58 0.38 1.00 0.70 0.65 0.73 0.78 0.48 0.59 0.56 0.45 0.39 0.68 0.38 0.62 0.75 0.60 0.59

Berlin 0.79 0.51 0.13 0.39 0.17 0.70 1.00 0.72 0.74 0.80 0.79 0.33 0.46 0.33 0.48 0.42 0.17 0.56 0.63 0.52 0.22

Dusseldorf 0.72 0.42 0.26 0.22 0.11 0.65 0.72 1.00 0.80 0.80 0.70 0.30 0.29 0.36 0.33 0.56 0.40 0.31 0.45 0.26 0.14

Frankfurt 0.70 0.51 0.27 0.39 0.29 0.73 0.74 0.80 1.00 0.84 0.75 0.38 0.49 0.60 0.57 0.60 0.23 0.60 0.65 0.47 0.35

Munich 0.69 0.46 0.36 0.41 0.36 0.78 0.80 0.80 0.84 1.00 0.75 0.45 0.64 0.41 0.44 0.61 0.25 0.57 0.72 0.56 0.39

Stuttgart 0.67 0.29 0.03 0.27 0.14 0.48 0.79 0.70 0.75 0.75 1.00 0.19 0.40 0.37 0.44 0.43 0.09 0.44 0.45 0.39 0.12

Budapest 0.42 0.59 0.78 0.75 0.63 0.59 0.33 0.30 0.38 0.45 0.19 1.00 0.51 0.42 0.44 0.66 0.50 0.62 0.65 0.64 0.60

Dublin 0.54 0.48 0.32 0.52 0.40 0.56 0.46 0.29 0.49 0.64 0.40 0.51 1.00 0.28 0.58 0.50 0.14 0.76 0.80 0.54 0.49

Rome 0.22 0.50 0.17 0.27 0.33 0.45 0.33 0.36 0.60 0.41 0.37 0.42 0.28 1.00 0.50 0.31 0.20 0.65 0.48 0.38 0.26

Amsterdam 0.51 0.44 0.16 0.44 0.46 0.39 0.48 0.33 0.57 0.44 0.44 0.44 0.58 0.50 1.00 0.50 0.22 0.73 0.65 0.60 0.29

Oslo 0.57 0.38 0.71 0.55 0.64 0.68 0.42 0.56 0.60 0.61 0.43 0.66 0.50 0.31 0.50 1.00 0.80 0.48 0.54 0.53 0.60

Warsaw 0.32 0.26 0.69 0.36 0.57 0.38 0.17 0.40 0.23 0.25 0.09 0.50 0.14 0.20 0.22 0.80 1.00 0.17 0.23 0.28 0.32

Barcelona 0.56 0.69 0.34 0.67 0.37 0.62 0.56 0.31 0.60 0.57 0.44 0.62 0.76 0.65 0.73 0.48 0.17 1.00 0.87 0.62 0.36

Madrid 0.65 0.62 0.39 0.78 0.37 0.75 0.63 0.45 0.65 0.72 0.45 0.65 0.80 0.48 0.65 0.54 0.23 0.87 1.00 0.61 0.43

Stockholm 0.47 0.45 0.48 0.47 0.68 0.60 0.52 0.26 0.47 0.56 0.39 0.64 0.54 0.38 0.60 0.53 0.28 0.62 0.61 1.00 0.52

London 0.21 0.24 0.54 0.37 0.61 0.59 0.22 0.14 0.35 0.39 0.12 0.60 0.49 0.26 0.29 0.60 0.32 0.36 0.43 0.52 1.00

Source: Catella Research


RETURN SPREAD BETWEEN REAL RETURNS AND MODEL RESULTS (CAPM)

%

-1,500

-1,200

-900

-600

-300

0

300

600

900

Vie

nna

Brus

sels

Prag

ueC

open

hage

nH

elsin

kiLi

lleLy

onM

arse

ille

Paris

: Cen

tral

Berli

nC

olog

neD

usse

ldor

fFr

ankf

urt

Ham

burg

Mun

ich

Stut

tgar

tBu

dape

stD

ublin

Mila

nRo

me

Luxe

mbo

urg

Am

ster

dam

Rott

erda

mO

sloW

arsa

wLi

sbon

Mos

cow

Barc

elon

aM

adrid

Stoc

khol

mBi

rmin

gham

Edin

burg

hG

lasg

owLo

ndon

: Cen

tral


CORRELATION COEFFICIENT OF EUROPEAN OFFICE MARKETS (1994-2021) Source: Catella Research

Vienna Brussels Prague Copenhagen Helsinki Paris Berlin Dusseldorf Frankfurt Munich Stuttgart Budapest Dublin Rome Amsterdam Oslo Warsaw Barcelona Madrid Stockholm London

Vienna 1.00 0.65 0.26 0.53 0.13 0.72 0.79 0.72 0.70 0.69 0.67 0.42 0.54 0.22 0.51 0.57 0.32 0.56 0.65 0.47 0.21

Brussels 0.65 1.00 0.40 0.58 0.28 0.66 0.51 0.42 0.51 0.46 0.29 0.59 0.48 0.50 0.44 0.38 0.26 0.69 0.62 0.45 0.24

Prague 0.26 0.40 1.00 0.54 0.67 0.47 0.13 0.26 0.27 0.36 0.03 0.78 0.32 0.17 0.16 0.71 0.69 0.34 0.39 0.48 0.54

Copenhagen 0.53 0.58 0.54 1.00 0.31 0.58 0.39 0.22 0.39 0.41 0.27 0.75 0.52 0.27 0.44 0.55 0.36 0.67 0.78 0.47 0.37

Helsinki 0.13 0.28 0.67 0.31 1.00 0.38 0.17 0.11 0.29 0.36 0.14 0.63 0.40 0.33 0.46 0.64 0.57 0.37 0.37 0.68 0.61

Paris 0.72 0.66 0.47 0.58 0.38 1.00 0.70 0.65 0.73 0.78 0.48 0.59 0.56 0.45 0.39 0.68 0.38 0.62 0.75 0.60 0.59

Berlin 0.79 0.51 0.13 0.39 0.17 0.70 1.00 0.72 0.74 0.80 0.79 0.33 0.46 0.33 0.48 0.42 0.17 0.56 0.63 0.52 0.22

Dusseldorf 0.72 0.42 0.26 0.22 0.11 0.65 0.72 1.00 0.80 0.80 0.70 0.30 0.29 0.36 0.33 0.56 0.40 0.31 0.45 0.26 0.14

Frankfurt 0.70 0.51 0.27 0.39 0.29 0.73 0.74 0.80 1.00 0.84 0.75 0.38 0.49 0.60 0.57 0.60 0.23 0.60 0.65 0.47 0.35

Munich 0.69 0.46 0.36 0.41 0.36 0.78 0.80 0.80 0.84 1.00 0.75 0.45 0.64 0.41 0.44 0.61 0.25 0.57 0.72 0.56 0.39

Stuttgart 0.67 0.29 0.03 0.27 0.14 0.48 0.79 0.70 0.75 0.75 1.00 0.19 0.40 0.37 0.44 0.43 0.09 0.44 0.45 0.39 0.12

Budapest 0.42 0.59 0.78 0.75 0.63 0.59 0.33 0.30 0.38 0.45 0.19 1.00 0.51 0.42 0.44 0.66 0.50 0.62 0.65 0.64 0.60

Dublin 0.54 0.48 0.32 0.52 0.40 0.56 0.46 0.29 0.49 0.64 0.40 0.51 1.00 0.28 0.58 0.50 0.14 0.76 0.80 0.54 0.49

Rome 0.22 0.50 0.17 0.27 0.33 0.45 0.33 0.36 0.60 0.41 0.37 0.42 0.28 1.00 0.50 0.31 0.20 0.65 0.48 0.38 0.26

Amsterdam 0.51 0.44 0.16 0.44 0.46 0.39 0.48 0.33 0.57 0.44 0.44 0.44 0.58 0.50 1.00 0.50 0.22 0.73 0.65 0.60 0.29

Oslo 0.57 0.38 0.71 0.55 0.64 0.68 0.42 0.56 0.60 0.61 0.43 0.66 0.50 0.31 0.50 1.00 0.80 0.48 0.54 0.53 0.60

Warsaw 0.32 0.26 0.69 0.36 0.57 0.38 0.17 0.40 0.23 0.25 0.09 0.50 0.14 0.20 0.22 0.80 1.00 0.17 0.23 0.28 0.32

Barcelona 0.56 0.69 0.34 0.67 0.37 0.62 0.56 0.31 0.60 0.57 0.44 0.62 0.76 0.65 0.73 0.48 0.17 1.00 0.87 0.62 0.36

Madrid 0.65 0.62 0.39 0.78 0.37 0.75 0.63 0.45 0.65 0.72 0.45 0.65 0.80 0.48 0.65 0.54 0.23 0.87 1.00 0.61 0.43

Stockholm 0.47 0.45 0.48 0.47 0.68 0.60 0.52 0.26 0.47 0.56 0.39 0.64 0.54 0.38 0.60 0.53 0.28 0.62 0.61 1.00 0.52

London 0.21 0.24 0.54 0.37 0.61 0.59 0.22 0.14 0.35 0.39 0.12 0.60 0.49 0.26 0.29 0.60 0.32 0.36 0.43 0.52 1.00

Source: Catella Research

context. These findings can be used as indicators, but they should be treated with care as the requirements for apply-ing the CAPM model are not met in full.

Insufficient divisibility, asset hetero-geneity, problems with actual availability and the lack of short-selling options all greatly restrict the theory‘s applicability to the real estate markets.

In other words, there is some bad news: mispricing and market inefficien-cies are always present in property markets. However, there is also good news: yield sources will never dry up for investors, particularly when it comes to options far removed from classic core real estate.


The rise of the European markets – deals & pricingThe office market in Europe – deals and pricing Transactions in the office segment have seen constant improvement since the 2007/2008 financial crisis. Looking at the data from 2007 to 2017, we can see that the highest annualised transaction volume was recorded in 2007 at EUR 126 billion. This figure fell by almost 75% to EUR 32 billion in 2009.

Since this low point, transactions began to grow continously almost 5% a year, though this annual increase stopped in 2016 and has fallen by 10%.

This decline in transaction volume cannot be interpreted as a turning point in the investment market.

Prices for offices continue to rise, resulting in yield compression in this segment. An assessment of the prices for office investments includes not just classic core and “core plus” items, but also (albeit to a lesser extent) value-added properties.

Analogously to the transaction volumes, it is necessary to point out that in Q3 2007, when prices were at their highest before the crash, investing in European office property reached its peak cost and, as a result, the lowest interest return. In autumn 2007, the medium-term capi-talisation rate (all risk yield; ARY) came to 5.5%. Medium-term yields of over 7% were once again being generated at the end of 2009.

The yield compression which set in afterwards has resulted in the present medium-term yield of 5.8% for office property, i.e. today’s prices have again edged towards their peak ten years ago. The difference in prices has fallen to under 5%.

Looking at distribution, we see that the median empirical yield distribution – transactions over the past few years – stands at just 5.5%. It is exactly the same as the simple mean value of pre-crisis levels.

We can also see that 50% of all trans-actions within the yield spectrum are located in the 6.7–4.5% range.

Top transactions took place with a yield level of 2%.

In the lowermost segment of the yield distribution table, there are transactions with yield returns of over 13%, so it is clear that a lot of money can still be made with real estate outside of conven-tional core markets.

The buyer profile has this year seen a clear shift towards non-national investors: while just under 48% of buyers were from abroad in 2016, Q1 2017 has already seen the figure for non-domestic purchasers jump to almost 66%.

The number of other domestic players on the market has remained more or less identical in recent years.

Looking at Q1 2017, we can see that the different investor categories favoured the German and UK market.

OFFICE TRANSACTION VOLUME EUROPE

0

5

10

15

20

25

30

35

40

Q1

’07

Q3

’07

Q1

’08

Q3

’08

Q1

’09

Q3

’09

Q1

’10

Q3

’10

Q1

’11

Q3

’11

Q1

’12

Q3

’12

Q1

’13

Q3

’13

Q1

’14

Q3

’14

Q1

’15

Q3

’15

Q1

’16

Q3

’16

Q1

’17

€ billion

Volume Long term average = € 19.47 billion

Source: Catella Research, PMA


Spain 6.1%

Netherlands 5.0%

Denmark 2.2%

Belgium 1.8%

Finland 1.6%

Others* 2.9%

Norway 6.6%

Sweden 7.2%

CROSS BORDER ANALYSIS IN THE OFFICE SEGMENT

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

USA

Germany

United Kingdom

Canada

France

Switzerland

South Korea

Qatar

China

Hong Kong

%

0

5

10

15

20

25

Source: Real Capital Analytics (RCA)

PRICING ANALYSIS*

Bottom Bottom 25% Median Top 25% Top

13.1% 6.7% 5.5% 4.5% 2.0%

* Yield at acquisition: quartile (data based on past 12 months)


Almost a quarter of the year’s property transactions involved real estate in the country. The German market leading the way with 27%, followed by the UK with 25.5%, with France in third place at almost 14%.

To conclude this study, we would like to take a closer look at the cohort of foreign investors. Many of them are from the USA, and they have invested an aver-age of EUR 17.8 billion in the European office property sector over the past three years.

US-based investor Blackstone deserves to be mentioned in this context: the company has acquired assets in the segment worth EUR 6.6 billion in the last two years alone.

Another visible trend is how an ever-growing number of investors from Arab and Asian states are moving into the European office market. Investors from South Korea, Qatar, China and Hong Kong were responsible for purchases amounting to EUR 9 billion in Europe in 2016 and EUR 1.3 billion in Q1 2017.

Turning to European investors, it is apparent that the Swiss are particularly fond of acquiring properties outside of their own borders, having invested EUR 8 billion in the last three years alone.


BUYER COMPOSITION IN THE EUROPEAN OFFICE MARKET

0

20

40

60

80

100

120

2013 2014 2015 2016 2017

%

3 2 3 6 2

15 12 11 14 8

6 10 10 10

7

28 24 22 23

18

47 52 54 48 66

Cross-Border Institutional REIT/Listed Private User/Other

Germany 27.2%

United Kingdom 25.2%

France 13.9%

MOST ACTIVE COUNTRIES BY OFFICE VOLUME Q1 2017Source: Catella Research, PMA

*Poland, Baltics, Luxembourg

SWEDEN

FINLAND

ESTONIA

LATVIA

LITHUANIA

GERMANY

POLAND

DENMARK

FRANCE

SPAIN

UK

NORWAY

NETHERLANDS

BELGIUM

STOCKHOLM

MADRID

LONDONCITY

STUTTGART

BERLIN

WARSAW

FRANKFURTLUXEMBOURG

TALLINN

HELSINKI

RIGA

LONDON WEST END

AMSTERDAM

MANCHESTER

BIRMINGHAM

ROTTERDAM

COLOGNE

DUSSELDORFBRUSSELS

PARIS

OULU

VILNIUS

MALMÖ

OSLO

TURKU

TAMPERE

LAHTI

GOTHENBURG

MUNICH

HAMBURG

COPENHAGEN

LYON

BARCELONA

European office market map overview 2017

3.60

24.00

6,000,000

3.10

28.50

17,821,706

3.10

36.50

13,770,914

4.25

20.90

2,200,000

3.80

26.50

7,577,590

5.25

35.60

3,733,262

3.25

26.00

11,754,939

3.70

34.20

9,925,871

4.10

27.90

5,986,268

3.60

38.00

10,311,190

3.85

22.00

5,964,191

4.50

19.20

5,175,129

3.50

23.00

6,032,613

4.45

45.00

3,064,787

4.00

21.25

9,611,908

3.40

48.90

11,587,583

5.12

16.25

3,649,168

3.40

33.00

12,850,000

5.30

32.10

2,418,737

3.00

63.50

52,238,805

4.65

18.75

13,392,385

4.00

71.50

6,207,7263.50

111.50

5,956,279

3.90

25.30

2,097,000

EUR 4.90bn

EUR 2.50bn

EUR 1.10bn

EUR 4.60bn

EUR 1.19bn

EUR 1.30bn

EUR 0.32bn

EUR 0.12bn

EUR 0.90bn

EUR 0.39bn

EUR 0.26bn


SWEDEN

FINLAND

ESTONIA

LATVIA

LITHUANIA

GERMANY

POLAND

DENMARK

FRANCE

SPAIN

UK

NORWAY

NETHERLANDS

BELGIUM

STOCKHOLM

MADRID

LONDONCITY

STUTTGART

BERLIN

WARSAW

FRANKFURTLUXEMBOURG

TALLINN

HELSINKI

RIGA

LONDON WEST END

AMSTERDAM

MANCHESTER

BIRMINGHAM

ROTTERDAM

COLOGNE

DUSSELDORFBRUSSELS

PARIS

OULU

VILNIUS

MALMÖ

OSLO

TURKU

TAMPERE

LAHTI

GOTHENBURG

MUNICH

HAMBURG

COPENHAGEN

LYON

BARCELONA

4.90

20.00

4,985,463

6.80

17.00

760,000

6.50

17.00

570,000

7.50

20.00

616,400

4.50

33.00

8,633,000

6.75

20.00

886,000 7.50

19.00

268,800

7.25

19.00

828,300

6.20

18.00

638,000

Prime office yield, net %

Prime office rent, EUR/sq m. per month

Office stock

Prime yields Due to high demand for prime assets, the yields in most European locations are forecast to decrease further. In addition to this, the yield gap between prime and secondary is expected to narrow.

33 locations

1

14

17

Prime rents Limited class-A stock and a lagging development pipeline in prime locations are the main reasons for growing or stable prime rents in the medium-term. Decreasing prime rents in London, due to ongoing BREXIT uncertainty.

33 locations

18

17

1

Office transaction volume

Forecast 6 months

3

11

19

19

12

2

Source: Catella Research 2017, PMA

Office transaction volume per country in EUR billion

Q1 2017 Q1 2016

% change compared to

Q1 2016* 2016

Spain 1.10 0.51 116% 5.91

France 2.50 1.32 89% 19.12

Baltics 0.15 0.10 50% 0.48

Norway 1.19 0.84 41% 2.88

Germany 4.90 4.00 22% 22.10

Sweden 1.30 1.09 20% 5.43

Netherlands 0.90 0.93 -3% 5.90

Belgium 0.32 0.36 -11% 1.78

Luxembourg 0.12 0.16 -26% 0.99

Finland 0.29 0.39 -27% 1.64

Denmark 0.39 0.57 -31% 2.17

United Kingdom 4.60 8.30 -45% 22.30

Poland 0.26 0.54 -52% 1.88

* Percent change may not be accurate, due to roundings

Office Transaction volume per country in EUR billion, Q1 2017EUR 1.30bn

EUR 0.29bn

EUR 0.15bn



Baltics

Great opportunities at attractive yieldsALTHOUGH MOST AFFECTED BY THE

CRISIS, the Baltics region witnessed great recovery afterwards, while the EU as a whole stagnated. The Baltics GDP growth was 2.0% in 2015 and 1.9% in 2016. During the past few years, while external environment has restrained the economic growth, the Baltics GDP growth has been mostly driven by the domestic consumption. Along with the economic improvement of the main trade partners, the GDP growth is expected to pick up again, landing near 2.6% in 2017.

Despite of the Baltics having generally stood out with solid inflation rates as compared to the rest of EU, since 2014 the inflation rates have plummeted due to energy related commodities pricing. From the 2H 2016, attributable to the disappear-ance of the negative impact from energy related prices, the inflation has picked up again with rest of the EU. In 2017 the inflation is expected to reach 2.1%.

The declining unemployment and low inflation across the Baltics has led to significant real wage increase, which in turn has driven the private consumption growth. Unemployment is expected to decrease further, whereas structural unemployment remains the key issue to reduce unemployment rates in the future.

The Baltics commercial property markets have been rather active from 2H 2012 onwards in terms of transaction volume. In 2016, the Baltic property investment market recorded a trans-action volume of around EUR 1.1 billion. Although the market is very well capital-

GROWTH RATES OF PRIME RENT

-8

-6

-4

-2

0

2

4

6

8

10

12

Tallinn Riga Vilnius

%

2000-2008 2009-2016 2017-2020

0

50

100

150

200

2008

2009

2010

2011

2012

2013

Q1

2017

2014

2015

2016

Tallinn Riga Vilnius

In EUR million

OFFICE TRANSACTION VOLUME

LOCATION KEY FACTS AS OF Q1 2017

CityOffice stock,

sq m.

Office trans action volume, mn EUR

Prime rent p. m.,

EUR/sq m.Prime yield,

%Vacancy rate,

%

Tallinn 638,000 25.0 18.00 6.20 5.00

Riga 760,000 11.0 17.00 6.80 7.40

Vilnius 570,000 75.0 17.00 6.50 6.10

Forecast 6 months

ized, the transaction volume is limited by the supply of suitable assets at accept-able pricing.

Local investors as well as investors from Nordic and CIS countries dominate the market. The majority of the main local investors are actively seeking investment opportunities. There has also been increasing interest among investors from CIS countries over the past year.

While the prime yield rates have compressed significantly over the past five years, further moderate contraction is expected due to excessive demand for prime assets in the region. The current prime office yield levels are around 6.2% in Tallinn, 6.5% in Vilnius and 6.8% in Riga.

TOTAL OFFICE STOCK IN PROPORTION TO TOTAL VACANCY

Riga

Tallinn

Vilnius


Prime yield at historically low levelTHE BELGIAN ECONOMY grew by an annualised 1.1% in Q4 2016, just below the overall growth rate of 1.2% last year. Domestic demand and net exports both contributed notably to GDP growth, while changes in inventories were a drag on growth. Consumer prices rose by 1.8% in 2016, compared to 0.6% in 2015 and 0.2% in the euro area at large. They are forecast to rise by 2% in 2017 and by 1.8% in 2018. Belgium’s economy is expected to grow by approximately 1.5% in 2017 and 2018. Domestic demand is projected to strengthen gradually, leading to a diminishing contribution to growth from net trade. Unemployment is forecast to continue decreasing steadily, falling to 7.6% in 2018. Inflation is set to hit 2% in 2017 and 1.8% in 2018. Risks to the out-

look are mainly external. In particular, any potential shift to a less trade-friendly global environment would have negative repercussions for the export sector. Bel-gium has tight trade links with the UK.

After strong performances in 2016, office investment volumes witnessed a slow start to the year in Q1, with EUR 138 million invested in Brussels office proper-ties. Compared to the same period in 2016 this is a decrease of 59%. Neverthe-less, appetite, especially from domestic investors, is still strong and healthy as the economic environment is forecast to remain attractive this year. The largest transaction was the acquisition of IT Tower for approx. EUR 76 million by AG Real Estate. However, foreign investors didn’t take place on the Brussel market

Belgium

so far. The prime yield decreased further during the past 12 months to a current low of 4.65% for Brussels and could even witness a slight further compression dur-ing 2017.

In Brussels, the take-up is around 80,200 sq m. in Q1, mainly helped by a 22,000 sq m. pre-letting of Beobank. We expect a relatively strong decrease of activity in 2017, take-up should stand at around 350,000 sq m. for the whole year. The vacancy rate recorded further decrease in Q1 and stands at around 9.2%. However, this should increase dur-ing the year, despite the limited specula-tive supply awaited. The prime rental levels continue their upward movement in the Periphery (in the Airport district) to reach EUR 15.40/sq m./month. Recov-ery will be led by speculative deliveries following strong consistent demand for new spaces.

2017 is set to be a pivotal year for Belgium. Political uncertainties in Europe, increasing volatility and slightly growing interest rates will contribute to slightly decrease the attractiveness of the investment market in the coming years. As a result, investors will be more selec-tive in their acquisitions, mainly focusing on core assets. Conversely, activity is forecast to decrease on the letting market in 2017. Prime rents will globally remain stable, though core locations will continue to see slightly upward pressure on rents due to limited supply.


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Brussels

%

2000-2008 2009-2016 2017-2020

0

500

1,000

1,500

2,000

2,500

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2016

2015

Brussels

In EUR million

Q1

2017



CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%

Brussels 13,392,400 137.6 18.75 4.65 9.00

Forecast 6 months


Brussels


Lack of prime office space in CBD

ECONOMIC GROWTH in Denmark is gradually gaining pace. Real GDP growth has reached 1.0% in 2016 and is expected to accelerate to 1.5% in 2017 and 1.8% in 2018. Private consumption is forecast to remain the main growth driver with increasing contributions from investment. Strong employment growth, rising disposable incomes and low interest rates have stoked strong domestic demand in recent years and these factors will continue to support robust private consumption growth over

Denmark

compared to 2016. This is due to a relatively high vacancy rate of 8.6% in Copenhagen and declining amounts of space recorded in CBD areas are offset by development space in the periphery with lower market rents. There is still a high demand for prime office space in the center of Copenhagen, but the supply does not meet the demand. We expect demand to continue to pick up momen-tum, but the offer remains tense.


0

3

6

9

12

15

Copenhagen

%

2000-2008 2009-2016 2017-2020

0

300

600

900

1,200

1,500

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Copenhagen

In EUR million

201

5 2

016

Q1

2017



CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%

Copenhagen 9,611,900 288.0 21.25 4.00 8.60

Forecast 6 months

the forecast horizon. Following several years of subdued price growth, inflation is expected to pick up in 2017 and 2018. The increase in inflation reflects increas-ing energy prices, higher capacity utilisa-tion and higher wage growth.

Office investment volume in Co-penhagen reached EUR 288 million, a strong increase of 53% compared to the first quarter of 2016. There is a strong focus on well-located properties in the harbour submarkets in Copenhagen and CBD. The high demand for prime office properties, together with the low supply, pressure the investors to seek in more peripheral areas around Copenhagen. We have seen a compression of the prime yield level towards 4.00% over the first quarter of 2017 and we expect to see the prime office yield remain around this level, with a slight downside potential during 2017. Compared to Q1 2016 prime yield dropped by 28 basis points.

Companies are targeting modern leases in CBD and this has led to a slight uplift in rents in CBD and some sur-rounding areas such as Ørestaden. Prime rent currently stands at EUR 21.25/sq m./month and remained unchanged


Copenhagen


Finland

Opportunistic investments attractFINLAND’S ECONOMY turned to broad-based growth in 2016 by 1.0%. The expansion is expected to continue in 2017 but at a somewhat lower pace due to weak income growth which should hold back domestic demand. Domes-tic demand increased on the back of strengthening private consumption and construction investment.

Employment has started to increase and job creation should become more robust, resulting in a lower unemploy-ment rate. The GDP growth expansion is expected to continue in 2017 but at a somewhat lower pace due to weak income growth which should hold back domestic demand. In 2018, growth is expected to pick up again as improved cost competitiveness boosts exports and investment.

The real estate transaction volume last year exceeded the previous record in Finland, and it seems like the market will remain very active also in 2017. As in recent years, the majority of buyers were domestic investors, while during the previous peak years, the growth in volume was largely a result of interna-tional investors operating at high levels of leverage. The Finnish office investment market slowed down in the first quarter of 2017 to EUR 285 million, a decrease of 27%. Similarly, office volume in Helsinki Metropolitan Area also declined by 22% to EUR 247 million. In addition to exist-ing players, many other foreign investors have been actively interested in the Finn-ish property market and participated in the bidding competitions, and the trend is assumed to continue. The transaction volume also revealed a shift towards a more opportunistic investment strategy, which applied for both, portfolios and individual properties. However, foreign investors are still mainly interested in prime properties, and the scarce supply of suitable assets continues to be a handi-cap limiting new operators entering the Finnish market. This also causes diversi-

fication between core and opportunistic properties.

The office yield in Helsinki CBD con-tinued to decline and now stands at 4.5%. The yield requirement decreased most in the city centre, in other key office areas the decline was less severe. In growth centres, the yield levels have decreased more moderately and partly remained unchanged.

In the near future, the transaction volume is expected to remain at a high level. The trend is maintained by high foreign demand and the low level of return offered by alternative investment instruments. The number of foreign players is expected to grow in the Finnish market and the improving liquidity is likely to further strengthen the favour-able development.

In Helsinki’s city centre there is shortage of high-quality offices and, for these, users are willing to pay top rents. We have seen rents of up to EUR 40.00/sq m./month for small premises in the central business district. The CBD prime rent is now EUR 33.00/sq m./month, an increase of 3% compared to Q1 2016. The prime rent in the surrounding area rose as well, and is now EUR 24.50/sq m./month. In the Helsinki Metropolitan Area, the amount of vacant office space is still high, with now 1.1 million square metres of empty office space. The vacancy rate is nearly 13%, mainly due to high supply of old office space.


-5.0

-2.5

0.0

2.5

5.0

Helsinki (Metropolitan area)

%

2000-2008 2009-2016 2017-2020

0

300

600

900

1,200

1,500

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Q1

2017


In EUR million



CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%


8,633,000 247.0 33.00 4.50 12.90

Turku 828,300 19.00 7.25 5.90

Tampere 886,000 20.00 6.75 5.40

Oulu 616,400 20.00 7.50 4.60

Lahti 268,800 19.00 7.50 5.50

Forecast 6 months


Helsinki

Oulu

LahtiTampere

Turku


France

Growing interest for value-addin the vicinity. Most of the investment has therefore been “core”, even though the “value-added/opportunist” possibili-ties are also clearly there. Île-de-France is the top destination for investors, accounting for 86% of all office invest-ments in Q1 2017, with a total volume of EUR 2.14 billion. Q1 2017 has seen a moderate consolidation regarding yields, but it is likely that a slight drop will occur in the second quarter, highlighting the current massive imbalance between the volume of capital in the investment market and the reduced number of products available. Office prime yield currently stands at 3.0%, only a slight decrease of 15 basis points compared to the first quarter of 2016. Despite the rise in ten-year government bonds, the property risk premium remains attrac-tive because of its height. The real ques-tion remains the impact of the results of the French presidential election on yields for both types of investment.

The dynamism seen in 2016 has continued through the beginning of 2017 in the Île-de-France office market. With 664,000 sq m. having been com-mercialized, Q1 2017 has seen the best first-quarter performance in a decade. This 27% increase compared to the first quarter of 2016 is due to a rise in the number of large transactions, in particular to the 86,000 sq m. “mega transaction” in the Tours Duo, leased by Natixis. The overall vacancy rate in the Île-de-France region has remained stable at 6.3%. Paris continues to post a vacancy rate of 3.4%, still below the average over the last ten years. But one should also consider the high volume of completion of buildings that will occur over 2017, which could have an impact on Paris supply volumes. Prime rents for new buildings have increased in the Paris CBD to EUR 63.50/sq m./month. Prime rent will mainly remain stable during the year, but areas with very tight supply have started to see sustained upward pressure on rents.

GDP GROWTH DECLINED slightly to 1.2% in 2016 from 1.3% in 2015, despite growth reaching 0.4% in the fourth quarter. Private consumption accelerated on the back of dynamic household pur-chasing power, while investment growth has been boosted by anticipation of the end of the over-amortisation scheme, a fiscal incentive for firms to invest. GDP growth is forecast to pick up to 1.4% in 2017 and 1.7% in 2018 under the usual no-policy-change assumption. Private consumption is expected to decelerate in line with purchasing power, as the tailwinds from lower oil prices fade out. Also, the recovery in investment is gaining momentum, particularly in the construction sector. Despite continued global uncertainty, risks to the forecast for France are less tilted to the downside than in autumn. The improvement of labour market conditions could allow for a more significant drop in the household saving rate on average and thus stronger private consumption.

The first quarter of 2017 has seen a duplication of French office investments, totaling to EUR 2.5 billion. This is a further positive sign of the continued dynamism of the market, although this performance is very much related to postponements from the end of 2016 to the beginning of 2017 regarding finalization of deals. The market remains focused on the most developed business districts, particularly those promising potential rental value growth in the medium term. Higher values would be due either to supply shortages for new or good quality buildings, or by the arrival of better public transport connectivity (notably the Grand Paris Express project)


-10

-5

0

5

10

15

20

25

Paris (GreaterParis Area – IDF)

Lyon

%

2000-2008 2009-2016 2017-2020

0

5,000

10,000

15,000

20,000

25,000

2001

2002

2003

2004

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2006

2007

2008

2009

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2011

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Lyon

In EUR million

Paris (Greater Paris Area – IDF)

2015

2016

Q1

2017


LOCATION KEY FACTS AS OF Q1 2017 Source: MBE Conseil/Catella Property France

CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%

Paris (IDF) 52,238,800 2,145.0 63.50 3.00 6.30

Lyon 5,175,130 72.9 19.20 4.50 7.00

Forecast 6 months


Paris

Lyon


Germany

Investment volume sets new recordGERMANY’S ECONOMIC GROWTH strengthened further in 2016. Gross domestic product increased by 1.9% after 1.7% in 2015. Private consumption continued to increase at 2.0%. Public consumption and investment rose mark-edly, due largely but not exclusively to expenditure for refugees. Private investment growth was primarily driven by housing investment. Employment is expected to continue increasing but at a slower pace as the labour market is close to full employment. With energy prices rising again, real household consumption is forecast to slow down somewhat, but to remain relatively strong thanks to the continued rise in employment and wages.

Overall, real GDP is expected to increase by 1.6% in 2017, slowed down by fewer working days, and 1.8% in 2018.

The German commercial property investment market got off to a strong start in the first quarter of 2017 and was able to maintain its rapid pace of growth. The transaction volume in the first three months amounted to a total of EUR 12.5 billion and represents an increase of almost 59% compared to the first quarter of 2016. This is the best first quarter ever recorded on the German commercial investment market. There was an unusu-ally high number of deals between EUR 50 million and EUR 100 million.

Acquisitions in German Top 7 mar-kets represent 41% of total investment volume in Germany in Q1 2017 com-pared to 51% in 2016. The office sector remains by far the most sought after asset with a share of 40% on the total German market and 50% share on German Top 7 markets. Given the current high price

0

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2,000

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2001

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Berlin

Stuttgart

CologneFrankfurt Hamburg

DusseldorfMunich

In EUR million

201

5 2

016

Q1

2017


-30-25-20-15-10

-505

101520253035

%

2000-2008 2009-2016 2017-2020

BerlinCologne

DusseldorfFrankfurt

HamburgMunich

Stuttgart



CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%

Berlin 17,821,700 717.0 28.50 3.10 2.70

Cologne 5,964,190 280.0 22.00 3.85 6.60

Dusseldorf 7,577,590 152.0 26.50 3.80 7.70

Frankfurt 10,311,190 429.0 38.00 3.60 10.60

Hamburg 11,745,940 143.0 26.00 3.25 6.20

Munich 13,770,910 836.0 36.50 3.10 3.50

Stuttgart 6,032,610 50.0 23.00 3.50 3.40

Forecast 6 months

level more owners are now willing to sell, given the strong conditions and good prospects offered by the occupier mar-kets investors are willing to contemplate a higher degree of risk. Prime yields compressed once again to now 3.46% with further compression expected due to strong demand and low bond yields. The strong focus of investors and users on central modern office properties in prime locations will further intensify competition and lead to a corresponding price dynamic and sustained pressure on property yields. This development will bring diversification effects to B- and C-category locations, without compro-mising on the quality of the properties.

Demand for modern office space remains strong across all major office markets. The shortage of large modern office spaces in central office locations is forcing occupiers to consider non-central locations for new lettings. This is particularly evident in Frankfurt, Ham-burg and Munich, where a significant proportion of take-up was registered. The supply/demand imbalance is exert-ing upward pressure on prime rents and increases have already taken place in Berlin, Frankfurt and Munich in Q1, with further growth likely in 2017. The already very low vacancy rates in most of the markets will decline further in the coming quarters.


Berlin

Hamburg

Frankfurt

Munich

Stuttgart

Cologne

Dusseldorf


Luxembourg

Further yield compression expected

pipeline remains limited, no changes are expected in the short term. This could lead to a slight increase of the prime rents in areas such as the Kirchberg or the Cloche d’Or. Demand should remain above the five-years average potentially helped by Brexit.

AFTER A RELATIVELY weak performance in the first quarter of 2016, closely related to the negative evolution of financial markets at the beginning of the year, economic activity gained momentum in the following two quarters, supported by a sharp improvement in the net exports of services, particularly financial ser-vices. In 2017, GDP growth is expected to rise to 4.0%. An improvement in household disposable income should support private consumption expansion growth, as disposable incomes benefit from the tax-reduction reform that took effect at the start of the year. Favourable financial conditions and strong employ-ment prospects should also outweigh the impact of higher oil prices. In line with the recovery in oil prices, inflation is projected to rebound.

The investment market in the country witnessed a weak start to the year with approx. EUR 120 million invested so far. Nevertheless, total office investment volume reached EUR 985 million in 2016, the highest level since 2007. International investors remain the

most active, thanks to the steady macro-economic fundamentals observed. The increasing competition contributed to further compression of the prime yield which is at 4.45%. Yield compression was also observed in secondary locations of Luxembourg, where prime yield stands at now 5.25%. Slight compression is also expected throughout the year, also helped by Brexit.

Following a robust take-up activity in 2016, volume stands again at a high of approx. 75,000 sq m. in Q1 2017. The Financing sector and the service firms should continue to perform at high level, likely helped by Brexit and the willing-ness of some corporates to relocate to the continent. Prime rents are expected to witness a slight upward movement in 2017 as the speculative pipeline is limited and as occupiers are focusing on the best locations. Compared to the first quarter of 2016, prime rent increased by 2.2% to a current level of EUR 45,00/sq m./month. The vacancy rate should remain relatively stable in 2017 with approx. 5.00%. As the speculative


0

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35

40

Luxembourg

%

2000-2008 2009-2016 2017-2020

0

500

1,000

1,500

2,000

2,500

3,000

2001

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Luxembourg

In EUR million

201

520

16Q

1 20

17



CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%

Luxembourg 3,064,790 53.9 45.00 4.45 5.00

Forecast 6 months


Luxembourg


Netherlands

Growing number of office developmentsTHE DUTCH ECONOMY performed bet-ter than expected with a projected growth rate of 2.1% in 2016. Upbeat economic sentiment and positive readings from forward looking economic indicators also suggest a reasonably strong first quarter in 2017. The labour market is performing well, with the decline in unemployment accelerating in the final months of 2016. Inflation is expected to rise from its very low levels in recent years to 1.4% in both 2017 and 2018. Employment is expected to continue to grow, leading to a further decline in the unemployment rate to 5.2% in 2017 and 4.7% in 2018. Looking ahead, quarterly growth rates are expected to decrease to slightly lower levels leading to an expected annual GDP growth rate of 2% in 2017 and 1.8% in 2018.

Downward risks to the outlook are substantial, particularly towards the end of the forecast horizon. The uncertainty related to United Kingdom’s decision to leave the European Union could have a negative impact on Dutch exports as the UK is the Netherlands’ second largest export destination in terms of value-added. Domestic downside risks to the forecast relate mainly to the situation of pension funds.

Investors’ appetite continued to remain high in the first quarter of 2017, although, the availability of prime investment products in dominant areas of the country is rather limited. Total office transaction volume in The Nether-lands amounted to approx. EUR 900 million in Q1 2017, a slight decrease of 3% compared to the first quarter of 2016. The two largest Dutch markets, Amsterdam and Rotterdam remain by far the most sought after locations with the highest transaction volumes.

The positive elections stimulated investors’ confidence as well as the interest rates which remained low. Due to a limited availability on prime locations and prime products in the country, investors’ focus shifts to core+ and value-add investments. Office yields compressed further compared to Q1

2016 by 70 basis points in Amsterdam to 4.1%, and 38 basis points to 5.12% in Rotterdam. Demand continues to remain high for prime locations. However, well-accessible second tier locations will benefit from a limited availability.

During the first three months of 2017 the Randstad area continued to remain popular amongst occupiers, vacancy rates dropped as supply decreased nationwide. Main drivers of the occupier market are Media and Technology firms and serviced offices. Supply of office space on prime locations further declined, particularly in Amsterdam where vacancy rates drop further as supply is limited in core submarkets. Thus, alternative well-accessible loca-tions and submarkets with a high level of amenities and qualified stock gain higher interest from occupiers. Prime rents remained on par for the vast majority of the office market, whereas some core submarkets in Amsterdam incidentally register higher rents. Nevertheless, pres-sure on prime rent remains, especially in Amsterdam, where the impact of Brexit might bring employment opportunities due to the influx of new businesses. This will have a positive effect on the office market, especially the Randstad area.


CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%

Amsterdam 5,986,270 435.4 27.90 4.10 13.40

Rotterdam 3,649,170 230.0 16.25 5.12 16.50

Forecast 6 months


0

2

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6

8

10

Amsterdam Rotterdam

%

2000-2008 2009-2016 2017-2020

0

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1,000

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2,500

3,000

2001

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2014

Amsterdam Rotterdam

In EUR million

201

5 2

016

Q1

2017



Amsterdam

Rotterdam


Norway

More upward potential for rentsECONOMIC MOMENTUM is building on the back of the oil price increase seen in late 2016, as evidenced by recent data. Exports, which are largely composed of fossil fuels, have been surging and grew almost 30% annually in March. On the domestic front, a rapid deceleration in inflation after its surge in late 2016, combined with declining unemploy-ment, is giving households some respite. With elections coming up in September, whether or not to continue with fiscal stimulus is at the center of debate. Sup-ported by steady private consumption and rebounding exports, the economy will accelerate this year. Total GDP is expected to expand 1.4% in 2017, which is unchanged from last month’s forecast. For 2018, economic growth will be 1.8%.

Norwegian offices remain a top target for investors due to favourable financing conditions and low interest rates. Oslo is yet again the core market, however, there are growing levels of activity in more second-tier cities, where it’s easier to get higher initial yield. The first quarter has been very active in the office segment, both in terms of amount of transactions and deal size. Office transactions volume totaled to approx. EUR 1.2 billion, a strong increase of 41% compared to the first quarter of 2016. There have been more players who are willing to sell their assets and realize some of the profit from lower yields and higher rents in the last few years. The Greater Oslo market recorded a share of 85% of total office volume in Q1 2017. The acquisition of DNB Headquarter by SBB I Norden for EUR 470 million heavily contributed to that positive investment volume in Oslo. We are expecting a good market activity with strong investor sentiment for offices till the end of 2017. Nevertheless, with the prime yield currently at 3.70%, we expect to see more upward pressure than down-ward through the year. This is mainly due to the movements in interest rates and bank margins, which increased through 2016, leading loan-financed investors to see the yield spread reduced substantially.

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Oslo

201

5

201

6

Q1

2017


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5

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15

20

25

30

35

40

Oslo

%

2000-2008 2009-2016 2017-2020



CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%

Oslo 9,925,870 1,010.0 34.20 3.70 7.10


Oslo

The positive increase in rent levels is a result of several big contracts expir-ing in combination with record low net new construction of office space. Among all the sub-areas, CBD is the area experiencing the highest increase, well supported by significant increase in take-up. The eastern and western part of the city has been stable the last period. In fact, annual take-up in the CBD areas are up almost 16% in 2016 compared to 2015. Compared to 2014, the increase in annual take-up in 2016 is as high as 52 %.

Preliminary figures indicate a low to moderate construction of new office space in 2017–2018. This is partly due to a low cyclical volume of new contracts being signed from late 2014 until 2016. There will be a high focus on converting office properties into residential, due to a strong housing market and vacancy rate is expected to decline further.


Poland

Landlords offering good incentives

(9,900 sq m.) with a number of projects under construction and being in the pipeline. Compared to the same period last year prime rents in Warsaw’s CBD decreased by EUR 0.50/sq m./month, and now stands at EUR 20.00/sq m./month. This is due to a still relatively high vacancy rate of 14.90% and high number of speculative developments. Landlords have to afford flexible lease teams and attractive incentives to push occupier demand.

INVESTMENT IS ESTIMATED to have contracted by 5.5% in 2016, limiting GDP growth to 2.8%. The apparent volatility through weak investment appears to be mainly related to the slow progress of projects financed by EU structural funds under the new programming period and increased policy and regulatory uncer-tainty. Private consumption, by contrast, expanded strongly (by 3.6%) providing the main growth driver. Solid real wage increases and rising employment, as well as increased social transfers, explain the continued strength of private consump-tion. On the downside, a prolongation of policy and regulatory uncertainty may weigh on investment and eventually also private consumption more strongly than currently foreseen. Labour supply could become a growth barrier in some sectors. On the upside, public and private invest-ment could accelerate faster than cur-rently projected. The economy is expected to gather momentum in 2017 and 2018 as investment gradually recovers from a substantial contraction in 2016. Private consumption is set to remain the main growth driver, and the labour market is expected to tighten further.

Investment sentiment in the Polish office sector remains solid with over EUR 260 million volume transacted in Q1 2017. With a share of approx. 39%, Warsaw is the main target for office properties among the country. But demand is also shifting towards second-ary locations e.g. Wroclaw, Krakow, Poznan. A notable deal was the acquisi-tion of an office building in Poznan by Union Investment for EUR 62.0 million as well as the West Link building in Wroclaw for EUR 36.0 million purchased by Griffin Real Estate.

With significant supply of ready to- buy assets and a number of investors willing to commit capital, the volume of

investment in 2017 is expected to reach last year’s levels of approx. EUR 1.8 bil-lion. Prime yields in Warsaw and regions are going to remain stable with slightly potential for downward pressure as a number of investors actively seek for core products. Due to strong development pipeline, investors are going to focus on forward-deals.

The Polish office market continued to prosper in Q1, fueled mainly by the business services sector. Warsaw contin-ued to see strong take-up levels, in line with trend levels of activity noted in the comparable period in 2016, with 106,000 sq m. in Q1 2017. Growing space avail-ability in Warsaw alongside downward pressure on prime rents prompts tenants to move to well-located properties, which now offer lower costs and favourable lease terms. The first quarter of 2017 recorded the delivery of a large number of projects including Business Garden Phases 3–7 (54,800 sq m.) and EQlibrium

0

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1,500

2,000

2001

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In EUR million

Warsaw

201

5 2

016

Q1

2017


-10

-5

0

5

10

15

20

25

Warsaw

%

2000-2008 2009-2016 2017-2020



CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%

Warsaw 4,985,460 102.0 20.00 4.90 14.90

Forecast 6 months


Warsaw



Spain

Further rental growth in CBDON ITS THIRD YEAR OF EXPANSION, Spain has continued to grow faster than the euro area average, and GDP almost reached its pre-crisis peak last year. Growth surprised on the upside in the first three quarters of 2016, and reached an annual average of 3.2%, despite a slight deceleration in the fourth quarter. Although domestic demand is expected to remain the main growth driver, the contribution of net exports to GDP growth was positive in 2016 for the first time since the recovery started. The rate of GDP growth is expected to ease over the forecast horizon to a still robust 2.3% in 2017 and 2.1% in 2018. Unemployment is set to continue to fall steadily, and inflation is picking up as oil prices increase and core inflation recovers. Thanks to both new revenue measures and a positive macroeconomic outlook, the general government deficit is expected to continue declining over the forecast horizon.

Interest for Spanish office assets is very healthy in 2017 and Q1 started briskly with an invested volume of EUR 1.1 billion in Spain with Madrid and Barcelona attracting most of the volume with a share of 83%. There were some acquisitions in Valencia and Zaragoza reflecting the fact that regional capitals are gradually gaining attention. Another important office investment deal was the Torre Agbar in Barcelona for EUR 142 million bought by the Spanish REIT Merlin Properties. Most of the capital invested had foreign origin,

standing out that from the US. Alterna-tive emerging property sectors such as the student accommodation market are gaining ground, and are attracting the interest of specialist student market investors from other European coun-tries. Value-added properties remain attractive to investors as they are an alternative to traditional markets, given the potential for increased rents follow-ing refurbishment

With a buoyant investment market, yields once again contracted to 3.4% in Madrid and 3.6% in Barcelona. Thus, prime yields stand at their historical minimums.

Office space demand in Q1 2017 remains solid in Madrid and Barcelona. The main reasons for new lettings are increase in floor space, creation of new firms and recent openings in Spain. The number of occupier deals, especially in the smaller and mid-sizes segment, will continue in 2017 but with some lack of large deals. Vacancy rates also decreased in both cities, due to scarcity of new speculative office space and the strength-ening of the demand. This development also puts upward pressure on rents for Grade A buildings, not only in prime locations, but also in secondary locations of Madrid and Barcelona. Prime rents have increased in both Madrid and Bar-celona (+6% and +9%, respectively YOY change) and are expected to rise again in 2017 in response to occupier demand and lack of new supply.

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12

Madrid Barcelona

%

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In EUR million

Madrid Barcelona

2015

2016

Q1

2017




CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%

Madrid 12,850,000 463.0 33.00 3.40 10.70

Barcelona 6,000,000 451.0 24.00 3.60 10.90

Forecast 6 months


Madrid

Barcelona


Sweden

Shift to secondary locationsSWEDEN’S ECONOMY continued to show strong real GDP growth in 2016, likely expanding by an estimated 3.3%. Domestic demand, notably investment and private consumption, provided strong support to economic activity. Economic growth is forecast to slow to 2.4% in 2017 and 2.1% in 2018 on the back of flattening domestic demand, while net exports are set to turn posi-tive in 2017. A steady increase in real disposable income, employment growth and upbeat consumer confidence are all expected to support growth in private consumption. The labour market con-tinues to strengthen, with employment having grown by 1.9% and unemploy-ment falling to 6.9% in 2016. Firms have reported skills shortages, in particular in the public and construction sectors. On the downside, as a small open economy, a further weakening of world trade could weigh on Sweden’s export sector and its overall economic activity.

The Q1 2017 office volume increased to EUR 1.30 billion, compared to EUR 1.09 billion in the first quarter of 2016. Private and listed property companies are the biggest investors, but there are also many foreign investors active in the market. Foreign investors represented over 25% of all investments in Q1 2017 (~10% in 2016). There is a good chance that the market is about to reach the end of the increasing trend that started in the autumn of 2014. One reason is that the volume during the spring 2016 was boosted by a number of large deals. In addition, uncertainty regarding the new tax regulations that may be implemented in mid-2018 might also have a negative impact on volumes going forward. Low priority locations are characterised by many sellers and relatively few buyers. As a result of the increased supply more commercial property transactions have taken place outside the major/regional cities lately, where yields are generally higher. One

reason for the move to secondary loca-tions is that changing macroeconomic fundamentals may have made sellers increasingly eager to sell.

Both Gothenburg and Stockholm vacancies have continued to compress and rents continue to grow. In Gothen-burg attractive development opportuni-ties in the area surrounding the central station and outside the CBD at Norra Älvstranden will further spur rental growth as the new high quality space is created. In Stockholm, the development pipeline remains modest, despite the occupational market. Growth in the office stock of just above 1% is expected annually until 2020. Stockholm rents are expected to grow in 2017 and 2018 on the back of recent years’ strong upwards trend. Major developments and refurbishments in the CBD will result in a more mixed use city center adding hotels, restaurant and retail space as well as improving the overall quality and attractiveness. Although GDP growth is expected to abate slightly in 2017 the major Swedish cities remain on a positive growth path for office employment and business activity. Rental growth will continue to drive capital values in the Stockholm region with both foreign and domestic core buyers looking to acquire the best suburban locations when supply in the CBD is low.


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Stockholm

%

2000-2008 2009-2016 2017-2020

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Stockholm Malmö Gothenburg

In EUR millionQ

1 20

17

201

5 2

016



CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%

Stockholm 11,587,580 534.6 48.90 3.40 8.30

Malmö 2,200,000 60.3 20.90 4.25 9.00

Gothenburg 2,097,000 273.8 25.30 3.90 6.00

Forecast 6 months


Stockholm

Gothenburg

Malmö



United Kingdom

Uncertainty is continuing to prevailtake-up is expected to remain low over the next couple of years or at least until the UK’s position in Europe has become clearer. An acute shortage of Grade A space is curbing occupier choice and driving the pre-let market. Some speculative construction is on hold due to economic uncertainties. Until this becomes apparent rising vacancy rates, pushed up by low levels of demand and high levels of development are expected to make rental decline for the next 2 years. Rental levels have remained relatively stable, although there has been evidence of rental declines in the West End Core and increases in incentive packages. Stable rents are anticipated in the regional markets, but downward pressure forecast in the short term across Central London. The timing and extent of the recovery will clearly depend on negotiations with Europe.

GROWTH CAME IN below expectations in Q1, with the remarkable economic resilience shown since last year’s refer-endum starting to show signs of strain. Recent momentum is projected to largely continue, resulting in growth of 1.5% in 2017 and weaken further in 2018 to 1.2%. The expected tempering in momentum is driven by a slowdown in private consumption. The impact of the result of the EU referendum is expected to become apparent later in 2017. Inflation is on an upward path and is expected to rise rapidly, and significantly, to 2.5% in 2017 and 2.6% in 2018, above the Bank of England’s inflation target of 2%.

The decrease in investor interest in the UK has continued and 2017 marks the slowest start to the year in the United Kingdom since 2012. The commercial volume in the UK totaled to EUR 9.46 billion in Q1 2017, which means a decrease of 41% compared to the first quarter of the previous year. Nearly the

same drop of volumes can be observed when looking at the office sector with 45% decrease to EUR 4.62 billion.

Even though investment volumes continue to fall in London its position as the largest market in Europe remains unassailable. Office volumes in Central London reach EUR 2.9 billion and will also get a further boost if the pending EUR 1.3 billion sale of the Leadenhall Building to Hong Kong’s C C Land completes in Q2 2017, as expected. This deal exemplifies the change witnessed since the Brexit vote, as market liquidity has been supported by an influx of cross-border deals from Hong Kong, China, the U.S. and Germany. The strength of underlying long-term drivers for key markets in the UK property market remains robust.

City take-up fell back in the first quarter of 2017, despite a few sizeable deals being achieved. With uncertainty surrounding Brexit still prevalent,

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London City London West EndBirmingham Manchester

In EUR million

Q1

2017

201

620

15


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%

2000-2008 2009-2016 2017-2020

London CityLondon West End

BirminghamManchester



CityOffice stock,

sq m.


Prime rent p. m.,


%Vacancy rate,

%

London City 6,207,730 1,266.0 71.50 4.00 8.90

London Westend 5,956,280 1,720.0 111.50 3.50 6.80

Birmingham 2,418,740 400.7 32.10 5.30 12.90

Manchester 3,733,262 94.9 35.60 5.25 12.60

Forecast 6 months


Manchester

Birmingham

London City

London West End


Contacts research

CATELLA EUROPE

Dr. Thomas BeyerleHead of Group Research+49 69 310 19 30 [email protected]

BALTICS

Martin Kolga +37 2 52 58 [email protected]

DENMARK

Bent Bjerring+45 3393 [email protected]

FINLAND

Pinja Raitanen +358 10 5220 [email protected]

FRANCE

Monique Benisty+33 1 56 79 79 [email protected]

GERMANY

Maximilian Radert+49 89 189 16 65 80 [email protected]

Andreas Slupik+49 211 527 00 [email protected]

SPAIN

Álvaro Martín-Simo+34 91 411 74 [email protected]

SWEDEN

Arvid Lindqvist+46 8 463 33 [email protected]

UK

Stephanie McMahonHead of Research, Strutt & Parker+44 20 7629 [email protected]

Photography: iStockphoto

CatellaHQ: Birger Jarlsgatan 6, Stockholm

[email protected]

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