According to current market pricing, yields on prime European offices have risen, but there’s a good deal of variation between the 23 individual markets Savills surveyed recently. In Q1 2023 alone, it calculates a 19 bps increase, led by Amsterdam (+40 bps), Frankfurt (+40 bps) and Berlin (+30 bps). On an annualized basis, yields jumped by +90 bps, which it calculates as a 22% drop in capital value since the peak, which it places in Q1 2022. The biggest falls in prices have taken place in Amsterdam, Berlin, Cologne and Paris (down 33%, 33%, 32% and 31% in percentage terms).
Savills then asks the question, how far do prices need to adjust? The answer it came up with was 15% on average, though it’s the individual market figures that will be of more interest: Based on current pricing against the five year average risk premiums, seven European office markets have moved into what Savills describes as fair value territory: Hamburg, Amsterdam, London City, La Defense, Frankfurt, Oslo and Berlin). Those fall into the fair category, claims Savills, because they are within 10% plus or minus of calculated market pricing.
Prague pricing doesn’t represent fair value yet, however, with Savills arguing it could stand to lose another 17%. Warsaw and Bucharest are even more over-priced on this analysis, with more than 20% still to go. Of the 23 market it studied, the furthest over-priced was Copenhagen.
Savills Czech MD Stuart Jordan says that “Even with the weight of capital that is raised and needs to deploy in to the commercial RE sector, the build up of pressure we may have seen in previous cycles or mini cycles – specifically on institutional fund managers – simply does not exist. Would-be purchasers are likely to have both more time and patience in any staring contest with would-be vendors, during which pricing should adjust further or asset level financial events materialise”
One outstanding question for me remains whether CEE cap rates were less over-priced at the market’s peak, but we’ll leave that for another day.
The study notes that Euribor swap rates have been rising, as have lender margins. “All-in-debt costs rose by an average of 20 bps during Q1 2023 and now range between 4.3% to 5% for mainland European core stock,” writes Savills. “Debt costs remain above prime yields during Q1 2023, which continues to hamper investment transactions.” They note that while banks are better capitalized than they were before the great financial crisis, they’re still spooked over market liquidity. That could leave it to alternative lenders to help out with refinancing — but it will be more expensive.