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Europe prime yields to tighten over 2018

By Paul Norman - Wednesday, February 14, 2018 9:31

Prime yields in European real estate are set to move lower over the next year, driven by "intense competition for limited supply in core markets", according to Savills Investment Management.

Savills IM said: "Investor risk aversion, together with an economic environment of lower growth and lower-for-longer interest rates are forecast to result in a renewed investor focus on prime real assets in core markets" driving down average prime yields in Europe.

Demand drivers in the market are looking strong for the next year, it said, helped by continued modest recovery in economic growth, European Central Bank Asset purchases and strengthening labour markets, the Report said. This is supporting occupier activity in the offices sector and is boosting retail sales, while occupier demand for logistics space is expected to remain healthy, thanks to growing e-commerce.

Irfan Younus, Head of Research, Europe, Savills Investment Management, said: “Perceptions of elevated geopolitical uncertainty, capital protection measures and economic risk could possibly constrain real estate investment across Europe. However, recent volatility in the bond market and stretched equity market valuations reinforce the case for real estate investment, as property can provide long and stable income flows. Furthermore, real estate potentially offers opportunities to add value through active asset management. Intense competition for limited property supply in core markets continues to exert downward pressure on yields, with prime yields declining in a number of markets towards the end of 2017.”

In terms of supply, the report notes that European office vacancy continued to decrease in 2017 but should stabilise, reflecting development pipeline increases due in 2018-19.

Savills IM reports: "The supplies of quality retail space on Europe’s best high streets and in its best shopping centres are limited but availability of secondary space remains high. Although speculative completions have increased, there is a shortage of vacant, prime and modern space in Europe’s core logistics hubs. Urban logistics, the report says, is set to be one of the most significant growth markets over the next few years as e-commerce continues to grow across Europe."

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