Page 1

European Office Markets Spring 2009 Letting activity in decline

Prime yields still moving upwards but at lower pace

2007-2008 Annual take-up change

Q1 08 - Q3 08

50%

160

40%

140

30%

120

20%

Q3 08 - Q1 09

100

10%

80

0%

60

-10%

40

-20%

20

-30%

-60%

-40

Source: Savills Research

Warsaw Zurick Hamburg Munich Berlin Amsterdam Lille Vienna Luxembourg Istanbul Lisbon Frankfurt Brussels Barcelona Rome Manchester Oslo Milan London WE Madrid Stockholm London City Prague Athens Lyon Paris Dublin

-20

London WE London City Lyon Dublin Vienna Frankfurt Istanbul Paris Luxembourg Hamburg Athens Lille Berlin Barcelona Brussels Munich Warsaw Manchester Lisbon Prague

0

-50%

Amsterdam Madrid

-40%

Source: Savills Research

“Falling demand, rent adjustment, oversupply risks, scarcity of capital, restrained financing; 2009 is definitly a year of opportunities, both for rarefying tenants and for equity-rich investors! � Lydia Brissy - European Research

 Falling leasing activity has affected some occupier markets in 2008, including notably Amsterdam (-52%), Madrid (47%), London WE (43%) and London City (38%). On average, take-up decreased by nearly 16% in our survey area, with a marked deceleration at the end of 2008.

 Some cities such as Prague (+40%), Lisbon (+16%), Manchester (+12%) and Warsaw (+6%) with strong needs for modernisation still recorded significant rises in transacted volumes.

 As net absorption is evaporating and job losses are creating additional space to sublet, supply is on the rise. Average vacancy rate went up to 8% at the end of 2008 from 7.8% the previous year.

 The combination of restricted access to financing and cautious attitudes from developers is shrinking the development pipeline. New developments planned for the next 3 years in our survey area

decreased by 5% on average Moreover, we expect some of schemes planned for 2009-2010 to be delayed.

 Following on from the falls in net effective rents, prime headline rents began to decline in H2 08 in most cities. Annual prime rent change is currently -4% on average with some double digit falls seen in few large business centres.

 Our forecast suggests an additional 8.1% rent contraction until the end of 2009, which will be the result of the combined threat of softening demand and increasing supply.

 Further to the 48.4bps outward yield shift between Q1 and Q3 last year, the average prime yield moved out by a further 20.2bps to 6.10% suggesting a deceleration of price movement. Restrained investment activity is likely to continue until at least the second half of the year.


Comparisons Development pipeline for the 3 coming years

Prime market and triple net yields

07-08 change

Triple Net Yield (inc Transfer Tax) Istanbul Lille Lyon Athens Manchester London City Oslo Prague Lisbon Brussels Dublin Madrid Barcelona Rome Luxembourg Milan London WE Warsaw Vienna Paris Amsterdam Stockholm Frankfurt Berlin Hamburg Munich Zurich

Luxembourg Frankfurt Warsaw Lille Madrid Berlin Istanbul Amsterdam Dublin Munich Lisbon Barcelona Paris Hamburg Oslo Brussels London WE London City Athens Manchester Vienna -75%

-50%

-25%

0%

25%

50%

75%

100%

Market yield 09 Q1* 7.75%

7.27%

7.75%

7.20%

7.50%

6.96%

7.25%

6.28%

6.75%

6.75%

6.75%

6.75%

6.75%

6.75%

6.75%

6.06%

6.50%

5.58%

6.25%

6.25%

6.00%

6.00%

6.00%

5.82%

6.00%

5.82%

6.00%

5.71%

6.00%

6.00%

5.85%

5.57%

6.00%

6.00%

5.75%

5.56%

5.75%

5.45%

5.75%

5.34%

5.75%

5.13%

5.50%

5.50%

5.30%

5.30%

5.20%

5.20%

4.90%

4.90%

4.50%

4.50%

4.25%

4.25%

0%

1%

2%

3%

4%

Source: Savills Research

Source: Savills Research / * first estimations

Prime rental growth

Prime rental growth forecast

-30% -25% -20% -15% -10% -5%

Source: Savills Research

6%

7%

8%

Q4 08-09 change

Q4 07-08 change Prague Milan Hamburg Berlin Frankfurt Vienna Munich Manchester Istanbul Stockholm Lisbon Luxembourg Luxembour Rome Athens Lille Amsterdam Brussels Barcelona Paris Oslo Madrid Zurich Lyon Warsaw Dublin London City London WE

5%

Berlin Hamburg Rome Prague Milan Luxembourg Luxembour Lisbon Manchester Dublin Athens Munich Brussels Vienna Amsterdam Frankfurt Warsaw Lyon Zurich Paris Oslo Lille Stockholm London City Barcelona Madrid London WE Istanbul

11% 9% 8% 6% 6% 5% 4% 0% 0% 0% 0% 0% 0% 0% 0% -1% -3% -6% -6% -9% -10% -10% -13% -14% -18% -28% -28%

0%

5%

10% 15%

-25%

1% 1% 0% 0% 0% 0% 0% -2% -2% -3% -4% -4% -4% -5% -7% -7% -7% -7% -9% -10% -11% -12% -13% -14% -15% -21% -21%

-20%

-15%

-10%

-5%

0%

5%

Source: Savills Research European Office Markets - Spring 2009

2


Amsterdam, Athens, Barcelona Amsterdam 2008 turned out to be a challenging year for the Dutch economy affecting both the letting and the investment markets. Office take-up figures for Amsterdam went down from 650,000 sqm in 2007 to 315,000 sqm in 2008 due to slowing business activity. As a result of weaker occupier activity, thevacancy rate increased from 12% to 13%. However rental values for prime offices remained relatively stable going from €375/sqm/year at the end of 2007 to €370/sqm/year. Office investments in Amsterdam totaled €920 million, a drop of 20% compared to 2007. In comparison to the minus 50% recorded for the whole country, the Amsterdam investment market remained quite resilient. Gross yields on prime locations increased during the year to the current level of 7.0%. We expect the letting market to pick up not before 2011 while the investment market should recover earlier.

Athens Economic uncertainty has had a negative impact on leasing activity in 2008 with fewer deals and slower decision making processes. Take-up of Grade A-B space (> 800 sqm deals) is estimated to be in the region of 125,000 sqm for 2008, 11% lower compared to the previous year. The average vacancy rate for Grade A-B offices has slightly increased to 7.0%, due to the slower absorption rates. Development activity slowed down significantly in 2007 and 2008 due to the shortage of sites and the economic slowdown. Average prime rents have remained stable in the main Athens submarkets over the past two years demonstrating only slight rises in submarkets with strong demand and low availability. Achievable prime yields are 150 to 200bps higher compared to 2007 and they range between 7.25% and 8.0%. Given the stability in the occupational market for high quality product we believe that prime office yields will stay in the region of 7.5%-8.0%.

Barcelona The office letting market in Barcelona has somehow suffered less than other main cities in Europe. Take-up showed an 11% drop to 351,000 sqm with a marked deceleratiion throughout the year. New business districts such as 22@ district, where large occupiers are attracted by highly-specified new office buildings at rents lower than in the traditional CBD, captured more than half of the annual transaction volume. Vacancy increased by only 1.5% last year to 8% overall. Although there is a further 350,000 sqm of new office space in the pipeline, delays in completion could help avoiding a sudden and massive oversupply this year. Nevertheless, this does not help to sustain rents, the decline of which - after a soft 4.5% last year – could accelerate by the combined threat of softening demand and increasing supply. The 75bps (prime) to 150bps (secondary) increase in yields did not prevent a dramatic 46% investment volume plunge in 2008.

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

decreasing

Supply

increasing

Rents

stable

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

decreasing

Supply

increasing

Rents

stable

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

decreasing

Supply

increasing

Rents

decreasing European Office Markets - Spring 2009

3


Berlin, Brussels, Dublin Berlin Although take-up significantly declined during the second half of 2008 in the German capital, the annual take-up is in line with the 5-year average. Since office completions remained below average, the vacancy rate fell again slightly and currently stands at 7.7%. Moreover, rents continued to increase compared to the first half of last year. At the end of 2008, prime rents stood at €22.81/sqm/month and average rent amounted to €12.02/sqm/month. For the coming year, we anticipate a continued downturn in take-up, with an overall figure of approx. 600,000 sqm. In contrast, prime rents should remain stable or even increase slightly.

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Investment volume was very low during the second half of 2008 but higher than in all other German markets. Prime yields again increased further by some 30 basis points.

Demand

decreasing

Supply

decreasing

Rents

increasing

Brussels Letting activity in Brussels performed well and reached 529,000 sqm over 2008 representing a slight increase compared to 2007. Low speculative supply during 2008 and large letting transactions by the public administrations, led to a stable vacancy rate of around 9.3%. The prime rent decreased by 3% to €285/sqm/year over the course of 2008. With the topquartile rent up 2% - boosted mainly by the inflationary-friendly rent structures in Belgium. The investment market in Belgium suffered enormously with the year-end total turnover reaching €2.1bn, down 58% compared to 2007. For a classic 3/6/9 year lease, the prime yield has shifted by 65bps from 5.4% in Q1 2008 to 6.25% in Q1 2009.

Prime Rent (€/sqm/year)

More than 210,000 sqm of modern office space was taken up in Dublin in 2008. Although this marked a reduction of 30% on 2007 levels, it was the fourth highest level of take-up ever recorded in the city. While most districts experienced an annual decline in demand, take-up in some areas actually increased such as the Irish Financial Services Centre and the North Docks. The vacancy rate increased from 13.4% in December 2007 to 15.6% in December 2008 due to the high level of office completion in 2008 (the highest rate since 2002). The annual prime rental growth decreased by nearly 20%, to €540/sqm/year. The momentum of take-up will remain subdued in 2009. Lease terms will be heavily negotiated and greater incentives will be offered to tenants. Prime yields moved out by 150 basis points over the course of 2008.The outward movement in yields will persist 2009.

Prime Market Yield 8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

In 2009, take-up is forecast to reach around 450,000 sqm, down 25% if compared to the five-year average. We forecast around €1.5bn of deals to close in 2009, down well over three-times the record level recorded in 2007 and 55% if compared to a five-year average.

Dublin

Other occupancy costs

800

Demand

stable

Supply

stable

Rents

decreasing

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

900

9%

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1%

0

0% 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

decreasing

Supply

increasing

Rents

decreasing European Office Markets - Spring 2009

4


Frankfurt, Hamburg, Istanbul Frankfurt Annual take-up in Frankfurt exceeded the average of the last 5 years by around 2.5%. However, this solid performance can be mainly attributed to the first halfyear, since take-up in the second half of 2008 fell by almost 50%. Letting deals exceeding 1,000 sqm were rare during the second half of 2008. Nevertheless, rents remained roughly stable. Prime and average rents are €38.50/sqm/month and €18.00/sqm/month respectively. Due to the fact that Frankfurt traditionally has been the most cyclical German market, recession will heavily impact on Frankurt’s office market in the course of 2009. Frankfurt’s investment market almost broke down in 2008. German open-ended funds have been the most active buyers whereas the share of foreign buyers declined heavily. As a result, prime yields shifted up by 50 basis points and currently stand at 5.3%.

Hamburg In 2008, Hamburg recorded an office take-up of more than 504,000 sqm. This is significantly lower than the transaction volume achieved in the previous year but it still exceeds the 5-year average by 5.5%. Demand for small units was high. The second half of the year saw only a ew transactions exceeding 10,000 sqm. Vacancy rate as well as rents remained stable in the last part of 2008. Currently, the vacancy rate stands at 6.8%; prime rent amounts to €24.70/sqm/month and average rent stands at €13.40/sqm/month. For 2009, we anticipate a fall in take-up, due to the effects of the recession. Since there is a current prevalence of supply bottlenecks, particularly for smaller units in top locations, we believe prime rents will remain stable.

Prime Rent (€/sqm/year)

Despite the global economic situation, the office rental market in Istanbul has seen positive rental growth of 19% on average compared to last year, whereas prime rents remained stable. However, rental growth has slowed down since last quarter of 2008 and asking rents have decreased to €255/sqm/year ($30/sqm/month) in prime locations. 2008 annual takeup reached 230,000 sqm which is 15% lower compared to the previous year. It is expected that the vacancy rate will keep increasing in 2009 as a result of completion of new projects and declining demand due to the global economic recession. Yields which had steadily decreased until early 2008 have begun to increase during the second half of the year. Prime yields stand now at 7.75%. We believe investors’ interest could be triggered by newly developed office schemes.

Prime Market Yield 8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

stable

Supply

stable

Rents

stable

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Against the background of the credit crunch, the Hamburg investment market performed relatively well. Prime yield remained roughly stable in the second half of 2008 and presently stands at 4.8%.

Istanbul

Other occupancy costs

800

Demand

decreasing

Supply

decreasing

Rents

stable

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

900

9%

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1%

0

0% 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Kuzeybati / * first estimations

Demand

decreasing

Supply

increasing

Rents

decreasing European Office Markets - Spring 2009

5


Lille, Lisbon, London Lille So far the office market in Lille has remained relatively impervious to the gloomy economic situation. The annual take-up in 2008 softened by 10% to 132,200 sqm from 146,200 sqm the year before but demand accelerated strongly in the final quarter of 2008 notably triggered by office deliveries offering modern facilities. Growing appetite for newly developed opportunities has been noticed over the past 12 months representing 27% of total transaction volume in 2007 and 1/3rd last year. Nevertheless as few large schemes were completed in the past three months, the stock of new supply more than doubled in one year. Given that the development pipeline remains quite low with some delays to be expected for some projects, this could become a positive aspect to avoid an undersupply situation that would freeze office demand. Rents remained stable over the period to €190sqm/year for prime rents.

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

stable

Supply

increasing

Rents

stable

Prime yields moved out by 175 bps from 6% to 7.75%.

Lisbon In spite of the deepening economic crisis, Lisbon’s office market reached a record in 2008, with take-up at 230,000 sqm However, take-up for the 4th quarter was down almost 50% from the year before, implying a difficult year ahead. Take-up in Lisbon has historically been relatively insensitive to GDP growth, as a result of the ageing stock providing a constant need for upgrading. Combining this factor with the limited development pipeline (139,400 sqm and 100,000 sqm for 2009 and 2010 respectively) should help to offset the economic downturn. We expect the vacancy rate to hold steady over 2009 at around 7%. Prime rents slipped at the end of 2008 from €21.5/sqm/month to €20/sqm/month.

Prime Rent (€/sqm/year)

While the second part of 2008 was a quiet one in terms of leasing activity in the West End, a very strong December lifted the total take-up for the second half to 102,200 sqm. This brought the total for the year to a marginally below average 279,000 sqm. Availability rose steadily throughout the year, though the vacancy rate was still very low at 5.1% at the end of December. 52% of the vacant space is Grade A, a reflection of the low levels of development completions across the West End. Average prime rents fell by around 30% in 2008, reflecting tenant caution particularly at the very top end of the market. While it is still far too early to call the end of the credit crunch, we do expect 2009 to see a change in the West End office investment market. The increasingly attractive yield gap and higher than long-term average yields are already beginning to stir some investors into activity.

Prime Market Yield 8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Abacus Property / * first estimations

Prime yields have moved out by 50 basis points compared to a year ago, currently at 6.50% gross. We expect further outward movement, as Spain in particular begins to look cheap by comparison.

London West End

Other occupancy costs

800

Demand

decreasing

Supply

stable

Rents

stable

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

2,800

7%

2,600 2,400

6%

2,200 2,000

5%

1,800 1,600

4%

1,400 1,200

3%

1,000 800

2%

600 400

1%

200 0

0% 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

decreasing

Supply

increasing

Rents

decreasing European Office Markets - Spring 2009

6


London, Luxembourg, Lyon London City The continuing turbulence in the world’s financial markets in the second half of 2008 led to significantly lower than average levels of take-up in both the 3rd and 4th quarter of the year. Take-up in the City of London totaled 353,200 sqm in 2008, well down on both 2007’s level, and the long term average of 409,000 sqm. A combination of speculative development completions and some space rationalisation has led to a steady rise in the vacancy rate throughout the second half of 2008 from 8.9% in June to 10.5% in December. Following on from the falls in net effective rents, headline rents began to fall sharply, by 21% to €615/sqm/year (£52/sq ft) over the 12 month period.

Prime Rent (€/sqm/year)

Take-up performed strongly during the year reaching 167,000 sqm, up 22% compared to the five-year average. Some 70% of the lettings took place during H1 2008 while a significant slowdown took place during the second half of the year. The vacancy rate stands at 2.05%, still one of the lowest in Europe today. Nonetheless, with an expected decline in takeup for 2009 and a significant speculative pipeline, the vacancy rate could double by mid-2010. The prime rent remains unchanged at €480/sqm/year. During 2009, take-up will likely soften as the expansion of the financial groups declines. Investment levels in Luxembourg deteriorated significantly down at around €360 million for the year. The prime yield for a 3/6/9 lease term currently stands at 6% and 5.8% for a 9-year firm lease. 2009 will be a tough year and Luxembourg investment turnover is estimated to reach around €400 million.

Lyon The impact of the economic recession was strong on the office market in Lyon. Take-up decreased by more than 30% between 2007 and 2008, however the quarter on quarter evolution does not show any decelerating pace of activity. Demand was still mainly concentrated in La Part Dieu (CBD) up to 22%.The share of new buildings in the total transaction volume is still on the rise and represents 60% of the total 2008 volume. Due to strong tenants’ interest for new office buildings, development completions were leased out relatively easily inducing the ageing of the office stock. The vacancy rate was at 6% at the end of last year. In spite of the large proportion of new buildings transacted, prime rents decreased by 13% over the past 12 months, steadily from €260sqm/year to €226sqm/year. Prime office yields went up from 5.6% to 7.5%, a 190bps outward movement.

Prime Market Yield 8%

1,400

7%

1,200

6%

1,000

5%

800

4%

600

3%

400

2%

200

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

The long term average yield on prime City offices (5.57%), the relative security of income, the declining currency risk, and the reversion of the yield gap with the cost of money, makes City of London office investment look increasingly attractive.

Luxembourg

Other occupancy costs

1,600

Demand

decreasing

Supply

increasing

Rents

decreasing

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

increasing

Supply

stable

Rents

stable

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

deacreasing

Supply

increasing

Rents

decreasing European Office Markets - Spring 2009

7


Madrid, Manchester, Milan Madrid The convulsive economic environment has had strong negative impact on the office market in Madrid. Annual take-up in 2008 was 500,000 sqm, representing a 46% drop on the previous year. The vacancy rate continued to rise reaching 7.50% in December. Headline rents held steady throughout 2008, however rent free periods and other incentives have increased. We expect take-up to reduce further in 2009, to between 350,000 sqm and 400,000 sqm. With a strong speculative development pipeline of circa 300,000 sqm planned for 2009, we anticipate a further rise in vacancies, although some completions may be delayed until 2010. Excluding the acquisition of BSCH Ciudad Financiera (€1,900m), total investment volume last year was €1,400m, 47% less than the previous year. Yields continue to rise. Castellana area has reached 6% at the end of 2008, more than 120bps than in December 07.

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

decreasing

Supply

increasing

Rents

decreasing

Manchester In 2008, total take-up totalled 97,190 sqm mainly driven by the Professional and Public Service sectors, accounting for 22% and 21% of space respectively. Due to take-up figures reaching almost 28,115 sqm in the fourth quarter and limited development completions coming on stream, total supply has fallen by 2% and now stands at 178,000 sqm. Grade A supply accounts for 45% of the total, up from 29% at the end of 2007. The vacancy rate is 11.1%, down from 11.7% at the beginning of the year. The development pipeline peaked in 2008 and the overall vacancy rate in Manchester should continue to decline throughout 2009. Prime rent in Q4 was €414/sqm/year (£28.50/sq ft) down from €474/sqm/year (£32.50/sq ft), achieved in H1 at the Zenith

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Prime office yields moved by 125 basis points from 6.25% to 7.00 over the past 12 months.

Demand

increasing

Supply

decreasing

Rents

decreasing

Milan The Milanese occupier market continues to show a healthy level of activity. A very significant growth in the number of office occupiers enquiring after space to let, combined with a lower level of growth in the total area being sought, together show that many companies in Milan are looking to consolidate their real estate costs, seeking a reduction in the area occupied combined with competitive rental levels and efficient space. Over the majority of 2008 rental values remained stable, with slight contractions in the latter part of the year. This is a trend which is expected to continue into the short-to-medium term, with supply adapting to meet occupier requirements for lower occupational costs, as above. At year end, prime office rents in Milan’s CBD stood at around €500/sqm/year. Gross market yields continue to edge upwards, although investment market activity increased a little at the start of 2009.

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

stable

Supply

stable

Rents

stable European Office Markets - Spring 2009

8


Munich, Oslo, Paris Munich Thanks to the economy rallying at the end of last year, 2008 saw Munich achieve an office space take-up figure of 770,000 sqm, the highest since 2001. Indeed, Hamburg achieved the highest take-up of all German markets. Due to the high demand, the vacancy rate continued to decrease in the second half of 2008 and currently stands at 7.2%. While prime rents rose significantly at the end of the year to €31.00/sqm/month, the average rent remained stable and stands at €14.20/sqm/month. Although the financial crisis has so far had no noticeable effect on the Munich market, we anticipate that 2009 will see a marked downturn in take-up and a slight drop in prime rental prices.

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Although prime yields rose significantly by about 30-40 basis points compared to midyear, Munich is still the most expensive German office market.

Demand

increasing

Supply

decreasing

Rents

increasing

Oslo In 2008, the occupier market in Oslo was driven by cost-cutting motivations mainly. High rents and a declining labor market resulted in decreasing demand for new office space. Recent job losses have led to an increasing number of sub-lettings. As a consequence of less demands and increasing vacated space, the office vacancy rate rose steadily from 4.6% as of mid year to 5.1% as of year end 08. We expect the vacancy rate to rise to about 7% in 2010. Prime rents dropped by nearly 9% over the past 12 months from €427/sqm/year (NOK3,400/sqm/year) to €313/sqm/year (NOK3,100/sqm/year). We believe that the rental level will further by up to 20% in the CBD until 2010.

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Total transaction volume in 08 declined by 45% and ended on €2.9 billion (NOK 29bn). With lending policy still very strict we expect an even lower investment turnover for 2009. Prime office yields went up from 5.6% to 6.75%.

Paris In Q4 2008, the Paris office market slumped due to the impact of the economic recession. Take-up fell by 30% compared to Q3, dragging down the annual letting volume to 2.36m sqm. Demand is fueled by cost reduction, leading some companies to renegotiate their leases rather than relocate. As net absorption is rapidly evaporating and job losses are creating additional vacated space to sublet, supply increased by 11.7% annually. The vacancy rate went up to 5.6% although some locations such as La Défense remain under supplied (3.6%). Headline rents began to fall in H2, by 6.4% to €711/sqm/year for Prime CBD. We anticipate quicker decelerating letting activity for 2009 with further falls in rents. The meagre investment revival in volume felt at the end of 2008 did not prevent a 52% plunge to €13.9 billion. Prime yields went moved out by 175bps to 5.75% We expect further outward movement in 2009 although in a more moderate way.

Demand

decreasing

Supply

increasing

Rents

decreasing

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

900

9%

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1%

0

0% 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

decreasing

Supply

increasing

Rents

decreasing European Office Markets - Spring 2009

9


Prague, Rome, Stockolm Prague In 2008, office take-up in Prague was approx. 255,000 sqm, almost 40% up from the previous year. Districts of Prague 4 and 5 have achieved the highest amount of take-up, followed by Prague 8 and 1. The vacancy rate has increased towards the end of 2008 to 8.3%, due to a large amount of speculative developments completed. But restricted access to financing will mean that amount of speculative developments will decrease significantly. Overall rental values are stable in Prague although prime rents increased slightly in PankracPrague 4 and Smichov-Prague 5 where supply remained limited. In 2008, investors have sharply reduced their acquisitions. and amount of potential buyers has decreased dramatically. Yields increased from 5.40% to 6.75% over the last 12 months.

Prime Rent

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: CPB Immobilientreuhand / * first estimations

Demand

dercreasing

Supply

decreasing

Rents

stable

Rome Rome’s office occupational market continues to be characterized by reduced take-up volumes and fewer new requirements. The majority of new occupier requirements tend to fall in the 500-1,500 sqm range, with requests for larger units being relatively rare. Prime rental levels remain fundamentally stable, with little market evidence for a fall, and reflecting the fact that the level of activity, whilst low, is as such fundamentally stable. At the end of Q4 2008, prime rental values stood at approx. €420qm/year in Rome’s centrally located CBD area and at approx.€300/sqm/year in non-CBD locations such as the EUR district. The investment market in Rome has also seen a yield increase, with prime gross yields quoted at 6.0% for Rome’s centrally located CBD district.

Prime Rent (€/sqm/year)

The investment market turnover in 2008 amounted to just under €14.6bn (SEK155bn), but if the Vasakronan related transactions are excluded the turnover has dropped by more than 30% compared to 2006 and 2007. H2 2008 and the beginning of 2009 have been extremely weak with regards to investment volume. We expect the transaction volume to be low well into 2009. Domestic investors and to some extent Nordic investors are still active in the market.

Prime Market Yield 8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Stockolm The rapid deterioration of the Swedish economy in H2 2008 has continued into 2009 and has led to a weakened letting market, where tenants are hesitant to signi new leases, thus resulting in a lower letting volume in the last two quarters. We are seeing signs of lower market rents, increasing vacancies and increasing sub-letting activity. However, there is still a shortage of modern premises in the CBD area and the majority of the vacancies are located in less attractive properties.

Other occupancy costs

800

Demand

stable

Supply

stable

Rents

stable

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

deacreasing

Supply

stable

Rents

decreasing European Office Markets - Spring 2009 10


Vienna, Warsaw, Zurich Vienna In 2008, the global turmoil has had little impact on the Viennese office market. Both supply and demand were only approx. 10% below the respective figures in 2007 with office take-up (300,000 sqm) well above that of completions (220,000 sqm). The vacancy rate remained unchanged at 5.6%.The prospects for 2009 are clearly affected by the deteriorating economic environment. However, hopes are high that Vienna will again prove to be a comparatively stable market. Due to the project financing issue, it is unlikely that the officially announced 200,000 sqm new office space will be developed. Demand will remain at its 2008 level driven by cost-cutting motivations. As relocations will often lead to reductions in occupancy (15-20%), the average vacancy rate will rise to at least 5.8%. Rental levels are likely to remain stable with prime rents of €276/sqm/year.

Prime Rent (€/sqm/year)

Despite the global financial crisis, demand for modern offices in Warsaw was strong in 2008 and amounted to 520,000 sqm. Majority of this took place in non central locations due to low availability of modern offices within the city centre. Last year new supply totaled 250,000 sqm, of which only 14,500 sqm was within the city centre. Prime rents reached €384/sqm/year in 2008 but decreased to €360/sqm/year. We anticipate rents to reduce to more sustainable levels of €300336/sqm/year in the city centre. Take-up is expected to ease in 2009, driven by cost optimizing processes involving consolidation and relocation. Total investment volume in 2008 amounted to €1.9bn which is nearly 27% lower than the previous year. Yields increased by 50 to 100 basis points in 2008 and now range between 6.5% and 7.0%. We expect prime office yields to stabilise in 2009 and secondary yields to soften.

Zurich The Swiss economic situation has so far had only a small impact on the Zurich office market. Demand for office space has reduced notably from financial services. Take-up is now mainly driven by consolidation and rationalisation or by some international corporate needs. As a result, total Zurich supply is increasing although class A space exceeding 1,500 sqm is still difficult to find. The vacancy rate in the CBD remains around 2% but is expected to ease up through out the year in spite of new developments being delayed. As a combined effect of weaker demand and expanding supply, rental values are declining. Prime rents in Zurich CBD are €434/sqm/year (CHF700/sqm/year) although a rent of €558/sqm/year (CHF900/sqm/year) has been achieved in Bahnhoffstrasse. Yields have not yet moved still at 4.25% for prime office building. Foreign investment interest may pick up as the yield gap has widened with lower interest rates.

Prime Market Yield 8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: CPB Immobilientreuhand / * first estimations

Prime office yields went from 5.40% to 5.75% over the last 12 months.

Warsaw

Other occupancy costs

800

Demand

stable

Supply

decreasing

Rents

stable

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

increasing

Supply

stable

Rents

decreasing

Prime Rent (€/sqm/year)

Other occupancy costs

Prime Market Yield

800

8%

700

7%

600

6%

500

5%

400

4%

300

3%

200

2%

100

1% 0%

0 2006 I

2006 III

2007 I

2007 III

2008 I

2008 III

2009 I*

Source: Savills Research / * first estimations

Demand

decreasing

Supply

increasing

Rents

decreasing

European Office Markets - Spring 2009 11


Economy, office costs and yields Negative rental growth is expected to continue in line with GDP change European economic growth

Vacancy rate has stabilised but will rise as a result of weaker demand

European rental growth

European average vacancy rate

5%

20.0%

4%

13.8%

3%

7.5%

2%

1.3%

1%

-5.0%

0%

-11.3%

-1%

-17.5%

-2%

-23.8%

12%

10%

8%

6%

4%

-3%

-30.0% 2001

2002

2003

2004

2005

2006

2007

2008

2009

2%

0% 2001

2002

2003

2004

2005

2006

2007

2008

Source: Savills Research

Source: Oxford economics / Savills Research

Prime occupancy costs and yields City

Prime rent

Service charge

Local taxes

Other charges

Total

Amsterdam Athens Barcelona Berlin Brussels Dublin Frankfurt Hamburg Istanbul Lille Lisbon London, City London, West End Luxembourg Lyon Madrid Manchester Milan Munich Oslo Paris Prague Rome Stockholm Vienna Warsaw Zurich

370 360 306 274 285 540 462 298 298 190 240 651 1,154 480 226 456 337 500 373 313 711 252 450 405 276 360 441

35 36 48 90 25 75 108 42 68 73 36 77 95 29 70 60 48 40 54 25 77 48 35 48 72 38

5 20 67 118 237 4 85 21 33 2 -

2.5 20 7 -

410 396 354 364 350 682 570 340 366 263 276 846 1,486 520 296 516 470 540 427 336 820 300 485 538 326 432 479

11 -

Parking Rental Prime (per space) growth (yoy) Yield 3,250 2,280 1,920 4,200 1,800 4,250 3,360 3,000 1,313 1,200 1,800 3,575 3,500 1,200 2,400 3,500 3,600 4,500 3,632 2,280 3,000 1,620 3,000 3,780

-1.3% 0.0% -5.6% 5.7% -3.4% -19.7% 5.5% 8.0% 0.0% 0.0% 0.0% -27.6% -27.8% 0.0% -13.1% -9.7% 0.0% 8.7% 3.6% -8.8% -6.4% 10.5% 0.0% 0.0% 4.5% -14.3% -9.7%

7.00% 7.25% 6.00% 5.20% 6.25% 6.00% 5.30% 4.90% 7.75% 7.75% 6.50% 6.75% 6.00% 6.00% 7.50% 6.00% 6.75% 5.85% 4.50% 6.75% 5.75% 6.75% 6.00% 5.50% 5.75% 5.75% 4.25%

(Gross) (Net) (Gross) (Net) (Net) (Net) (Net) (Net) (Gross) (Gross) (Gross) (Net) (Net) (Net) (Gross) (Gross) (Net) (Gross) (Net) (Net) (Gross) (Gross) (Gross) (Net) (Gross) (Gross) (Net)

Note 1: All costs are in â‚Ź/sqm/year Note 2: Prime rents and yields refer to modern, minimum 1,000 sqm, fully let, standard leased building Note3: Rental growth is calculated in local currencies

European Office Markets - Spring 2009 12


Survey map and office market cycle Survey Map

European office market cycle

European Office Markets - Spring 2009 13


Contacts For further information please contact

Eri Mitsostergiou European Research +30 210 6996311 emitso@savills.com

Lydia Brissy European Research +44 20 7016 3776 lbrissy@savills.com

Austria 1

Alexandra Ehrenberger

a.ehrenberger@cpb.co.at

Belux

Sheelam Chadha

schadha@savills.be

+32 2 542 40 57

France

Lydia Brissy

lbrissy@fpdsavills.fr

+33 (0) 1 44 51 73 88

Germany

Benjamin Poddig

bpoddig@savills.de

+49 (30) 726 165 145

Greece

Eri Mitsostergiou

emitso@savills.gr

+30 210 699 6311

Ireland

Joan Henry

joan.henry@hok.ie

+353 (1) 618 1483

Italy

Susan Trevor Briscoe

stbriscoe@savills.it

+39 335 574 7418

Netherlands Norway 2

Jeroen Jansen

j.jansen@savills.nl

+31 (0) 20 301 2094

Leif-Erik Halleen

leh@heilo.no

Poland

Malgorzata Nowotna

mnowotna@savills.pl

Portugal 3

Andrea Correia

acorreia@abacusproperty.pt

Spain

Gema de la Fuente

gfuente@savills.es

Sweden Turkey 4

Peter Wiman

pwiman@savills.se

Nesil Akman

nesil.akman@kuzeybati.com.tr

United Kingdom

Mat Oakley

moakley@savills.com

+43 (0) 699 1000 4049

+47 23 00 39 63 +48 (0) 22 330 0633 +351 (21)3 170 577 +34 (91) 310 1016 +46 (8) 545 85 462 +(90) 212 325 28 00 +44 (20) 7409 8781

In association with: 1. CPB Immobilientreuhand 2. Heilo Eindom AS 3. Abacus Property Ltd 4. Kuzey Bati Our thanks to the following consultants for their contribution to the publication: Czech Republic

CPB Immobilientreuhand

Michael Ehlmaier

Switzerland

Michel Racheter & As.

Don Mackenzie

+43 (0) 1 512 76 90 12 +41 (22) 362 00 80

Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 180 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. A unique combination of sector knowledge and entrepreneurial flair give clients access to real estate expertise of the highest calibre. We are regarded as an innovative-thinking organisation backed up with excellent negotiating skills. Savills chooses to focus on a defined set of clients, therefore offering a premium service to organisations with whom we share a common goal. Savills takes a longterm view to real estate and works hard to invest in long term and strategic relationships and is synonymous with a high quality service offering and a premium brand. This bulletin is for general informative purposes only. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The bulletin is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research. (c) Savills Ltd February 2009

EOM Spring 2009  

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