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Europe’s vibrant office markets set to cool

December 4th 2018

By Property Funds World

Office property markets will remain buoyant in Europe’s 20 largest cities in 2018-22, though rents will rise less rapidly than they have in recent years, with Berlin set for the biggest increase and London the smallest, says Scope.

Berlin keeps its top ranking in Scope’s listing of office-property markets by rental growth even though a forecast for yearly growth of 3.5 per cent will be well below the 7.1 per cent average annual increase in the city in 2013-17.
 
“A tight labour market in the German capital has helped sharply reduce the amount of vacant office property,” says Manfred Binsfeld, director at Scope Investor Services. Office vacancies in Berlin are down at 2.5 per cent, the lowest of the 20 markets in this study, a steep drop from 9 per cent in 2006.
 
Favourable economic conditions across Europe and dynamic job creation continue to create strong demand for office space and a vibrant rental market. One consequence is that several cities are experiencing a severe shortage in office space. Vacancies in 14 of the 20 cities are at 10-year lows. In Berlin, Munich and Paris, they are under 3 per cent, below a “healthy” fluctuation reserve, says Binsfeld.
 
There are some exceptions, notably London which falls to last place in Scope’s ranking of office-property markets, with forecast five-year rental growth of just 1.0 per cent compared with 4.4 per cent in 2013-17.
 
“Brexit uncertainty weighs heavily on the London market,” says Binsfeld. London’s office rental market has picked up a little from last year (0.7 per cent pa), but growth is still far behind the average for the last five years (4.4 per cent pa). The UK capital was a frontrunner in the current cycle, but the impact on sentiment and economic activity of the 2016 vote to leave the EU and subsequent uncertainty over Brexit put an end to the property boom and skyrocketing rents. Many banks and other financial institutions have moved or plan to move jobs to Frankfurt, Paris, Luxembourg, Dublin or Amsterdam.
 
Indeed, of the 20 markets in the study, the Dutch city is where rents are accelerating most rapidly, to 3.2 per cent a year over the next five years from 2.5 per cent in 2013-17. This elevates Amsterdam to third place from sixth in Scope’s market ranking. With the Netherlands economy enjoying sustained growth, Amsterdam is one of most dynamic business centres in Europe. This has contributed to a dramatic fall in vacancies to 8 per cent after years in the double digits.
 
“The pressure on office rents remains high beyond 2019 in the absence of significant new office development,” says Binsfeld.