June 16, 2017

Sky high competition in the real estate market means that picking an asset in a prime location and hoping it delivers the desired growth is no longer an option.

2016 saw record investment of 81.3 billion euros across Continental Europe’s office markets, an increase of 8 percent year-on-year. Pricing is being pushed to record lows and investors are increasingly focused on income as the main driver of their returns.

Peter Hensby, Head of European Office Capital Markets at JLL, says that in such a highly competitive market investors need to use greater creativity when deciding where to allocate their capital. This includes a willingness to look beyond traditional prime city locations towards their smaller sub-markets.

“Accessing returns in the low interest rate, low growth environment is pushing investors to seek opportunities where future growth is underpinned by solid property fundamentals, strong occupier demand and a catalyst that differentiates the market,” he says.

Across Europe as a whole, the office vacancy rate stands at 8 percent – the lowest since the fourth quarter of 2008. Hensby says there is a spill-over from the “best” cities to the “next to best”, which presents opportunities for investors.

In a new report, JLL highlights some of the places in Europe where it believes offices will demonstrate above average rental growth in 2017.

Here are three sub-markets to watch:

1. Hauptbahnhof-Europacity, Mitte and Mediaspree, Berlin, Germany
Berlin continues to be one of Europe’s technology sector hotspots and is increasingly mentioned as a potential beneficiary of Brexit. A low vacancy rate of 4.3 percent, record leasing volumes and moderate levels of development are driving healthy rental growth.
Europacity, where take-up is 83 percent higher than the five-year average, is expected to outperform at the prime end as business services tenants bid for space.
Mitte has proximity to residential talent pools thanks to its strong public transport links. Start-up and business sector demand is expected to drive down Mitte’s already record-low vacancy rate of 1.8 percent.

2. 22@ – Placa de las Glories, Barcelona, Spain
Barcelona’s 22@ – Placa de las Glories submarket is benefitting from a successful urban regeneration project, a new intermodal transport hub and strong demand from the TMT sector. The vacancy rate is 7.1 percent, down from the five-year average of 13.8 percent, while take-up is 17 percent higher.
“New Grade A developments have attracted more TMT tenants on the back of quality, location and overall lack of supply elsewhere in the city,” says Hensby.

3. Amsterdam/Utrecht
The Amsterdam office market may have recorded its strongest year on record in 2016 with take-up reaching 405,000 sq m, up 72 per cent on the five-year average, but, with growth tightening in the popular Amsterdam South market (7.2 percent in 2016), attention has started to spread to secondary locations within the city.

Amsterdam South East has the edge, thanks to strong employment growth driven largely by a media and tech firm boom.

Outside of the capital, Utrecht offers potential.

“The substantial Central Station development is quickly revitalising this high-traffic area,” says Alex Colpaert, Head of EMEA Offices Research at JLL.

“For domestic occupiers it is a cost efficient alternative to Amsterdam – prime rents sit at 40 percent below Amsterdam – and the good connection to Schiphol Airport will attract international occupiers.”

Shift in pricing
The low interest rate environment and persistent wall of capital targeting real estate means investors should be prepared for continued asset shortages, which could create a long-term shift in global real estate pricing.

Hensby adds: “Although we continue to see persistent interest in high-quality assets with steady and stable income streams in core markets, given the supply constraints, institutional capital will have to look harder for assets or become more creative in accessing deals.”


Peter Hensby

Head of European Office Capital Markets at JLL

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