Logistics yields falls for the first time

Around a third of the office locations surveyed saw some yield compression with the prime weighted average down from 4.49 pct to 4.42 pct. In contrast, high street retail yields softened in a few locations with the overall prime yield moving out by 1 bp to 4.19 pct. Despite the fall in the prime logistics yield below 6 pct, the gap relative to office and retail is still higher than in the previous cycle.

Office rents grew at a robust rate of 0.8 pct q-o-q, with several markets – across different countries and regions of Europe – seeing increases up to 5 pct. Limited rental growth was recorded in the retail sector, as the rental correction in Turkey offset the growth, resulting in a weighted average rent 0.1 pct lower than in the first quarter.

Offices

Office rents remained on a strong upward trajectory for the seventh consecutive quarter. Average office rents grew by 0.8 pct in Q2, with growth recorded in eleven out of the 47 office markets surveyed.

“Warsaw continues to lead in terms of its office leasing activity in the CEE region, with an 11 pct y-o-y increase in net absorption in H1. WeWork entered Poland with two leases signed in Warsaw during H1, and Standard Chartered announced its plan to open a shared services centre in Warsaw, which will create 750 jobs. The hunt for core remains rigid with a limited number of new schemes being available in 2018 and we expect the remainder of 2018 to set new prime yield records of below 5 pct,” comments Soren Rodian Olsen, a partner for capital markets at Cushman & Wakefield Poland.

Average European office yields fell 7 bps to 4.42 pct, setting a new low since 2001, with 14 out of the 47 European markets surveyed recording inward movement while there was no outward movement in the other markets.

Logistics

Five out of the 45 logistics markets covered saw some rental growth while all other markets remained flat in Q2. Manchester recorded solid growth of 16.7 pct q-o-q and 25 pct y-o-y supported by major leasing transaction activity this quarter. Elsewhere, pockets of growth were found in Helsinki (+4.3 pct), Budapest (+3.9 pct) and Rome (+3.8 pct).

The average yield fell by a substantial 14 bps q-o-q and 42 bps y-o-y – the largest annualised reduction in the last nine quarters. Logistics yields fell in 15 out of the 45 markets, including all locations in Germany, Italy and Sweden. Benelux and the CEE markets, on the other hand, had less substantial yield compression.

“Logistics properties have increasingly become a desirable asset for real estate investors on the back of the growth for e-commerce and the streamlining of supply chains, and now account for a growing share of investment activity supporting a strong reduction in yields over this period. Yields in almost all the markets surveyed are at a ten-year low, although we believe there is still room for further downward movement in selected markets during the second half of the year,” predicts Lisa Graham, the EMEA head of industrial and logistics, research and insights at Cushman & Wakefield.

“The Polish logistics market is continuing its dynamic growth, but now with evidence of net effective rental growth in several key distribution hubs and a countrywide all-time low vacancy rate at 4 pct at the end of Q2 2018. Although there are a number of large logistics portfolios currently in exclusivity, investors are struggling to find products as the demand for core and value-add logistics remains high and several Korean AMCs are chasing long-term income assets, which are rare in the Polish market. Prime yields remain stable at 6.25 pct to 6.75 pct,” Soren Rodian Olsen explains.

High street retail

Overall, high street retail rents softened marginally by 0.1 pct with growth recorded in just five markets q-o-q. More than half the markets surveyed registered no movement in rents at all in the last twelve months. Budapest topped the rental growth table for the second quarter, with a 7.7 pct increase q-o-q and 16.7 pct y-o-y, reflecting strong local consumption and demand from retailers.

High street retail yields edged up 1 bp to 4.19 pct, bringing to an end four years of yield compression.

With strong GDP growth, Budapest again ranked first in the yield chart with a 25 bps downward shift in Q2, with indications that there is still room for further yield compression in the Hungarian capital along with other key markets in the CEE region – including Warsaw and Bucharest, where retail assets are still ranked as fairly priced.

“The retail sector remains the main driver of this year’s transaction volume, with a 59 pct market share at EUR 1.902 mln after H1 2018, more than double the figure recorded in H1 2017. The high investment activity was primarily due to large portfolio deals with investors attracted to the continued retail sales growth in Poland. Despite the large transaction volume and vast number of assets available for sale, retail investment activity has already slackened in H2, mimicking the wider trends towards retail. Dominant schemes, however, continue to enjoy strong investor interest, translating into lower yields,” explains Paweł Partyka, an associate in the capital markets department at Cushman & Wakefield Poland.