This is against a backdrop of increased caution around rising risk free rates which has impacted European office investment transactions. Transaction volumes reached €19bn for the quarter, a 28% fall against the five year Q3 average, says the international real estate advisor.

Prime European office yields have increased by an average of 40 bps since Q1 2022 to account for higher financing costs, rising from 3% to 3.5% in Amsterdam, 2.9% to 3.25% in Milan and 2.6% to 3% in Paris CBD, according to Savills.

Mike Barnes, Associate Director European Research at Savills, says: “The European investment market is undergoing signs which are common to a period of price discovery. Falling real estate fundraising, a rise in refinancing risks and NDAs on transactions are becoming more common, with no buyer wanting to be known to have paid the last record low yield.

“Investment transactions are still underway in Q4 2022, although the number of investors is thinning, particularly for value add stock as buyers seek larger discounts. We expect this to be reflected in pricing with further outward movement during Q4 2022 and motivated sellers returning to the market in Q1 2023.”

Chris Gillum, Head of Offices, European Capital Markets at Savills, says: “American and Singaporean buyers, along with Middle Eastern sovereign wealth funds, and high net worth family offices are likely to be among the main international buyers in Europe over the next six to nine months, who will also benefit from a relatively weak euro.

“Negotiations on pricing are currently taking more time, although the number of forced sellers is still limited as investors attempt to secure more favourable debt terms on refinancing.”

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Methodology

Savills EME Office Value Analysis compares the fundamental (calculated) yield relative to current market pricing across 24 EME markets, covering London-City, Stockholm, London-WE, Manchester, Lisbon, Oslo, Berlin, Paris, Copenhagen, Dublin, Amsterdam, La-Defense, Prague, Hamburg, Madrid, Barcelona, Helsinki, Munich, Warsaw, Brussels, Frankfurt, Milan, Dubai and Bucharest.

An investor must be compensated for bearing the risk of investing in real estate over sovereign bonds. The calculated yield is derived as the current risk free rate plus five year average office risk premium, discounting for nominal rental growth, inflation and expected depreciation forecasts across each market. The fundamental yield represents a hypothetical yield assuming a fully liquid market and that the investor is fully hedged against currency risk. Fundamental market yield > 50 basis points above market pricing we consider under-priced. Fundamental market yield within 50 basis points of market pricing we consider fairly priced. Fundamental market yield > 50 basis points below market pricing we consider fully priced

To read the report, please visit: https://www.savills.com/research_articles/255800/335535-0