With equity still committed and ready to deploy across Europe’s office sector, there appears to be a mismatch in pricing expectations for core product. Vendors are in no need to sell and redeploy capital, whilst buyers are seeking 5–10% ‘Covid chips’ on price – a shortage of investment transactions is making repricing difficult. Given the deterioration in market sentiment and need to deploy capital, this could drive some core cities pricing even sharper.

Much of this stems from lenders’ caution on office pricing of prime assets, with lending rates moving out as much as double for some core German offices, and doubts rising over the speed of return to pre-Covid levels. Likewise, loan-to-value ratios (LTV) on offer for core deals are reducing from c.65% to what could tend to a new-normal of 55%, limiting debt-backed buyers’ purchasing power. More focus will applied to existing tenant covenant strengths, particularly for insurance companies and banks. Some landlords are pushing ahead with office transactions with the intention to refinance debt once lender caution abates. This will present more core buying opportunities for cash-rich institutions who previously had not been able to compete with leveraged buyers.

As part of a shift to core, we expect the proportion of cross border activity to decline compared to previous years, particularly from Asia-Pacific capital where we have observed unprecedented levels of investment in recent years. We expect that this will affect the Southern European and Central and Eastern European (CEE) markets which are more heavily dependent on cross border capital, relatively more than those in Western Europe.

Core-plus and value-add investors are viewing the pandemic as a chance to count stock on their existing portfolios. Part of this stems from the fact that pricing in these risk profiles is usually more heavily influenced by strong macro fundamentals. At the other end of the scale, we can expect to see US private equity investors seek distressed Southern European opportunities offering price chips of c.50bps.

_{Read the articles within European Offices Outlook below.}