Services, manufacturing and pharma sectors driving European office demand as yields move in, says Savills

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According to Savills latest research, there has been a shift in demand for European office space away from the tech sector (21 per cent to 14 per cent of take up yoy), towards the advanced manufacturing and pharmaceutical sector (increasing from 5 per cent to 13 per cent), and real estate (2 per cent to 10 per cent). 

For example, in Paris, 3D Design company Dassault Systems signed for 28,000 sq m of space. The pharmaceutical sector further lifted demand in Prague, accounting for 23 per cent of total space.
 
However, it should be noted that the tech sector accounted for c16 per cent of take up in Europe during 2019, before peaking at a record share of demand in 2020, so the current proportion is in line with the historic average. Professional and business services was the most active sector, accounting for 17 per cent of take up, down from 20 per cent last year.
 
Mike Barnes, Associate Savills European Research, says: “Whereas flexible office providers took 9 per cent of space back in 2019, they have accounted for only 2 per cent of space in H1 2021. However, as a service-based element becomes more essential in welcoming staff back to the workspace, we anticipate this sector will grow over the next 12 months. We also expect tech companies to be among the fastest to adapt to a hybrid working approach which will increase exposure to flexible offices.”
 
According to Savills, European office vacancy rates continue to creep upwards, increasing by 150 bps to 7.2 per cent over the past 12 months. Among the fastest risers are La Défense, Warsaw and London City.
 
Christina Sigliano, Savills EMEA Head of Occupier Services, says: “We anticipate overall vacancy rates will continue to increase for the remainder of 2021, due to subdued occupier demand and second hand space returning to the market. As office demand continues to grow on a quarterly basis, grey space is withdrawn from the market and newly developed stock is absorbed, we expect supply to tighten, particularly within the constrained Western European markets.”
 
Prime office yields moved in by an average of 9bps over the past 12 months to 3.63 per cent, according to the international real estate advisor. London West End moved in 50 bps while Berlin, Paris and Hamburg moved in 30 bps yoy to Q2 2021. Some outward yield movement in Warsaw (+10 bps), London M4 (+25 bps), La Défense (+25 bps) since Q2 2020 was recorded, but core markets are generally remaining stable or have hardened.
 
The overall yield spread between prime CBD offices and government bonds remains favourable. Despite a slight increase in government bond rates, and CBD yield compression, yield spreads continue to position European offices attractively compared to risk free rates, 20 bps above the long-term average.

James Burke, Associate Director, Savills Regional Investment Advisory EMEA, adds: “There remains a high level of dry powder circling prime office assets in core European cities. Despite the looming shadow of rising inflation, bond yields remain in negative territory in key western European economies, with higher than average yield spreads on offer. The return of international travel from certain jurisdictions such as North America and the Middle East will also likely bring a return of extra-European capital sources.
 
“While many Asia-Pacific investors are not currently travelling to Europe, given their vaccination rates and their caution regarding travel to an area with higher case incidence rates, some South Korean investors, for example, are becoming more comfortable transacting without conducting in-person inspections of assets themselves. Despite prime office yields remaining at record lows, we anticipate yields to remain stable in the medium term outlook.”