CBD prime office market yields are now sub-3% in Hong Kong (2.43%), Frankfurt (2.9%), Tokyo (2.9%) and Berlin (2.9%), with Melbourne (-1.74%), Beijing (-1.32%) and Berlin (-1.2%) seeing some of the largest compression in yields in the past three years, according to Savills Impacts report. It forecasts that the Paris (3%) and Amsterdam (3.5%) prime CBD office markets could see market yields harden to under 3% by the end of 2019.
In Impacts, its global thought leadership programme, Savills explores the link between office yields and borrowing and concludes that the relationship has become more tenuous as investors’ profiles have changed and fewer investments have been predicated on finance from bank borrowing. As such, according to Savills, a rise in interest rates in any domain (which itself is looking increasingly improbable) is unlikely to result in a corresponding rise in prime office yields, so they are likely to remain stable or continue to fall in many markets.
Mat Oakley, head of commercial research for UK and Europe at Savills, says: “While the link between real estate yields and base rates has become less strong, it is by no means broken. Investors who look across a multitude of asset classes, particularly those searching for long-term secure income, will reach a point where the yield on sovereign bonds becomes attractive enough to prompt them to choose them above real estate. For the foreseeable future, however, prime offices in the world’s global cities will remain attractive, with competition fierce for the best assets.”
Simon Smith, head of Asia research at Savills, comments: “With the threat of a US-China trade war easing and the Fed signalling that it is unlikely to raise rates at the time of writing, we have seen a resurgence in demand for prime offices in Asia-Pac after activity weakened in the latter half of 2018. 2019 is therefore unlikely to see any movement outwards in yields.”