The gap between Europe’s capital value cycle and the rental value cycle has risen from a historic average of 15% to 37% in Q1 2015, according to research from Savills.
Low interest rates are boosting investor confidence in real estate, particularly in core markets because, despite low prime yields, property is considered attractively priced compared to historic low government bond yields, Savills says.
Additionally, the ECB’s latest quantitative easing measures and the enhancement of liquidity in Europe create better prospects for an improved economic outlook and thus improved occupier markets and rental growth.
The research notes that both CBD office rents and capital values in the nine sample markets are still about 8% below their 2007 peak, demonstrating that there is still potential for growth.
Savills predicts total investment volumes in the survey area could increase by 7% this year to exceed €172bn and prime CBD rents are expected to grow by up to 2%.
Eri Mitsostergiou, director of Savills European research, says: “Over the past 15 years the widest discrepancy between capital and rental values was during periods of high investment activity, notably 2007, at 36% and 2014 at 37%. The investment market is driven not only by economic fundamentals and the anticipation of rental growth but mainly by the weight of capital in property. High allocations into real estate are driving fast yield compression, which outpaces the rate of rental growth in the occupier markets.”
