The tide is turning for European office investments as debt capital boosts returns again

Owners of core office properties want to hold on to them if possible

According to Savills, the tide is turning in the European office investment market as investors prepare for the start of 2025. The international real estate consulting firm observes that owners of core office properties want to hold on to them if possible and buyers approach the sellers’ price expectations when bidding.

In the case of non-core office buildings, owners are increasingly willing to consider offers from developers and private equity funds. However, there are very few non-performing properties so far and buyer demand remains low for the time being due to reservations about future modernisation costs or the rentability of a property.

According to the latest Savills study, prices for prime offices in Madrid, Oslo and Amsterdam look the most attractive compared to their respective historical levels in Europe, as fundamentals for real rental growth are strong and the price adjustment is significant, which has led to a wider gap with government bond yields.

According to Savills, average European prime yields for office properties remained stable at 4.9% in the third quarter of 2024, moving sideways for the third consecutive quarter.

James Burke, Director, Savills Global Cross Border Investment, comments: “It remains difficult to obtain capital commitments for office investments, but with lower interest rates and improved sentiment among lenders and investors, we expect transaction activity in the European office investment market to pick up. Buyers’ purchase price expectations are converging with sellers’ expectations, so that yield compression for core office properties is likely to occur again from the beginning of 2025. The focus of office buyers should not only be on well-positioned cities, but also on attractive local office submarkets.”

Mike Barnes, Associate Director in Savill’s European Commercial Research Team, adds: “Financing costs have now fallen below prime office yields in several markets, including Paris CBD, Frankfurt, Brussels, Amsterdam, Dublin, Lisbon and Madrid, which we believe will support core office property transactions in 2025. In the City of London, while borrowing costs are still higher than prime yields, we expect prime rents to rise by more than 4% per year over the next five years, which will have a positive impact on total returns. In London, more banks are also willing to lend with a loan-to-value ratio of 60% (compared to 55% in the second quarter), which improves liquidity.”