UK Leads European Office Market Recovery as Investment Rises
The office real estate market in Europe, long subdued, is showing signs of rejuvenation with the United Kingdom taking the lead. According to Savills, a prominent international real estate firm, the UK’s office investment has surged, marking a significant rebound in a sector that has faced challenges from post-pandemic shifts and rising interest rates. This trend is expected to continue, with increased investment likely in the latter half of 2024.
UK Office Investment Surges
In the first half of 2024, the UK recorded €4.1 billion ($4.52 billion) in office transactions, representing nearly 30% of all European office deals. This figure exceeds the five-year average share of 24% and outpaces France’s €1.8 billion and Germany’s €1.7 billion in transactions. This spike is attributed to the UK’s earlier and more significant market re-pricing, which has been accelerated by recent political stability and the Bank of England’s rate cuts.
“London is leading the charge due to its quicker and more pronounced market adjustments,” says Kim Politzer, Head of Research for European Real Estate at Fidelity International. The rise in average annual office yields in London to over 6% compared to around 4.5% in other major European cities is also driving this uptick.
Recovery Trends Across Europe
While the UK is spearheading the recovery, other regions are showing mixed results. Ireland and the Netherlands are following the UK’s lead with growing investment, while southern Europe, particularly Spain, Italy, and Portugal, is seeing robust office take-up. Conversely, France and Germany continue to struggle with slower recovery due to political instability and economic challenges.
Savills notes that overall European office investment fell by 21% year-on-year to €14.1 billion in the first half of 2024, marking a 60% decrease compared to the five-year average. However, industry analysts are optimistic about the second half of the year, anticipating increased activity as interest rates decline and investors seek opportunities in undervalued markets.
Occupancy Rates and Market Divide
Despite these positive signs, occupancy rates remain a concern. A notable divide is emerging between highly amenitized, green-certified office properties and those lacking these features. Tenants are increasingly favoring modern, energy-efficient buildings with strong environmental credentials, which are often located in central business districts (CBDs) and close to public transport and amenities.
Grade A offices, particularly those with green certifications, are seeing high demand. According to Cushman & Wakefield, these buildings accounted for 77% of London’s office leasing activity in Q2 2024, the highest level on record. This trend highlights a growing emphasis on sustainability and energy efficiency in the office market.
Future Outlook
The constrained development pipeline is expected to drive further growth in high-quality office spaces. With fewer new developments on the horizon, there will likely be a gradual decrease in vacancy rates, particularly for Grade A offices, leading to increased rental growth at the top end of the market.
Andy Tyler, Head of London Office Leasing at Cushman & Wakefield, predicts that the limited supply of new office spaces will continue to fuel demand and rental growth, especially for properties that meet green building standards.
In summary, while the European office market faces challenges, the UK’s recovery and the shift towards sustainable, high-quality office spaces are shaping a positive outlook for the sector.