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Euro zone crisis hits commercial property prime rents and yields

The Knight Frank weighted average European prime office rent, calculated from the cities covered by the report, declined for the first time in over two years, falling by -0.5% in the three months to June. Prime office rents were revised downwards in Brussels (-6.8%), Barcelona (-5.9%), Milan (-1.0%) and Dublin (-0.6%).

Prime rents were largely stable elsewhere, indicating that there has been a pause in the rental growth that has been seen over the last year in cities such as Paris, Warsaw, Stockholm and Moscow.

While recent rental increases in these markets have in any case been modest, they now appear to have completely ground to a halt, with landlords and tenants adopting a "wait and see" strategy as events in the euro zone play out.

In the investment market, Knight Frank’s weighted average European prime office yield moved outwards slightly for the second successive quarter, rising by four basis points to 5.62%. This was a result of a 25 bps softening of yields in both Milan and Madrid.

Prime office yields remained unchanged in all other markets, but investment market sentiment appears to be weakening and a more widespread correction of prime office yields may follow in the coming quarters.

The fading of investor confidence has been reflected in reduced investment volumes in the year-to-date, particularly in southern Europe.

Matthew Colbourne, senior international research analyst, said: "The limited rental growth that has been recorded in European office markets over the last 12 months now appears to have almost entirely ended, as businesses cautiously assess the impact of recent developments in the euro zone.

"With no quick solution to Europe’s problems in sight, we may be reaching a tipping point when occupier sentiment takes a more decisive turn for the worse and a greater number of markets may see rents start to fall over the rest of the year."

Andrew Sim, head of European investment, said: "The current uncertainty in the euro zone is clearly having an impact on investor confidence and transaction volumes, particularly in secondary markets. However, there remains a strong appetite for prime property in the most stable and liquid cities, coming from super high net worth individuals as well as sovereign wealth funds and institutions from the Middle East and Asia. As a result, prime yields for the best property in Europe are holding firm."

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