Andy Schofield

Office gossip

It might be wishful thinking after a rather eventful couple of years but, with the Eurozone breakup and China hard landing fears relegated to the back burner, attention is now re-focusing on differentiated property market risk. Andy Schofield, Director of Research, summarises a few headline views on European and APAC office markets.

It might be wishful thinking after a rather eventful couple of years but, with the Eurozone breakup and China hard landing fears relegated to the back burner, attention is now re-focusing on differentiated property market risk. Andy Schofield, Director of Research, summarises a few headline views on European and APAC office markets:

In Europe, preferred markets are those where prime rental growth is emerging in response to low levels of development and where the underlying economy is conducive to improving occupier demand, namely London, Stockholm, Munich, and Hamburg. Given keen yields, we advise seeking value-add opportunities, perhaps accepting tenant risk, shorter lease terms and development angles. Cyclical markets, such as Madrid, Barcelona and Dublin, should also be considered because rental and capital values have fallen sharply and have yet to recover. However, weak economic recoveries mean great emphasis should be placed on covenant strength and lease length.

Opportunity–led acquisitions supported by good micro-location stories are recommended in markets characterised by high vacancy and where the medium-term economic outlook is muted. Examples include Brussels, the Randstad markets in the Netherlands and Milan. For these markets, prime rents look high relative to current occupier conditions. Caution is also advised in Paris where economic prospects are muted and yields are keen. The longer-term occupier picture will improve for Paris, but there is a risk that medium-term rental growth could disappoint.

APAC markets will experience slower economic growth over the next few years and, like Europe, will face rising bond yields. Be cautious of markets where expected rental growth is strong, but where a re-pricing could lead to poor performance overall, namely Hong Kong, Singapore, and Beijing. Also be vigilant in markets where there is little scope for further yield falls but where expected rental growth is also likely to disappoint, e.g. Seoul and Melbourne. Acquiring in these markets requires a strong micro-location/asset story.

The better performing APAC markets will be those that are higher yielding, offering scope for valuation uplift, despite their relatively muted growth outlooks. Good risk-adjusted returns are anticipated in Sydney, Perth, and Osaka. The best performer, however, should be Tokyo, which combines potential for inward yield shift with healthy rental growth.

Andy Schofield

Andy Schofield

Director of Research

Andy's biography