Average European occupancy costs are forecast to increase below inflation over the next two years. This, combined with limited new supply and increased demand will push up both prime and average rents across most European markets.
Average European occupancy costs are forecast to increase below inflation over the next two years. This, combined with limited new supply and increased demand will push up both prime and average rents across most European markets.
According to DTZ 2014 Global Outlook report, average or secondary rents will increase more rapidly than prime rents to 2016. This reflects a ‘catch-up’ effect as secondary rents recover from their current historically low base.
Most of the cities with high productivity, including London, Paris and Frankfurt also have high occupancy costs. In contrast, Moscow is the least affordable market, combining high costs with low productivity. Smaller markets such as Copenhagen, Brussels and Rome are shown to be especially affordable.
'All three are more affordable than the European average, providing a good alternative for occupiers looking for expansion in key sub-regions within Europe,' said Magali Marton, CEMEA head of Research at DTZ and co-author of the report.
When considering space efficiency and DTZ’s forecasts, many of the most efficient cities are also likely to see the fastest increases in occupational costs over the next two years. Consequently, occupiers can only try to improve space efficiency in order to offset these higher costs. There is limited room to do this across most large European markets but some, including Frankfurt and Munich, do present opportunities. In the rest of Europe, occupiers will need to look for innovation to create operational flexibility, such as more innovative workspace planning, DTZ said.
Investors, on the other hand are currently benefiting from good relative value across the majority of European markets. The DTZ Fair Value Index score stood at 74 in Q3 2013, which is at near record high. The UK and CEE markets are the most attractive with scores of 85 and 81, respectively. Dublin office, Frankfurt retail and Milan office are all categorised as hot for the moment.
However, based DTZ’s forecasts, the FVI is expected to decline sharply in 2014 and 2015. This decline will be triggered by a combination of lower expected returns as markets become more fully priced and higher required returns caused by rising bond yields and interest rates.
