Publication

World Office Yield Spectrum 2H 2018

With investment capital becoming more global in its search for returns and diversification, the need for a standardised set of indicators to make sense of opportunities, risk and return expectations has become critical.


The Savills World Office Yield Spectrum is designed to fill a void in market knowledge. For too long the global property investment community has been denied a credible, factual yields series which can be reliably used to compare “apples with apples.” This unique global publication is the culmination of substantial work by dozens of researchers in the international Savills team. 

Savills Research trusts you find this body of work useful, illuminating and of value to you in your endeavours. As always your thoughts, feedback and ideas are most welcome. Please feel free to contact you Savills representative with regard to this publication. 

Commentary

Asia

The average Asian office market cap rate dropped moderately by 3 bps over the first half of 2018 to reach 4.74%, supported mostly by robust domestic activity. The transaction volume recorded a 20% YoY growth rate over the first half of 2018 despite expectations of a general decline in global liquidity. China outbound saw significant shrinkage over the second quarter with activity restricted to a few large scale office deals in Hong Kong. Our outlook for Shanghai, Hong Kong and Jakarta remains cautious as the effective risk premiums are now negative in these cities. Risk factors are rising while the US 10-year treasury yield has now entered an upward cycle.

UK/Europe

In the worrying context of a tariff war between continents, investor interest in the European commercial property markets does not seem to have faded. During the first half of the year, the total investment volume reached more than €97bn, 5% down on the last first half turnover, but 42% up on the average 10-year first half figure. Europe is still attracting foreign capital, which accounted for half of the total volume. Although offices remain the preferred asset class, prime CBD office yields are showing signs of stabilisation. In 02/2018 the average European prime CBD office yield stood at 3.84%, -14bps YoY compared to the same period last year but only -2bps compared to last quarter. We expect the annual commercial investment volume for 2018 to be in line with last year. 

United States

Office property sales have decelerated in the first half of 2018, falling by more than 20% compared to the first half of 2017. Investors snared many of the choicest assets in prior years and the market now has a dearth of prime properties available for purchase. The disparity in valuations between High Streets and Main Streets has ballooned in this cycle, much more so than in the 2006-2007 run-up. Stabilized Grade A assets in the so- called "Big Six" gateways (Boston, Manhattan, Washington, DC, Chicago, Los Angeles and San Francisco) sell for US$500 to US$1,000 per sq ft or more. Average pricing in nearly all other markets is at best 10% above its prior peaks attained in 2007. 

Australia/New Zealand

Market yields across Australian office markets continued to fall in the first half of 2018, fuelled by increased competition between domestic and offshore investors fighting for limited available stock and relatively high investment yields (when looking at comparable investment destinations globally). Tightening credit conditions have meant that investors are increasingly interested in investing in safe haven areas, such as Australia, which ranks second highest globally in terms of transparency and is supported by strong population growth. This is further accentuated by the weight of superannuation funds increasingly re-weighting their holdings to Australian commercial property in the search for secure income streams.