High debt costs suggest European office price correction
Unlike US office markets, prime assets in key European cities did not experience a correction during the pandemic. Prime yield remained flat for the most part, with some compression even evident in selected locations during 2021. As a result, prime yields in European office markets now look in need of adjustment by 10bps-75bps relative to the all-in interest rate, assuming a low-risk interest coverage ratio and a reasonable LTV are to be maintained.
What you will learn:
- Our analysis suggests a 10% correction is needed on average for the major office markets in Europe to compensate for the higher cost of debt.
- We believe that investment-vintage risk is currently elevated since we expect office yields to move above current levels for some time due to structural issues.
- We remain cautious about the outlook for the office sector. European office total returns are expected to be 5.3% over 2022-2026, 3.4ppts lower than 2015-2019 and the second-worst performing sector within our coverage over the next five years, only ahead of hotels.
In light of the recent Fed rate hike, look to apartments during periods of high inflation
The Federal Reserve is worried about inflation and has made a big step to tackle it, raising the federal funds rate by a further 75bps at its June FOMC meeting – its biggest rate hike since 1994.Find Out More
US: High debt costs suggest an industrial correction
The scale of the increases in debt costs, coupled with the low-yielding environment makes some repricing highly likely for gateway US industrial markets over the coming quarters.Find Out More