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IPF: City and West End are only European cities expected to deliver rental decline over the next two years

By James Wallace - Wednesday, May 16, 2018 10:03

The City of London and the West End are the only two major European cities forecast to deliver rental growth decline over the next two years, according to IPF research, as waning fears over Brexit trade negotiation uncertainty continues to weigh heavy on market sentiment.

The bi-annual IPF research entitled European Consensus Forecasts of Prime Office Rents collates rental growth forecasts from 20 contributors for 29 European cities.

Average rental growth expectations for the City of London and the West End in 2018 have moderated in the last six months but remain negative, at -3.0% (-3.9% in November 2017) and -2.5 (-3.6 in November 2017). This compares to a 2018 mean forecast of 2.6% (1.6% in November 2017) while the strongest rental growth across Europe is expected in Berlin, with 7.2%.

In addition, rents in a further seven markets are projected to grow by more than 4.0%: Madrid (7.1%), Lisbon (4.8%), Amsterdam (4.6%), Barcelona and Munich (4.3%), Oslo (4.2%) and Milan (4.1%).

In a further five markets rental growth of 3% or better is expected, including the German cities of Frankfurt and Hamburg and the two Paris markets. Growth expectations have weakened in four locations: Moscow, Luxembourg, Budapest and Vienna. Average forecasts have fallen by between 0.4% (Moscow) to under 0.1% (Vienna). Outside the eurozone, the Nordic markets are all expected to deliver positive rental growth in 2018: Oslo (4.2%), Stockholm (3.7%) and Copenhagen (2.4%).

“Forecasts for Copenhagen have risen over the six months since the last survey, to average 2.4% from 1.5% previously, with a good supply of space diluting the impact of rising demand,” the IPF survey stated. “The Helsinki office market continues to show improving growth prospects (1.9% from 1.0% in November), with demand over the next three years likely to be stimulated by population and strong export growth as well as an improving labour market.”

The macro backdrop to these European city rental growth forecasts is of improving GDP growth across much of Europe. The EU27 is forecast to grow by 2.6% in 2018 and 2.3% in the EA19.Major countries individual forecasts include 2.3% in Germany, 1.5% in the UK, 2.0% in France, 2.9% in Spain, 1.5% in Italy and 5.7% in Ireland.

In 2019, forecasts further deteriorate for the two flagship London locations for 2019 rental growth, with the City of London expected to decline by -2.9%, compared to -0.8% in six months ago, while the consensus rental decline forecast for West End has turned negative in the last six months, from positive 1.1% rental growth to a decline of -1.2%.

The 2019 mean forecast for all locations has risen to 2.0% (from 1.2% six months ago) with 16 markets forecast to achieve better rental growth than this average rate, led by 5.2% in Madrid. Four further markets are forecast to grow by more than 3.0% next year: Berlin, Moscow, Barcelona and Amsterdam (at between 4.8% and 3.3%) with Munich and Frankfurt additionally at circa 3.0%.

The outlook for the City of London and the West End is more optimistic for 2020, with both capital locations expected to return to positive rental growth, at 0.8% and 1.0%, respectively.

Rental growth sentiment in Manchester – the only other UK city captured by the IPF research – has improved in 2018, up 0.7% to 1.4%, but weakens in 2019, falling to 0.7% from 1.2%. “The impact of Brexit, despite ongoing uncertainty over the trade negotiations, has waned, although averages remain a negative influence on the central London markets,” the IPF wrote.

Athens was excluded in this research update due to receiving fewer than five forecasts. All forecasts were generated within three months of the 25 April 2018 survey date.

James Wallace is a freelance consultant and can be reached via Linkedin or email: jawallace32@gmail.com

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