Investment into the world’s office markets fell sharply in Q3 2022, however, there is plenty of capital still circulating poised to target the best assets, as well as any areas of discount, as debt-backed buyers withdraw and others pause decision-making, said property expert Savills.
New York saw prime office yields rise by 50bps to 5% (100 basis points make a percent), whilst they held stable for prime core office assets in Asia Pacific, although with a large dispersion, ranging from 1.7% in Hong Kong to 8% in Mumbai, stated Savills in its latest Capital Markets Quarterly report.
In Dubai, yields sat at 6.75% for the quarter. In Europe they varied between 3 and 3.5% for Paris, Frankfurt and Madrid, whilst Savills says that in London City, the prime benchmark was raised by another 25bps to 4.25%, implying a near 12% decline in values since the beginning of the year.
According to the international real estate advisor, asset pricing remains ‘sticky’ in comparison with borrowing; half of the markets tracked in its report have seen the cost of debt rise by more than 200bps since Q1 2022, and it expects to see the potential for some further upward pressure on yields in the next 12 months across the majority of locations.
Edward Price, Associate Director, Capital Markets Middle East said: "In Dubai, regional performance is being supported by high oil prices, which are well above the fiscal breakeven level, leading to gains for governments across the region."
"The occupational market remains strong, supporting the prospect of positive rental growth due to a shortage of Grade A stock in the pipeline amid healthy demand," he stated.
Oliver Salmon, capital markets analyst and director in Savills World Research, said: "The good news is that inflation is probably close to peaking and therefore, by implication, so are market-based interest rates. But to prevent a larger correction in asset pricing, rates need to begin to come down."
"There will likely be some distress along the way, but there is still plenty of capital out there poised to take advantage of the current circumstances. This capital is most likely to deploy where discounts are available, or on core assets with strong fundamentals where pricing remains stable due to scarcity, and they either have the advantage through a currency play and/or through being one of only a few competing buyers in the market," he added.
According to Savills, those investors that are active continue to be buoyed by robust leasing activity, particularly for best-in-class offices, with broadly stable vacancy rates across Europe, Middle East and Africa, and Asia Pacific markets in 2022 justifying current valuations.
The global economic outlook does challenge this narrative, but so far an under-supply of high-quality buildings in many geographies is keeping a floor on price declines, it added.
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