European rental outlook improves on the back of increased demand and emerging shortage of supply

European office rental growth picked up in Q2 2010 with prime rents increasing by an average of 1%, up from 0.4% in Q1. This represents a significant turnaround from the same period last year when rents fell 5.7%, reports global real estate advisor, DTZ, in its Q2 European Property Times report, issued today.

Commenting on the figures, Magali Marton, Head of DTZ CEMEA (Continental Europe and Middle East) Research says: “Rental growth has now returned to an increasing number of markets with the strongest growth over the quarter being recorded in Moscow and in London City. In Moscow, a recovery in demand together with a fall in new supply saw prime rents rebound by 12% in Q2, albeit from a low level following the significant fall witnessed in prime rents last year. In London City, the increasingly constrained levels of available grade A stock pushed prime rents up for a third consecutive quarter, by just over 5%.”

In many markets, demand is being driven by an emerging shortage of supply, especially for quality office space. This is most noticeable in markets where developers reacted quickly to the downturn by delaying or postponing construction projects. Whilst this trend was already evident in London and Paris at the start of the year, it has now spread to other markets, including Stockholm, Dublin and Frankfurt. Space upgrades and further consolidation and downsizing of companies resulted in take-up increasing by 11% across the major European office markets in Q2, to reach 1.8 million sq m.

According to the latest forecast from DTZ, the rental growth outlook for European offices has improved with prime rents now expected to increase by an average of 2.6% in 2010 compared to 1.1% forecast at the end of March. Magali Marton concludes: “The improved rental growth outlook for 2010 is due to strong rental growth forecasts in London, Moscow and Paris and the faster than expected bottoming out of rents in a number of European markets.”

The availability rate for offices in Bucharest rose to 18.9% in Q2 2010, compared to 18.1% in the first quarter of the year. A further increase of the availability ratio is expected by the end of the year, when a significant amount of new supply is about to be delivered: Platinum Business & Convention Centre, Swan Office Park (Phase I), Nusco Tower.

“We believe the office rents in Bucharest haven’t reached the bottom, especially for semi-central and decentralized locations, where we expect further drops of about 5% by the end of 2010, mainly due to the delivery of large office projects in those areas. The high occupation ratio in central business district, however, along with the increasing level of interest from the corporate sector, could lead to the growth of prime rents starting next year and throughout 2012, as the new supply diminishes by 35% in 2011.”, commented Bogdan Sergentu, Head of Valuations and Consulting, DTZ Echinox.