It’s been a tough few years for real estate professionals tasked with monitoring the goings on in the office market in the U.K. and Europe, to say the least. But in these uncertain times, surprisingly few grasp the chance presented by the public market to supplement other information sources with regular, detailed insights into what is, in effect, a €90bn Office portfolio covering fourteen countries, countless submarkets, a range of product qualities and types (including flex) and hundreds of thousands of square metres of development.  

So, what knowledge can be garnered regarding the Pan-European Office market in the latest round of results, for the period to 30th June, from office-focused companies under Green Street’s research coverage in Europe?   

Operational Strength Nearly Everywhere 

To the more casual observer, perhaps the most notable and Office-narrative-busting observation from Europe’s office REITs is the continuing strength of rental growth in REIT portfolios – averaging around 5% and comfortably positive in all ten countries material to recent disclosures. True, there are some pockets of weakness and some over-renting after the storm-force tailwind of inflation-indexed rents, but REIT portfolios on the whole reflect better-than-average asset quality and location, which helps explain the robust picture overall. 

Irrespective of a range of performance within Europe, however, transatlantic comparisons make for interesting reading. Owners of similarly good quality REIT portfolios in the U.S. may scarcely believe the income growth and occupancy numbers their European brethren have been enjoying this year, as illustrated in the chart below. The reasons for such disparity are too many to interrogate in this article, but tight supply and high barriers to new development in many of western Europe’s central business districts (where much of REIT-owned stock lies) have certainly been key to mitigating the worst post-pandemic impacts on demand for office space. 

* Asset-weighted average of 16 Pan-European companies and 17 U.S. companies, office asset only, where data available. Income measures are same-store NOI for U.S. and like-for-like GRI for Europe, i.e. not perfectly comparable, but illustrative.  

Valuations and Investment Market – In Sight of the Trough 

In common with many market investors, a range of REIT management teams have been cautiously articulating the view that office valuations are bottoming out. Third party valuations at 30th June would appear to vindicate such a view, with reported value changes since 31st December generally coalescing close to zero (on either side), with the aforementioned rent growth tending to offset modest yield expansion. Of course, REITs are operating in the same, volume-limited investment market as everyone else and are keen for better liquidity to return, but glimmers of light are certainly available in REIT commentary for those looking for it. 

A Window into Flex 

The public market has often been a great source of information for emerging ‘niche’ segments of European commercial real estate (think self-storage, student housing etc). Flex office is the latest example. In London, GPE’s 2Q reporting of seven fully managed flex leases signed at £210/s.f. (including two renewals in the West End with 30% uplifts to £249/s.f.) is an interesting datapoint for anyone wrestling with the sustainability of 50%+ net effective rent premiums for flex, compared to conventional ready to fit. Derwent London’s management disclosed that every space they receive back under 10,000 square foot is appraised for their ‘Furnished & Flex’ product, a clear signal regarding the apparent permanent shift to flex for smaller spaces. Beyond London, Gecina is rolling out an ostensibly similar product in Paris CBD, although latest disclosures point to ERV premiums in the range of 20-30%, making for an interesting comparison to those achievable in London’s West End.  

Needless to say, there are many more insights for market participants to glean from just one round of public market results than could be squeezed into a very short article – not to mention sectors beyond Office. But the breadth and depth of near-real time disclosure available from the public market means that if you’re missing it, you’re missing out.