Madrid’s prime office yield is expected to harden for at least the next two years. The office market (occupier take-up, investment volumes and prices) performed extremely well throughout 2015 and exceeded all expectations. However, in the final months of 2015 and H1 2016, the market recovery slowed. Caution has been the watchword that best describes investor sentiment over the past few months, reasserting the view that the recovery is still at an early stage.
Uncertainty has been fuelled by the absence of a stable government, as well as the difficulty obtaining planning permits in major cities. Other macro-economic challenges have encouraged caution among investors, such as the commodities crisis in emerging markets, the volatility of the stock markets, and the uncertainty in the European Union following Brexit.
These negative factors have made it difficult to judge the market outlook. However, one thing is certain, the correction in the Spanish real estate market over the course of the crisis was so significant that there is a widespread view that the sector’s recovery will follow soon, it is just a question of when. The Madrid office market, however, is already experiencing this recovery.
DUBLIN AND MADRID PRIME OFFICE YIELDS VS BOND YIELDS
It is telling that the number of employees per square metre in Madrid is one of the highest compared to other global capitals such as London, Paris, New York and Hong Kong, as this demonstrates that there is pent-up demand, which will go on to drive take-up over the coming quarters. Madrid prime rents are also expected to increase by at least 16% over the next three years.
The second half of 2016 is expected to see a return to institutional normality with a new Spanish government, and any political changes will be relatively benign in order to ensure economic stability and an extended recovery cycle. The current outlook is therefore clearly one of growth: disposable income is on the up, unemployment is down, financing costs are lower and property returns are higher than alternative investments.
The Madrid prime office market is currently serving as a safe haven for international capital. This will continue to be the case, as long as there continues to be uncertainty in other investment destinations outside of Spain. Also, our forecast of rental growth to come suggests that prime yields in the best locations will continue to harden, reaching 3.8% by the end of 2017. Until then, the foreseeable and on-going decrease in available space in consolidated secondary and out-of-town areas and rental increases, will guarantee opportunities for investors of all risk profiles.