Cautious optimism?

In May, UK property yields remained stable, with the average prime yield holding at 5.91% for the third month, though five sectors experienced downward pressure.

The events in the US are undoubtedly influencing the Bank of England’s thinking on interest rate movements, albeit the markets had expected rate cuts prior to President Trump’s tariff policy. At their most recent meeting on 8th May, the Bank of England Monetary Policy Committee reduced interest rates by 25 bps to 4.25%, with Governor Bailey citing a “gradual and careful approach to further rate cuts”, which is anticipated to further stimulate investment.

The UK’s occupational market remains robust, with rental growth continuing due to limited new development. As the final position around tariffs becomes clearer, investment volumes are likely to rise, supported by strong occupational fundamentals, improved debt availability, higher loan-to-value ratios, and some market distress.

However, a key trend in 2025 has been the increasing withdrawal of assets from sale, reflecting ongoing caution. For market confidence to fully return, trading volumes must rise. Over the next 12 months, the gap between buyer and seller expectations is expected to narrow, potentially unlocking more deals and restoring momentum to the market. However, with increased market volatility part of the new normal, is now the time to find confidence and take action?

European average Central Business District (CBD) office rental growth doubles non-CBD rental growth since 2020

Since 2020, European office tenants have increasingly opted to relocate to CBD locations, which is driving outperformance of prime rental growth in central locations.

Across European cities, prime CBD rents have grown by an average of 19% over the last five years, while prime non-CBD rents have grown by 9% over the same period. Düsseldorf, London West End, and Amsterdam have all recorded CBD rental growth more than twice as strong as non-CBD rents.

We are seeing that tenants are seeking better quality office space in well-connected CBD locations in order to attract and retain talent. For every five minutes a prime office is located closer to a city’s major transport hub, occupiers can expect to pay an average 6.7% more in rent, Savills research finds.

In London, HSBC announced it is moving from Canary Wharf to the City, while in Paris, EY will move from La Défense to 30,000 sq m in the CBD. More recently, KPMG confirmed it is moving from The Squaire to two buildings in central Frankfurt. This is against a backdrop of European office development completions entering their lowest level for ten years, adding upwards pressure on prime rents. Prime vacancy rates in CBD locations are around the 2–3% mark in many European cities, limiting options for footloose occupiers.

However, given record-high eurozone inflation in recent years, CBD office rents are still down by 4% in real terms compared to pre-pandemic levels, indicating that tenants are paying less on rent as a share of their total costs. Over the last 12 months, though, prime CBD rental growth has outpaced inflation, and we expect this trend to continue for the next couple of years, given the shortage of supply.

Rental growth prospects remain strong for prime CBD offices, and tenants who are unable to pay more for well-located stock will be forced to look to non-CBD locations.

The UK regional office markets continue to benefit from a sustained flight to quality and constrained supply, both of which have fuelled significant rental growth. This trend is expected to persist, particularly across the Big Six regional cities, where supply constraints are most evident. Each of these cities has less than two years of prime office supply remaining, based on the five-year average Grade A take-up rates, and there are limited development completions in the pipeline. As a result of this tight supply, occupiers are increasingly turning to refurbished office space. Refurbishments now account for 60% of speculative office space expected to be delivered over the next three years.

Over the past 12 months, refurbishment rents have risen sharply. The rental gap between prime new builds and refurbished spaces in the Big Six cities has narrowed considerably. In some cases, such as Glasgow and Edinburgh, refurbishment rents have even surpassed those of prime new builds. This highlights occupiers’ growing willingness to pay premium rents for well-designed, comprehensive refurbishments amid the ongoing shortage of new build supply.

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