Office rental growth across Europe was marginally negative in Q3 2020 (-0.1%) compared with the higher (-0.7%) fall in Q2 2020. This was not enough to arrest the erosion in annual growth, with rents just 1% higher compared to the same period a year ago. This is the slowest rate of growth since 2014. Just five markets saw rents increase over the quarter compared with ten registering a fall. Prime office yields rose to 4.34% compared with 4.32% in Q2 2020, indicating yields have now reached their floor. However, core markets of France, Germany and UK both saw yields compress further, albeit at a modest rate over Q3 2020.
The retail sector continues to struggle in the wake of the pandemic, with weaker sales in physical stores, less tourism in some markets and rising online sales. This pushed rents lower (-2.3%) in Q3 2020, albeit better than the (-4.3%) in Q2 2020. Overall annual growth slipped (-7.2%), it weakest rate since Q4 2009 (-7.6%). There were no growth markets, with half the monitored markets reporting a quarterly fall. Prime high street yields rose 11bps over the quarter to 4.67%, led by the UK.
The logistics sector remains in favour with investors and continues to be the best performing mainstream sector. Rents rose by 0.6% in Q3 2020 maintaining annual growth at 2.1%, with increases in most markets during Q3 2020 versus Q3 2019. Yields continue to compress further driven by strong investor demand. The European headline yield stands at 5.26%, 25bps lower on a year ago. The country average for France and Germany is sub 4%.