brunoconsiglio, Author at Cromwell Property Group - Page 2 of 4
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Research and Insights

August 3, 2023

Greenwashing: transparency is everything

Many companies have publicly declared their environmental, social and governance (ESG) strategies to formalise a commitment to net zero and align to the UN’s sustainable development goals. However, if these strategies are not backed up by solid, auditable data and acted upon in a meaningful way, then they are pointless. Making empty or misleading statements about the sustainability of a company’s products or services, whether intentional or not, is known as greenwashing.

Our latest briefing note looks closely at what greenwashing within real estate looks like in its many forms, and the steps businesses need to take to avoid significant reputational damage.

The full research briefing note can be found by clicking here.


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July 18, 2023

Ignore the noise: Australian office isn’t dead (or dying)

Colin Mackay


The future of offices in a post-pandemic world continues to be a topic of robust conversation.

Arguably, most airtime on the subject has been given to dramatic statements like “expect the death of the office” – perhaps recycling articles from the past decade that incorrectly asserted a retail apocalypse was nigh! The reality is that, as retail has adapted to the internet age – and survived – so too will office spaces adapt to these changing conditions.

It can be easy to fear the worst, especially as reports of landlords handing keys to the bank; assets sitting unoccupied; and valuations declining 80% take up the front page of newspapers.

It’s important, however, to understand that these events have been limited to the US, a challenged market with different financial, social, and real estate context. The outlook for office in Australia is markedly more positive for several reasons.


Higher office occupancy

The return to the office has been strongest in Asia-Pacific, where office occupancy is sitting at 70-100% of pre-pandemic levels1. Workers in North America have been the most reluctant to come back to CBDs (45-65%), with Europe (65-85%) splitting the two regions. At the individual market level, the likes of Shanghai and Beijing are back at pre-pandemic occupancy; Sydney has recovered to 70%; London is a bit weaker at 65%; and the major US cities are significant laggards with office-based work still below half of pre-pandemic levels in Chicago (49%), New York (46%), and San Francisco (42%).


Propensity to return to the office appears to be driven by a number of factors, including cultural expectations (e.g., Tokyo/Seoul); industry composition (e.g., finance vs tech); and ease of commute (e.g., rapid transit vs LA traffic). While commute time is highlighted by workers around the globe as the most important driver of returning to the office2, another critical factor is the micro-location of each office building. In addition to influencing commute time, different locations can vary significantly in terms of crime and safety risks, amenity (e.g., restaurants), and environmental desirability (e.g., proximity to water/green spaces).

Australia measures up very attractively on these characteristics, offering reliable rapid transit, exceptional proximity to desirable environmental features, a high density of quality amenity integrated throughout the CBDs, and very low rates of crime. The return to the office will likely gather more steam in the coming months as large employers mandate a minimum number of days in the office per week, as announced recently by NAB and CommBank. However, over the long-term, locations and assets which can attract employees through choice rather than coercion will outperform.




Expanding space requirements

One of the forces expected to offset the impact of remote work is the expansion of workspace ratios – the amount of office space per employee. Forty years ago, in the days of private offices, Australian offices had more than 20 square metres (sqm) of space per employee. Over time, as occupiers sought more “bang for their buck”, desks became more tightly packed together and the corner office was sent to the scrap heap.

The result has been densification of the workplace, with the pre-COVID workspace ratio sitting at 11.1 sqm per employee for Sydney and 12.0 sqm for Melbourne3.


The experience of the pandemic has initiated a shift in the purpose of the workplace and workstyles. The office is increasingly becoming a place for collaboration and social connection rather than focus work, meaning a greater need for meeting, gathering, and collaboration spaces. There is also a need to lower density and make workplaces more comfortable from an employee wellbeing and retention perspective, as employers fight for top talent. Studies have shown that inadequate privacy and space is the dominant cause of workspace dissatisfaction4.

The office is increasingly becoming a place for collaboration and social connection.


In the US, markets such as Chicago and Los Angeles have ratios above 20 sqm per employee, with even New York at 16.0 sqm3. The pandemic-initiated evolution of the work environment can be achieved in these markets by simply recalibrating (and even shrinking) existing footprints.


Contrast this environment with Australia, where workspace ratios are below the global average of 13.3 sqm3 and potential space efficiencies are limited. In this market, the recalibration will likely require additional space, providing a source of demand and limiting the amount of rent-dampening excess stock.


Appropriate financing

Earlier in the year, some high-profile office defaults in the US by Brookfield, and a PIMCO-owned landlord, kicked off concerns about a real estate debt crisis. Risks are certainly elevated in the US, given the aforementioned demand challenges, which will pressure serviceability and put significant downwards pressure on valuations. While pockets of distress may emerge in Australia, the likelihood of a widespread crisis is much lower. Banks remain confident in Australian commercial real estate, increasing their exposure by 5% in December 2022 compared to a year ago5. Loan quality has also remained stable, with non-performing commercial property loans as a share of total exposure unchanged at 0.5%.

Most importantly, the office demand outlook in Australia is much more positive. Solid cashflow will support serviceability as debt rolls onto higher interest rates and help prevent valuations from declining to the extent that is expected in the US. Australia’s lending market is also well regulated, diversified, and strong, and doesn’t face the concentrated exposure or balance sheet issues that smaller regional banks in the US have been contending with throughout 2023.

Additionally, Australian gearing is more conservative with typical loan-to-value (LTV) ratios pre pandemic of 55%, compared to 72% for the US6. While lending conditions have tightened somewhat over the last six months (LTVs now 50%), the US has seen significant tightening (to 57%), contributing to a significant funding gap which will need to be plugged with discount-seeking capital.

The final word

Office is going through a period of change, and assets need to evolve to meet the needs of post pandemic workstyles. While there will be challenges – and opportunities – as a result, the current narrative erroneously extrapolates issues from offshore to the domestic market.


Australian office is well-placed to contend with increased rates of remote working and tighter capital markets given its resilient demand drivers, quality of stock, and sensible financing arrangements. Skilled managers with the expertise to identify underappreciated assets and adapt them to the future of work will continue to deliver strong investment returns.


1 The Future of the Central Business District, May 2023 (JLL)
2 The Global Live-Work-Shop Report, November 2022 (CBRE)
3 Benchmarking Cities and Real Estate, June 2021 (JLL)
4 A data-driven analysis of occupant workspace dissatisfaction, August 2021 (Kent, Parkinson & Kim)
5 Quarterly authorised deposit-taking institution property exposures, December 2022 (APRA)
6 Analysing the Funding Gap: Asia Pacific, May 2023 (JLL)

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Research and Insights

March 15, 2023

Timber buildings – Cost-competitive sustainable real estate

In 2022 we released our report on timber construction titled “Timber Buildings – Truly sustainable real estate”. This demonstrated the many benefits of construction using mass timber (short for massive timber) when compared to traditional steel and concrete.

To recap, the benefits of using mass timber include:

  • Energy efficiency: manufacturing mass timber materials uses significantly less energy than steel and concrete production;
  • Faster construction: prefabricated timber panels enable shorter construction timetables than building with steel and concrete thereby reducing construction-based emissions;
  • Less disruptive: fewer delivering trucks are needed resulting in less disruption to communities around building sites;
  • Resistant: mass timber is fire-resistant and avoids moisture damage when built correctly; and
  • Financially attractive: rising occupier demand for greener buildings led to a 9% rental premium for timber buildings.

This report seeks to look more closely at the amount of carbon reduction during the building development and lifecycle. It also explores how the cost implications of timber buildings compare to steel and concrete.

The full report can be found by clicking here.


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Research and Insights

March 14, 2023

Australian Market Outlook for 2023

According to industry experts, commercial property investors will be cautious until interest rates peak later in 2023, while inflation and cost of living pressure will weigh heavily on the economic outlook.

Global independent real estate consultancy Knight Frank predicts that, despite the challenges present in the global economy, the Australian capital markets will outperform others amidst looming downturn and will remain a global safe haven for global investors.

Businesses continue to show a desire to be headquartered in our nation’s cities, with overall demand for CBD office space remaining positive, according to the latest data from the Property Council of Australia (PCA).

Research by the property industry’s leading advocate showed that, on average, demand for office space increased by 0.1% across Australia’s CBDs between July 2022 and January 2023. The future supply of office space in CBD markets is forecast to be higher than the historical average through 2023, before retreating under the average in 2024 and 2025. Supply in non-CBD markets is set to be higher than the historical average in the first half of this year before declining in the following years.

The state of the office market

As businesses countrywide adopt hybrid work models – and employees are encouraged back into the office – the market continues to adapt to the diverse needs of tenants and occupiers. Vacancy rates are shifting slightly across CBDs, Knight Frank predicts that short-term market disruption is more likely to be in the form and function of office space – there is a growing expectation that building owners create office space experiences to entice work-at-home staff back into CBDs.

In the six months to January 2023, tenant demand outstripped supply in Brisbane, pushing the vacancy rate down from 13.9% to 12.9%. The PCA found that there is less than 100,000sqm of office space coming online in Brisbane over the next three years, 72% of which has already been pre-committed.

Similarly, vacancy declined marginally in Perth from 15.8% to 15.6%; and Hobart recorded a drop from 2.7% to 2.5% – now its lowest rate since 2008.

In other capitals, vacancy rates rose slightly – from 8.6% to 8.9% in Canberra; 10.1% to 11.3% in Sydney; and 12.9% to 13.8% Melbourne. Adelaide’s vacancy increased from 14.2% to 16.1%, driven by above average supply additions – as a result, the South Australian capital now has the highest vacancy rate in the country. In those markets where vacancy increased, there were moves toward prime stock over secondary stock. Non-CBD areas saw a decline from 15.2 to 15.1 per cent, with tenant demand lifting 0.3%.


Australian office space trends

There is a consensus among Australian property experts that the following represent the most prevalent emerging trends in the local market. These include:

  • Workplace change is set to continue – hybrid working environments are now the overwhelming majority in most of Australia’s capital cities. As such, businesses are set to continue to evaluate, and adapt to, employees’ changing working preferences. Workspaces will continue to be reworked and refined over the foreseeable future to accommodate occupiers changing needs.
  • The need to create a workplace experience – Knight Frank has found that there is an increasing expectation by building occupants that owners provide experiences and opportunities, including upgraded end-of-trip facilities, wellness centres, food and beverage options and more.
  • Tenants’ ESG interest – ESG concerns are increasingly becoming front-of-mind for building occupiers and tenants, as well as the general population. As such, building owners will need to invest in environment and sustainability in their key decision-making processes going forward.


Examining office rents

According to the latest Cushman & Wakefield Marketbeat report, premium grade gross face rents rose 6.0% in Brisbane over the final 2022 quarter – to average $965 per square metre – one of the largest rises in recent years. A-grade also recorded an increase in gross face rents, though slightly more modest – at 1% QoQ (6% YoY) – and B-grade rents remained stable over the final quarter of 2023.

In the Sydney CBD, prime face rents held at an average of $1,410 sqm per year, increasing 4.2% over the course of 2022. Premium, A-grade and B-grade gross face rents averaged $1,525, $1,335 and $1,045 per square metre, respectively.


The Melbourne Marketbeat report revealed that rents and incentive levels remain stable, as quality office accommodation options remain available in the Victorian capital’s CBD. Premium and A-grade net face rents in Melbourne were steady, reflecting the city’s “new and better quality stock” – rates averaged $725 and $660 sqm per year, respectively.


Industrial property

Knight Frank has found that, as global supply chain issues caused by the COVID-19 pandemic and war in Ukraine begin to ease, and with the container freight cost indexes backdown to late 2020 levels, the industrial market in Australia is facing an acute shortage of space for near term or imminent occupation. This space shortage is forcing adaptation from both occupiers and developers, as they seek to navigate unprecedented market conditions.

Much of the current ‘available’ space is still under construction with very limited existing stock available. Consequently, lease deals are increasingly being negotiated 6-18 months in advance for existing space – an extended timeframe that previously was reserved for new construction.

Industrial rents are growing rapidly and, with competition high, landlords are frequently able to select from a number of competing offers for the same tenancy. Large international and ASX listed tenants are generally favoured in this process, which has left smaller businesses at real risk of being without business premises.


Retail space

According to Colliers, rents and incentives remained stable throughout most asset classes through the final quarter of 2022, the exception being neighbourhood centres – where rents grew +0.4% nationally in response to low vacancies and tenant demand within the strong-performing asset subclass.

By the end of 2022, occupancy levels for retail assets were at 98.53%, up slightly from 98.44% at the same time 12 months prior.

Rental yields have remained stable, when compared to other sectors, as a result of more headroom on a yield spread basis – when compared to the 10-year bond yield and borrowing costs. The national weighted average retail yield was 5.50%, as at the end of 2022.


In summary, the consensus among industry experts seems to be that 2023 will be a year that Australian markets will begin to shake off the impacts of the COVID-19 pandemic and war in Ukraine. 2022 saw some recovery in selected metrics, and the next 12 months will be largely determined by expected interest rate peaks, as well as ongoing inflation concerns. Though a large amount of uncertainty still remains for investors, Australian markets as a whole are expected to outperform others across the world.

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Research and Insights

February 15, 2023

Polish appeal: Europe’s most dynamic country should be a focus for savvy investors

Poland’s performance prospects are compelling. In our view it is being unfairly discounted by investors due to its proximity to Ukraine. We also believe that it is set for sustained occupier demand growth due to the strength of long-term fundamentals related to economic growth and demographics. A combination of rising occupier demand increasing rental potential, a lack of space suitable for modern businesses and a flawed perception of risk creates a powerful impetus for savvy investors to seize the chance today to acquire good quality real estate and benefit from superior performance tomorrow.

In the first article of this series, we explore why Polish investment prospects are so compelling. In future articles we will examine the performance opportunities presented by individual real estate sectors.

Risk perception: Extreme caution towards Poland is misplaced

International investors have shunned Poland since the Ukraine invasion given its proximity to the conflict and its high associated risk perception. Polish real estate investment volumes in H2 2022 were 35% down on the five-year average according to RCA (figure 1). Polish prime yields have moved out between 50-90 bps over the last year and it remains one of the highest-yielding European markets (figure 2).



Logical reasoning implies that this heightened risk perception is misplaced. Indeed, far from being an inhibitor of future performance, proximity to Ukraine is likely to be an accelerator of it.

Our baseline assumption is there will not be a horizontal escalation of the Ukraine conflict in which Poland is invaded. Given Russia’s battlefield setbacks, their inability to retain territorial gains and the assertive, unified position of NATO and the EU towards Russian aggression, we believe such escalation is highly unlikely. If such an escalation did eventuate, we would all have far more to worry about than real estate values in any case. In the medium-term (the next five years), we also assume that the conflict reaches a settled state and active combat ends. Accepting that, let’s turn to the real estate fundamentals.


Economics and demographics: Dynamism in leading occupier demand indicators

According to Oxford Economics, Poland will benefit from some of the strongest economic growth in Europe over the next five years (figure 3). Because such growth is a leading indicator of occupier demand, this bodes well for real estate performance. However, we believe that even these bullish growth assumptions may be too pessimistic as they fail to account for the full impact of Poland’s post-war relationship with Ukraine.


Poland has been a hub for shipping arms and aid to Ukraine over the last year. Post-war, it will be the conduit through which the reconstruction effort is funnelled. Given the damage Russia has inflicted – the reconstruction costs are estimated by the World Bank amount to €322 billion so far – that effort will be significant. There is talk of a new Marshall Plan, the American programme that turbo-charged Europe’s economic recovery after the second world war. Poland’s leading role in the reconstruction effort will be solidified by the international creditability it has gained by virtue of its resolute response to the invasion. This will translate into far greater foreign direct investment (FDI) from international capital once the risk perception declines.

Poland has been a haven for Ukrainian refugees, with 7.5 million fleeing across the border according to the European Investment Bank. Some 1.5 million are estimated to remain there today, many of whom are likely to settle permanently. The presence of so many additional people has caused some immediate tensions by exacerbating pressure on housing and social infrastructure. Short-term challenges aside, these immigrants will inject dynamism into Poland’s demographic profile by adding labour and population. The new arrivals tend to be younger and better educated than the average Pole. It will be an attractive destination for corporate occupiers seeking to tap that plentiful, affordable supply of skilled labour.

Current forecasts do not, in our view, fully account for the additional economic and demographic growth impetus associated with these factors which will directly translate into stronger real estate demand.


Conclusion: Unwarranted risk and solid fundamentals make Polish real estate an investment gem

In summary, we believe that the Ukraine-related risk of Polish real estate investment is over-estimated. We also consider that economic and demographic growth drivers will stimulate sustained occupier demand in the medium-term and long-term. Investors who access the market now can secure assets and development sites aligned to future demand and associated rental growth at higher yields than will be available once the Russian-Ukraine conflict settles. Exposure to capital and income growth potential will, if executed correctly, deliver out-performance. That is why we are so optimistic on Polish real estate.

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Research and Insights

December 7, 2022

The Proptech Revolution: how technology is reshaping Real Estate

Tom Duncan, Head of Research, Strategy & Product, Cromwell Property Group

In just two decades, advances in computer technology have radically altered our economies, and our societies, faster than at any other point in history. The opportunities resulting from developments like Wi-Fi, smartphones, artificial intelligence (AI), cloud computing, and connected devices – or the ‘Internet of Things’ (IoT) – are so significant that they represent a new industrial revolution. ‘Industry 4.0’ is of a magnitude that is as transformational – if not more so – as the harnessing of steam power or the invention of the mass assembly line (Figure 1).


Traditionally, real estate has been a laggard in embracing this new technological era – consumers and businesses have instead been leading the way. Recently though, there has been a realisation among landlords, occupiers, and building users about the power of property technology – or ‘proptech’ – to provide better, more engaging and sustainable assets.

As a result, proptech is radically redefining the requirements for successful buildings. Landlords must include this technology if they are to attract, and retain, occupiers – and to protect, create, and grow income.

The proptech universe is varied and diverse, touching every aspect of real estate – from identifying investment strategies, to construction and design through to operations. In this article, we consider three important dimensions of proptech at asset-level: smart technology, occupier engagement, and operational efficiencies.

Smart technology

‘Smart’ technology refers to any network in which software and hardware are connected to provide immediate information. When applied to buildings, smart technology allows 24/7 visibility over operations, which enable efficiencies to be optimised in real-time. Heating, lighting, and air conditioning systems can be automated, for example, meaning that they are adjusted up or down in accordance with how heavily parts of the building are being used.

As such, smart buildings make the building more attuned to user needs. Perhaps more crucially though, they minimise needless consumption of precious water and energy resources. Smart buildings are an essential prerequisite to creating more sustainable, environmentally friendly real estate. After all, you cannot reduce what you cannot measure.

An example of this is Cromwell’s partnership with Deepki – a consumption data tool for analysing energy, water, waste, and carbon dioxide use – within our European portfolio. The Deepki platform comprises an ESG data hub that provides a comprehensive view of the current efficiency of every asset. It means we can identify where improvements can be made to align to Paris agreement climate change objectives or when assets may become stranded, thereby allowing proactive management or divestment.

Closer to home, smart technology is a key component in our ongoing refurbishment of 400 George Street, Brisbane – a 44,000sqm building that comprises of office, retail, and childcare uses. We have delivered best-in-class end-of-trip facilities using smart technology and fixtures that measure water consumption in real time. We have also upgraded the building access control system to Schneider Electric EcoStruxure Security Expert.

Our focus is now transitioning to refinement and upgrading of the building management system (BMS) to the EcoStruxure platform, which will allow continuous monitoring of equipment and operations. The upgrade will allow us to improve performance and undertake pre-emptive maintenance before issues emerge as well as easing reporting. This type of smart technology typically results in 80% of issues being resolved remotely, a 29% fall in unscheduled maintenance and 20% lower energy costs.


Occupier engagement

Proptech allows human users to understand and interact with the building in new ways, usually via smartphones. So-called occupier engagement apps can offer automated building/guest access, direct temperature/lighting control, food/coffee pre-ordering or pre-booking of desks or meeting rooms. These features can connect individual users to the wider community within the asset through message-boards or meet-ups, or to the local community by offering discounts at local businesses or advertising nearby events. It makes it easier for any building faults to be reported directly to the asset manager meaning faster resolution – trip hazards can be photographed and logged immediately on the app for example.

Occupiers can derive information on energy or water use at a touch of a button or gain deeper insight on how their staff use the space. For landlords, occupier engagement apps can provide valuable data on how occupiers use their buildings, including where pressure points are and where improvements can be made. Apps like these create a more collaborative relationship between landlords and occupiers which assists to meet compliance obligations, achieve ESG objectives, and build long-term value.

Occupier engagement is a priority for our 400 George Street refurbishment. By adding an app connected to a smart framework, developed by Schneider Electric EcoStruxure, we expect to increase the appeal of the asset to occupiers. In addition to aiding occupier retention, apps can increase brand awareness, increase occupier satisfaction, provide data for better asset management, and ultimately deliver a higher investment return.


Operational efficiencies

Proptech offers significant potential to remove some of the hurdles that have traditionally impeded the efficient occupation and management of real estate. Virtual lease or contractor contracts, for example, can be used to lessen the time it takes to formalise occupier agreements, engage services, and lower associated legal costs. Virtual data-rooms can be established to centralise access to building information preserving data that may otherwise be lost, and accelerate the due diligence process when assets are traded. AI can be used to automate data collection and analysis.

While the technology is at a fledging stage, Cromwell has already experimented with using AI technology to enter historic leases into Yardi, our asset management software, and explored virtual data room technology. Though being an early adopter in this space may be disadvantageous if dominant providers emerge, it is still critical to monitor developments and be ready to adopt suitable solutions at an appropriate time.

The real estate industry is just beginning to harness the power of proptech to make buildings and their management better. It is a journey without an end, given that technology will continue to evolve and iterate at an accelerating rate as one advancement builds on another. It is crucial for landlords to understand the transformational impact of proptech, and to adapt accordingly. Investors, occupiers, and building users are coming to expect proptech solutions within real estate. Those assets with the best technology will deliver superior performance; those without will under-perform. While it has been slow to get going, the proptech revolution promises to profound and utterly transform real estate.

It is crucial for landlords to understand the transformational impact of proptech, and to adapt accordingly. Investors, occupiers, and building users are coming to expect proptech solutions within real estate. Those assets with the best technology will deliver superior performance; those without will under-perform. While it has been slow to get going, the proptech revolution promises to profound and utterly transform real estate.

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Research and Insights

October 11, 2022

The impact of rising interest rates on real estate yields

Alex Dunn, Research Manager, Cromwell Property Group

Interest rates tell you how high the cost of borrowing is, or how high the rewards are for saving. So, if you are a borrower, the interest rate is the amount you are charged for borrowing money, shown as a percentage of the total amount of the loan. In 2022, interest rates have risen across Australia, Europe and the US.

The relationship between interest rates and real estate yields is important for investors to understand, given the potential impact of the former on the latter.

While we believe that recent interest rate increase will place upwards pressure on real estate yields, our research implies that other real estate fundamentals are also important, and theses will limit the extent of yield softening.

Statistically, our analysis shows there is a very close relationship between 10-year government bonds and real estate yields.

Government Bonds: Closely correlated with real estate yields

Government bonds are viewed as proxy for the ‘risk-free rate’, which is the theoretical rate of return for an investment that has no risk of financial loss. An increase in interest rates encourages saving and deters borrowing and in so doing raises the required rate of return for real estate investment.

In figure 1, we compare Eurozone government bonds to prime Eurozone office yields. A score of 1 means two variables are perfectly correlated, meaning they move in unison. A correlation of 0 means there is no relationship between them. The correlation between Eurozone government bonds and prime office yields over this period is 0.89. This implies a strong relationship and the long downward trend in real estate yields since 2001 is heavily linked to the fall in interest rates.



Although there is a strong correlation between the two variables, the magnitude of moves in real estate yields and bond yields has differed significantly over the past two decades. Figure 2 shows that real estate yields fell by an average of 280bp across major European markets from peak to trough, while bond yields reduced by 495bp over the same period. This suggests that real estate yield movements, although in line with bond yields, are far less volatile and are subject to other forces.

Figure 3 shows the spread between prime UK office yields and 10-year government bonds, and we have used data from the UK office market due its stable history. The spread at the end of 2021 was around 476bps, compared to the long-term average of 306bps. While there is no mathematical rule to indicate the spread which can trigger repricing, we believe the bond yield must first rise to reduce the spread to levels comparable with the long-term average before exerting direct upwards pressure on real estate yields.


Figure 2 also shows that since 1992, there are two periods where the spread between UK prime office yields and 10-year government bonds significantly reduced: between 1993-7, and 2005-8. In both periods the UK was experiencing inflation above the Bank of England (BoE) target of 2%. This suggests that investors are willing to accept a lower spread between real estate yields and government bonds in periods of high inflation due to the perception that real estate is an inflationary hedge.

The Spread: What other factors impact capital values?

The volatility in the real estate-bond yield spread suggests the complex influence of several factors playing a role in affecting real estate yields. These include capital markets, macroeconomic variables, and real estate fundamentals.

The spread is related to the expectations around rental and capital value growth, which in turn are related to the supply/demand dynamics of a particular market. If demand for real estate from investors and/or occupiers is high relative to supply, then there will be a downward yield pressure. Where supply is high, for example due to a wave of development completions or occupier bankruptcies, this would exert upward yield pressure.

Despite the disruption brought on by the pandemic, many markets in both the office and logistics sector are undersupplied with available space. Figure 4 shows how the vacancy rates across European office and logistics and industrial properties are significantly below the levels witnessed in the aftermath of the GFC.


A combination of rising construction costs and economic uncertainty has also impacted the development pipeline for both the office and logistics sector. The lack of new stock being brought to the market will exacerbate the current supply/demand dynamics and cause faster prime rental growth.

Debt financing availability has also risen over the last decade due to greater availability of non-bank lenders. This will help maintain yields more than has been done in the past when interest rates rise.

Companies are also in a much healthier position today than they were during the GFC. Figure 5 shows the average loan to value ratio across Europe which has declined from a high of 58% in 2009 to 35% at the end of Q2 2022. As such companies should be better able to protect the downside during a weaker economic environment and, crucially for real estate investors, continue to pay their rent.


The weight of capital targeting real estate across Europe has doubled over the last ten years due to both greater desire for real estate exposure amongst historic investors and new entrants to the market such as sovereign wealth funds.

The significant weight of capital was reflected in the investment volume during the first half of 2022 which totalled €143bn according to RCA. This was the largest transaction volume recorded in H1, and also makes Q2 2022 the second highest rolling 12-month period on record, reflecting investors strong desire to put their money into real estate.

Conclusion: Interest rates are important but not the only factor

The combination of positive rental growth expectations brought on by encouraging supply/demand dynamics, the versatility in the debt markets, and sheer amount of money allocated towards real estate suggests that the spread between 10-year government bonds and real estate yields will be lower in the future. This would therefore reduce the rate of yield softening brought on by rising interest rates. Although we have used data on the European real estate market to explore this topic, the same trends permeate all western markets, and the implications are likely to be the same.

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Research and Insights

July 12, 2022

The relationship between interest rates and real estate yields

The relationship between interest rates, real estate yields and performance is important for investors to understand.

Cromwell’s latest report published by Alex Dunn and Tom Duncan from the research and investment strategy team sheds some light on this topic. Their analysis indicates that interest rate movements do not necessarily cause directly comparable real estate yield changes. The volatility in the yield gap between real estate yields and ten-year government bonds suggests that the influence of other factors play a substantial role in price movement.

This has implications for the extent of yield compression that investors can expect during periods of falling interest rates, as well as decompression when interest rates rise.

The full report can be found by clicking here.


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Research and Insights

April 7, 2022

Timber buildings – Truly sustainable real estate

In this special report, our Research and Investment Strategy team explore how timber buildings can be a critical part of the solution the real estate industry needs to mitigate climate change.

The report takes a deep dive into timber as a renewable building resource. Alex Dunn and Tom Duncan explore how using timber in new building construction can deliver positive environmental impacts and lead to truly sustainable real estate. They provide a balanced view of the benefits and challenges of timber construction; address some common misconceptions around its use and consider the advantages from an occupier and investor perspective. This is essential reading for all real estate stakeholders who are serious about enacting impactful environmental change.

The full report can be found by clicking here.


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Research and Insights

March 8, 2022

ESG: a duty, not an option

The topic of environmental, social and governance (ESG) matters has been brought into sharp focus in recent times, thanks to the lessons of the pandemic, new EU regulations, and alarming emerging metrics on emissions and the impact of the built environment’s carbon footprint.

Sandrine Fauconnet, European ESG Manager recently participated in PropertyEU’s ESG roundtable where she and a panel of experts agreed that although the real estate industry has now grasped the importance of ESG, considerable action is still needed to make a difference.

The full roundtable discussion can be found by clicking here.