Can Oslo office yields continue to edge lower? - Capital Economics
European Commercial Property

Can Oslo office yields continue to edge lower?

European Commercial Property Update
Written by Amy Wood
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Although much of 2020’s fall in Norwegian government bond yields has been reversed, we think that improving economic activity and supportive valuations will allow prime office yields to reach new historic lows this year.

  • Although much of 2020’s fall in Norwegian government bond yields has been reversed, we think that improving economic activity and supportive valuations will allow prime office yields to reach new historic lows this year.
  • Despite the hit to economic activity and heightened uncertainty, Oslo office yields fell last year. The decline in yields contrasted with broadly flat or rising yields in most other markets in Western Europe. This appeared to be driven by the sharp drop in Norwegian government bonds yields and swap rates over the first half of the year, which improved property valuations and reduced the cost of debt. In addition, the relatively good performance of the Norwegian economy also likely played a role. However, office yields are now at historic lows and government bond yields have reversed much of their 2020 falls. (See Chart 1.) But we don’t think that this yet marks the trough for prime office yields.
  • For one, office valuations are still expected to remain supportive. We think that the pace of monetary policy tightening will be more gradual than the Norges Bank currently projects, with interest rates unlikely to rise until 2023. (See here.) If we are right, government bond yields should remain close to current levels this year. As such, even if there is a further fall in office yields, the spread to government bond yields is not expected to return to its previous lows over the next couple of years. (See Chart 2.)
  • In addition, the Norwegian office market is well placed to recover this year. Virus containment measures will weigh on activity in Q1. However, employment is expected to return to growth from Q2, which will support occupier demand. Further, there has not yet been a material increase in subleasing as firms review space needs, with Savills data showing tenant sublet space fell over 2020 to just 0.3% of total stock.
  • Admittedly, landlord vacancy did rise considerably in 2020 and will likely rise a bit further this year so we think it is unlikely that there will be a return to rental growth this year. But this still compares favourably to our expectations for many other markets in Western Europe, where we expect rents will see more material falls. This should allow yields to compress further, albeit we have pencilled in only 10bps.
  • All that said, beyond 2022 the story will be different. A combination of rising government bond yields as interest rates increase and our view that rents are at risk from a faster adoption of remote working is expected to put more upward pressure on office yields. In fact, we think that Oslo will be the first office market in Western Europe to see yields rise. As a result, after growing by 1.5% this year and next, we think that office capital values will do little better than mark time further ahead.

Chart 1: Oslo Prime Office Yield and Norwegian Government Bond Yield (%)

Chart 2: Oslo Office Yield Spread Over Norwegian Government Bond Yield (Bps)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Amy Wood, Property Economist, amy.wood@capitaleconomics.com