Property investment professionals have been consistently hampered by the difficulties evident in forecasting property yields. These problems have stemmed partly from a lack of information to help model the risk associated with property relative to other investment classes. A further handicap, less specific to property, has been the fluctuating nature of investor expectations. The difficulties evident in accurately quantifying risk have led to previous research in this area relegating these considerations to model residuals. This paper takes a different approach in an attempt to model yields in seven core European office markets. Specific market, national and local factors are considered in estimating historical relationships between office property yields and economic and property specific explanatory variables. The analysis examines links between property yields and the traditional real risk free investment yield as well as the impact of expectations on historical yields. Property specific risk is also included as a potential explanatory variable. The paper concludes that within all the European markets considered there is a strong link between the property yield and the risk free interest rate, though the relationship varies in its' time lag depending upon the market examined. In addition the inclusion of risk and expectations to the office yield formation proves highly significant in the estimations for all the European markets.

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