European commercial property pricing has reached its most attractive level for investment in almost 10 years, according to research from DTZ, a UGL company.
DTZ’s Fair Value Index offers quarterly insight into the relative attractiveness of current pricing in European property markets by grading them with a score out of 100. The most recent figures show that in Q4 2012 the overall index score for Europe rose to 78 from 62 in the previous quarter – recording its highest score since September 2003.
Individual property markets across Europe are also ranked as hot, warm or cold. Of 105 markets covered, 69 were rated as hot and 25 as warm – making them attractive to investors. Significantly, 33 markets were upgraded between Q3 and Q4, with 24 improving from warm to hot and nine moving from cold to warm.
Magali Marton, head of CEMEA research at DTZ, says: “The rapid increase in the attractiveness of property can be seen by the fact that almost a third of European markets were upgraded to either warm or hot in the last quarter. The most significant factor behind this change has been the more positive outlook for the eurozone which has pushed down bond yields and required returns as the risk of break up has receded. The upshot is that property looks better value in comparison to bonds.”
Belgium and the Netherlands topped the list of most attractive markets, closely followed by the Baltics, Finland, Norway and Denmark. Each of these top six countries recorded the highest possible index score of 100 and had all three sectors covered by the DTZ analysis – offices, retail and industrial – classed as hot in investment terms (more than five per cent under-priced).
This leading group was closely flowed by a second tier comprising UK & Ireland and Germany, both with an index score of 91. A third group – comprising the CEE markets, France and Italy – were all priced roughly at fair value. In contrast, Spain’s relatively high hurdle rate and subdued expected returns are reflected in an index score of just 17, making it an unattractive investment option well adrift of other European markets.
With nine hot markets, two warm markets and no cold markets, Germany rose to 91 from 73 in the previous quarter. The UK’s index increase of three points was less dramatic, although the upgrading of office markets in Bristol and Cardiff from warm to hot means that 17 of the UK’s 20 markets are now classified as hot.
Matthew Hall, global head of forecasting at DTZ, says: “The UK and German markets in particular offer good investment prospects, with the overwhelming majority of markets in both countries being rated as hot. Although only modest rises in rents and capital values are expected, returns in excess of six per cent per annum look appealing when compared to five year bond yields of less that one per cent.”
Industrial became the most attractive sector in Europe at 82 as small upward movements in yields boosted income returns throughout the next five years. This in conjunction with downward pressure on hurdle rates drove industrial property to the top of the rankings in the low rental growth European environment. Offices were at 70 while retail was at 82.
Hall adds: “With total annual returns forecast to average 7.8 per cent for Frankfurt and 7.5 per cent for Berlin over the period of 2013-17, German retail markets are among the top performers in Western Europe. The outlook for rental growth in these markets in the medium term is reasonable, while German bond yields remain ultra-low as Europe muddles through the crisis. As such, German retail markets look attractive for investors on a five-year investment horizon.
“Despite relatively high yields in Southern Europe, weak capital growth prospects mean that total returns are low, and that these markets are classified as cold or warm.”