DTZ Fair Value Index reveals Europe now offers more prime property investment opportunities

European property markets now offer better value to investors than they did in Q1 2011, according to the latest European all-property DTZ Fair Value Index TM for Q2 2011. The index, which measures the attractiveness of commercial real estate markets around the world, currently stands at 41 for Europe, which is an increase from 32 in Q1 2011.

All sectors gained with offices increasing to 28 in Q2 2011 from 17 in Q1 2011, and retail and industrial both increasing to 52 from 40 and 48 in Q1 2011 respectively.

The index score increased despite the worsened economic outlook caused by the renewed uncertainty over the Eurozone debt crisis. The rise in the score follows two consecutive quarters of declining scores and largely reflects the fall in bond yields in core markets witnessed over recent months. With government bond yields compressing in many countries, significantly in Germany and France, prime property is now relatively more attractive. It offers higher income yields and a broadly stable capital value outlook going forward.

The number of HOT markets in Europe increased from 10 in Q1 to 11 in Q2 2011 and 18 markets were upgraded from COLD to WARM. The number of COLD markets decreased from 46 in Q1 to 28 in Q2 2011. The majority of HOT markets are Central and Eastern European office and retail markets, such as Moscow office and retail, and Bucharest and Prague retail. These markets are expected to enjoy strong capital value growth in the medium term, stemming from yield compression and strong rental growth, which more than compensates for their higher risk.

Most of the markets that were upgraded were in France, Germany and the UK. Several German markets, including Berlin and Frankfurt offices and Munich retail were upgraded from COLD to WARM, even though they became more expensive in Q2 as yields compressed. However, the shift was not sufficient to offset the positive impact from the inward German government bond yield movement.

In France, Paris CBD yields compressed further to 4.5%. This market remains COLD as it is considered over priced and an outward yield shift is expected. Paris La Defense provides higher yields but poor quality stock and high service charges are dampening rental growth as investors prefer other areas close to the CBD. On the upside, improved rental growth outlook led to the upgrade of Lyon retail and Marseille offices from COLD to WARM.

The Nordic markets have a relatively low ranking in the DTZ Fair Value Index TM due to their aggressive pricing. For example, yields moved in from 5.5% in Q1 to 5% in Q2 2011 in Oslo and are at a low 4.85% in Stockholm.

Magali Marton, Head of CEMEA Research at DTZ said: “Our latest Fair Value Index^TM shows that core European markets now offer better value to investors than they did earlier this year. This is partly explained by the higher income returns property now offers relative to government bonds in core markets. Although occupier demand is likely to be affected by the turmoil in the economy, the lack of supply at the prime end of the market is expected to keep rents broadly stable, with growth prospects in some markets. For example, a lack of supply in the office and retail markets of Milan and Rome is supporting price stability in spite of subdued occupier demand.”

Tony McGough, Global Head of Forecasting and Strategy Research commented: “The shift in our DTZ Fair Value Index^TM scores this quarter underscores the appeal of the solid income returns offered by prime property amidst a clouded economic outlook. Our outlook for property returns in European markets remains largely unchanged, and is characterised by solid income returns but weak rental growth in most markets. However, these income returns look increasingly attractive in the current climate of increased equity market volatility and very low fixed income returns.”

The report shows that in Q2 2011 the global Fair Value Index^TM score rose to 55 from 50 in Q1, which indicates that the global investment environment has retained its appeal to investors in spite of an uncertain global economic outlook. The UK index score rose from 28 to 50 and the Asia Pacific score from 65 to 70, while the US score remained broadly unchanged at 73.

“As generally recorded throughout Europe, in Romania, on the grounds of an uncertain economic outlook, the real estate properties increase their attractiveness. In the last quarter, retail remained the most attractive sector for the investors mainly due to the relatively low capital values of the commercial properties corroborated with the stable rents. Also the industrial sector increased its attractiveness due to the high yields and to the potential of a slight rent levels increase.

The office sector, presents modest increase in attractiveness since the first quarter of 2011, especially due to the lack of new supply and to the slight increase in occupier demand.

As the Fair Value Index increases and thus the attractiveness of the real estate properties, this should theoretically be reflected in a future increase in transaction volumes; however the current incertitude of the market evolution render any forecast as premature.” Commented Bogdan Sergentu (photo), Head of Valuations and Consulting, DTZ Echinox 

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DTZ is a global real estate services firm with offices in 140 cities and 42 countries (across Europe, Middle East and Africa, Asia Pacific and the Americas). The firm provides advice and on-the-ground delivery to investors, developers, corporate and public sector occupiers and financial intermediaries.  DTZ works with clients across the breadth of their real estate needs, spanning all real estate sectors and encompassing Investment Agency, Leasing Agency and Brokerage, Property Management, Project Management and Building Consultancy, Valuation, Investment and Asset Management, Consulting, and Research. The parent company, DTZ Holdings plc, has been listed on the London Stock Exchange since 1987.

In November 2002, after 9 years of successful operations on the Romanian real estate market, Echinox Consulting entered a partnership agreement with the multinational company DTZ, one of the leading global real estate services companies. Therefore Echinox Consulting became the local DTZ representative office, operating under the trade name of DTZ Echinox.

Tags: markets outlook yields score retail income office global returns market growth increase attractiveness offers europe index value prime property echinox investors european investment estate

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