European commercial property pricing has reached its most attractive level 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.
Magali Marton, Head of CEMEA Research at DTZ, said: “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 bee 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, indicating attractive pricing across all three major commercial use classes (office, retail and industrial).
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 regional office markets 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, said: “The UK and German markets in particular offer attractive pricing, with the overwhelming majority of markets in both countries being rated as HOT. Although only modest returns are expected, the extremely low hurdle rate continues to paint these markets in a positive light on a risk adjusted basis.”
Industrial became the most attractive sector in Europe with an index score of 86 as a small upward movement in yields boosted income returns throughout the next five years, while offices and retail reported index scores of 70 and 82 respectively. Low rental and capital growth throughout Europe increased the significance of higher income returns and placed industrial property at the top of the sector rankings.
Matthew Hall added: “For investors in the retail sector, German markets offer attractive terms. Total returns of 7.8% per year for Frankfurt and 7.5% per year for Berlin are forecast for the next five years. Relatively strong rental growth is expected while German bond yields remain the lowest in Europe, creating an extremely low hurdle rate.”