European property markets now offer relatively less attractive returns to investors than they did in Q3 2010, with the latest European all-property DTZ Fair Value Index (FVI) Q4 2010 standing at 40, a decline from 55 in Q3. The DTZ Fair Value Index, which measures the attractiveness of commercial real estate markets around the world, also shows that Europe has fallen in the global rankings with the Global Fair Value Index standing at 53.
Additionally, Germany is outperforming other European markets. It is the only country with an improved overall score in Q4. Stronger economic performance in Germany is feeding through to the occupier market. With solid rental growth prospects, relatively high yields and relatively low government bond returns, all German markets are HOT or WARM and offer reasonable to good investment opportunities.
Across Europe the number of HOT markets has decreased to 14 in Q4 from 23 in Q3, while the number of COLD markets has increased to 34 from 14. The majority of markets remain in the WARM category. London City and London West End offices have been reclassified from HOT to WARM as yields compress and the forecast strong rental growth materializes. Paris CBD offices move from WARM to just COLD for a similar reason. All three markets still have plenty of rental growth to come but this is now priced in.
Q4 also sees downgraded ratings for European markets in significantly indebted economies such as Ireland. Here government bond yields have moved out once more and these markets are being supported by ECB intervention. Consequently, though we still expect good investment returns the risk of entering these markets (shown by the bond yield) is reflected in the Q4 scores for Dublin Retail moving to COLD. Madrid Offices also saw downward revisions as Spanish government bonds moved out as the nervousness in the markets spread. Berlin Retail is the only market to be upgraded into the HOT category in Q4 offering an attractive yield and rental growth.
The office sector is most significantly impacted by the FVI Q4 score, declining from 46 in Q3 to 25 in Q4 2010. This sector is now fully re-priced, with prime yields reflecting the expected future rental growth, at a time when rental growth prospects are being revised down in many markets. In contrast, the retail and industrial sectors still provide relatively good value with scores of 52 and 54 respectively. Industrial markets now offer good income returns in an environment of weaker capital growth.
Although the majority of European industrial markets are not expected to have significant rental growth or yield compression, total return