Substantial variations in the pricing of investment property remained across Europe at the end of 2004 despite a benign environment of low inflation and low interest rates, a study by IPD shows. The research, sponsored by Arlington, DTZ and MEAG shows results for twelve European countries across the four main sectors: office, retail, industrial and residential.
Despite a benign environment of low inflation and low interest rates across Europe, there are still substantial variations in the pricing of investment property. The net income yield series reveal a number of intriguing patterns:
- The retail sector shows the largest range in yields across different countries. Yields appear to be most uniform in the residential sector.
- In general net income yields are highest in the industrial market and lowest in the residential market.
- In the Nordic region, the Netherlands, Ireland and the UK retails are priced on a lower net income yield than offices, suggesting that investors anticipate faster income growth in the retail market over the long-run. The gap is approaching 200 basis points in Ireland and the UK.
- In France and Germany, net income yields in the two sectors are virtually identical. By contrast, in Southern Europe, offices are priced on significantly lower yields than retails.
- Within each sector, net income yields tend to be lowest in Germany, Ireland and Switzerland and highest in the Netherlands and Norway. The low level of yields in Germany and Switzerland cannot be explained by stronger economic prospects. One possible explanation is that property yields are still reflecting historic differentials in inflation and bond yields which existed before the creation of the Euro.
Looking at variations in irrecoverable operating costs:
- Operating costs are typically highest as a percentage of gross income in the residential sector and lowest in the industrial and office markets. The variation appears to be largely a function of the number of tenants and the mix between single and multi-let properties, which are more management intensive.
- Irrecoverable operating costs are highest in the Nordic region as a percentage of gross income and lowest in Ireland, Italy, Spain and the UK. These variations reflect differences in the degree to which cleaning, insurance, maintenance, security and utility costs are the responsibility of the landlords. In Sweden, for example, landlords are often partially responsible for heating costs.
Office is the single most important investment sector in Europe, accounting for around 40% of all assets by capital value. National average net income yields ranged from 4.8% to 7.0% at the end of last year.
- Net income yields were highest in the Netherlands (7.0%), Norway (6.7%) and the UK (6.6%).
- Net income yields were lowest in Germany (5.0%), Italy (5.1%) and Switzerland (4.8%).
- The inter-quartile range suggests that the spread of yields was particularly wide in France, Italy and Portugal. A quarter of offices in France, the Netherlands, Norway and Portugal had a net income yield of at least 8.0% at the end of 2004.
- In most of continental Europe operating costs on offices were equal to between 8-13% of gross income. Operating costs were highest in the Nordic region at 17-19% of gross income and lowest in the UK and Ireland at 2% of gross income.
The retail sector shows the largest range in yields across different European countries. National average net income yields ranged from 3.4% to 7.0% at the end of last year.
- Net income yields were highest in the Netherlands (6.4%), Norway (6.5%) and Portugal (7.0%).
- Net income yields were lowest in Ireland (3.4%), Switzerland (4.5%) and the UK (4.8%).
- The inter-quartile range suggests that the spread of yields was greatest in Denmark and France. A quarter of retails in Denmark, France and Portugal had a net income yield of at least 7.5% at the end of 2004.
- Operating costs tend to account for a slightly higher percentage of