Increased investor interest in commercial property across Europe saw yields fall in many markets in Q1, with the best buying opportunities remaining in central and southern regions of the continent, according to research from DTZ.
The European Fair Value Index published by DTZ identifies Europe’s most attractive office, retail and industrial markets for prime commercial property investment now on a five year hold period. The report shows that peripheral Eurozone, Baltic and Central European markets are likely to outperform their traditional western European counterparts in terms of attractive investment opportunities.
DTZ’s latest Fair Value Index™ for Europe fell to 69 in Q1 2015 from 79 the previous quarter, meaning that although European commercial property markets are still attractively priced, their relative pricing compared to bonds is starting to diminish, reducing the ‘sweet spot’ of opportunity for investors.
The European Central Bank’s €1.1tn QE programme has resulted in bond yields and forward rates falling to unprecedentedly low levels, which has increased property’s attractiveness to investors searching for higher yields. The resulting increased investor demand for European property has seen prime yields fall in around half of the 117 markets in DTZ’s European Fair Value Index™ this quarter, causing the overall index score to fall.
Fergus Hicks, DTZ’s Global Head of Forecasting, said: “Our latest European Fair Value Index™ is showing that European property remains attractively priced. However, yield compression across much of Europe is seeing property become more fully priced and reducing investment opportunities.”
The industrial sector remains the most attractively priced sector in Europe, with 4 of the top 5 most underpriced markets in DTZ’s European Fair Value Index™ all in this sector. Higher income yields compared to the office and retail sectors make it particularly attractive to investors and results in a wider spread over government bond yields.
Central European, Baltic and Eurozone peripheral markets top the rankings as the most underpriced markets in Europe in the index this quarter, with the Riga industrial market ranked number 1. In contrast, many core European markets are now classified as fairly priced, while the Russian, Turkish and Swiss markets remain overpriced at the bottom of the rankings.
Magali Marton, DTZ’s Head of Research for EMEA, said: “While there are still plenty of attractive investment opportunities in core western European and Nordic markets, we believe that industrial markets in the Eurozone periphery, Baltics and Central Europe offer the best value over the medium term”.
The findings are based on the DTZ European Fair Value Index™, which provides a quarterly insight into the comparative attractiveness of current property pricing across 117 European markets. The classification for each market, based on a five year hold period, is determined by comparing the forecast return and the risk-adjusted fair/required return. A score of 100 indicates that all markets in the index are underpriced and zero that all markets are overpriced. A score of 50 indicates a balanced number of over- and underpriced markets. In Q1 59 markets were rated as ‘underpriced’, 44 ‘fairly priced’ and only 14 as ‘overpriced’.