22 November, 2011
- European all-property DTZ Fair Value IndexTM score of 30 indicates that Europe now offers fewer investment opportunities compared to Q2 2011
- Worsening economic outlook resulting in lower expected property returns and increased investor risk aversion
- Germany and UK holding up well with majority of German markets WARM
- Industrial sector hardest hit this quarter, whilst retail showed signs of resilience
- Relative to falling bond yields, most markets continue to offer solid income returns.
European property markets now offer slightly fewer attractive investment opportunities than they did in Q2 2011, according to the latest European all-property DTZ Fair Value IndexTM for Q3 2011. The index, which measures the attractiveness of commercial real estate markets around the world, currently stands at 30 for Europe, which is a decrease from 41 in Q2 2011. The decrease came as a result of changes in all sectors with offices decreasing to 20 in Q3 2011 from 28 in Q2 2011, retail from 52 to 40 and industrial from 52 to 35.
The index score decline reflects the worsened economic outlook caused by the uncertainty over the Eurozone debt crisis and the prospect of a double-dip recession in Eurozone economies. The impact of the economic environment has fed through to property markets via our forecasts for rental growth which have been downgraded in several markets this quarter, lowering expected returns. In addition, increased instability in financial markets has led to a rise in risk aversion. Investors are demanding a higher risk premium across a range of asset classes, and this has raised our required return estimates this quarter.
Tony McGough, Global Head of Forecasting and Strategy Research at DTZ said: “Our latest Fair Value IndexTM shows that core European markets now offer slightly fewer attractive opportunities for investors than they did last quarter year. A key driver of this is lower forecast rental growth which is dampening the outlook for expected returns over the next five years. The current economic environment is resulting in reduced occupier demand as businesses delay expansion plans and consumers reduce spending. On balance, core market required returns are broadly stable this quarter, however, required returns in peripheral and CEE markets have increased markedly, which has lowered the European Index score.”
However, relative to falling bond yields, property continues to offer solid returns. This is reflected by our analysis that over half of the 98 European markets in our coverage remain HOT or WARM. In Q3 2011, 19 markets moved from WARM to COLD. Five markets moved from HOT to WARM and two upgraded from COLD to WARM.
Tony McGough, remarked: “In Germany, the markets are nearly all in the WARM category, with property offering solid returns relative to low bond yields. We see the German market as more attractive than the French market at present, given the higher economic risk in France and better rental growth prospects in Germany.”
Although there are few clear opportunities for outperformance, selected Central and Eastern European markets still present good investment opportunities this quarter, while some core industrial markets continue to offer attractive returns. The Munich office market and Amsterdam industrial markets were upgraded this quarter. Munich offers solid rental growth prospects over a five year period and Amsterdam presents attractive income returns.
Magali Marton, Head of CEMEA Research at DTZ said: “Several Italian markets have been downgraded this quarter, with the debt crisis driving up required returns. In the medium-term, rental growth in Spain is expected to outperform that of Italy and as such we believe pricing in Barcelona and Madrid markets is more attractive than Rome and Milan.”
The report shows that in Q3 2011 the global Fair Value IndexTM score dropped to 47 from 50 in Q2, which indicates that the global investment environment has become more challenging as a consequence of the weaker global economic outlook. The UK index score fell from 50 to 33 and the Asia Pacific score from 70 to 58, while the US score rose to 76.
To download a copy of the report, visit the DTZ Research homepage here