Despite a worsening economic outlook and renewed uncertainty in the Eurozone over the debt crisis, European commercial property markets now offer better value to investors than they did in the first quarter of the year, according to the latest European All Property DTZ Fair Value Index.
The index measures the attractiveness of commercial property markets around the world and currently stands at 41 for Europe, an increase from 32 in the first quarter of 2011. All sectors gained, with offices increasing from 17 to 28 and retail and industrial commercial property both increasing to 52 from 40 and 48 respectively.
The rise comes after two consecutive quarters of decreasing scores and reflects the fall in bond yields witnessed over recent months. Prime commercial property is now looking more attractive compared to government yields in many countries, particularly Germany and France, as it offers higher income yields and a more stable capital value outlook.
HOT markets in Europe increased from 10 in the first quarter to 11, and 18 commercial property markets registered a shift from COLD to WARM on the index. The number of COLD markets decreased from 46 to 28, indicating some shift for commercial property Europe-wide. However, the majority of HOT markets, which are expected to enjoy strong capital value growth in the medium term stemming from falling yields and strong rental growth, are in Central and Eastern Europe.
Most of the upgraded commercial property markets were in France, Germany and the United Kingdom. In Germany, office and retail commercial property became more expensive in the second quarter but this was not enough to offset the positive impact from inward German government bond yield movement.
In the Paris Central Business District the commercial property market remained ranked as COLD as it was considered overpriced and yields are under pressure. Paris La Defense provides higher yields but poor quality commercial property stock and high service charges are dampening rental growth as investors prefer other areas near to the Central Business District. Improved rental growth outlook did lead to the upgrade of Lyon retail and Marseilles office from COLD to WARM though, providing some comfort for the commercial property market in Paris.
The Northern European commercial property markets, particularly those of the Nordic countries, have a relatively low ranking in the DTZ Fair Value Index because of their aggressive pricing.
Magali Marton, Head of CEMEA Research at DTZ, said that this latest index shows that core European commercial property markets now offer better value to investors than earlier this year. ‘This is partly explained by the higher income returns property now offers relative to government bonds in core markets,’ she added.
Despite economic worries keeping occupier demand for commercial property suppressed, the lack of supply in the market is expected to keep rents broadly stable with possible growth in some markets.
According to Tony McGough, Global Head of Forecasting and Strategy, the outlook for commercial property returns in European markets remains static, and is characterised by solid income returns but weak rental growth in most markets. ‘However, these income returns look increasingly attractive in the current climate of increased equity market volatility and very low fixed income returns,’ he added.
