DTZ

18 August, 2010

• European property markets are broadly priced at fair value, as indicated by the European all-property Fair Value Index™ score of 49 in Q2 2010. With the global all property index at 62, European markets have become less attractive
• Office markets are the most challenging sector, despite the fact that overall HOT and COLD markets are broadly balanced in Europe
• UK is the least attractive, and Germany is the most attractive, country in Europe
• Nordic markets are the most challenging sub-region in Europe after the UK, while the majority of French markets are classified as WARM

European all property Fair Value Index at 49 implies markets fairly priced

The European all-property DTZ Fair Value Index™ stands at 49 for Q2 2010 (see Table 1). The index offers investors insight into the relative attractiveness of current pricing in global commercial property markets. An index score below 50 indicates there are more markets categorised as COLD (i.e. unattractive to investors as expected returns are below risk-adjusted required returns) than HOT (i.e. attractive to investors as expected returns exceed risk-adjusted required returns). At 49, the current index score implies that European commercial property markets are on average priced at fair value.

Office much less attractive than retail and industrial

However, the all-property score of 49 hides significant differences between sectors. Whilst pricing in several European office markets has overshot fair value with the office index standing at 35, this is not true for the retail and industrial markets where the index scores stand at 65 and 57 respectively.

Opportunity in European markets slipped as index score declined

The all-property index score of 49 for Q2 2010 represents a decline from 61 for Q1 2010. This implies that the number of opportunities for investors in European markets has slipped away to some extent. However, compared to the score of 24 as of Q2 2009, pricing remains much more attractive than it was a year ago. In our view, the recent decline in attractiveness is due in large part to strong yield compression on the back of investor interest and lack of product, especially for offices and in the UK. Increased risk premiums in some markets – related to financial instability associated with sovereign debt levels – has also played a role.

European markets fall further behind other regions in global terms

The global all-property Fair Value Index score for Q2 2010 stands at 62, well ahead of the European score of 49. This implies that markets in Asia Pacific (67) and the US (89), offer more attractive investor opportunities than in Europe.

Hans Vrensen, Global Head of Research at DTZ, comments: “We have devised the DTZ Fair Value Index™ to help investors to allocate funds to commercial property, particularly in this highly uncertain market environment. The indices take into account macro-economic factors such as the European sovereign debt crisis. The index quantifies the impact of these trends on the attractiveness of individual markets over a five-year investment period – providing investors with our foresight.”

HOT and COLD markets broadly balanced

Table 2 presents a breakdown of the number of HOT and COLD markets throughout Europe. The European market is broadly in balance with 20 and 21 HOT and COLD markets respectively.

Office markets are most challenging sector in Europe

Across the European markets, offices are offering the most challenging opportunities, as indicated by the index score of 35. In fact, of the 21 COLD markets across Europe, 16 are office markets. In turn, almost half of the 16 COLD office markets are UK regional markets, such as Bristol, Manchester and Leeds. The rest of the 16 COLD European office markets are located in the Nordics (Oslo, Copenhagen, Helsinki and Malmo), Central and Eastern Europe (Bucharest and Budapest) and other markets, including Barcelona.

UK is the least attractive major national market in Europe

The UK has eight COLD markets, which is the highest number of any country in Europe. Most of the UK COLD markets are smaller regional office markets. The key London markets, such as London City offices and West End retail remain classified as HOT. [For more details about the UK markets, please refer to the UK press release.]

Germany is most attractive major national market in Europe

In contrast to other office markets in Europe, all German office markets are WARM. Ursula-Beate Neisser, Head of Research Germany at DTZ, comments: “The fact that there are currently no COLD markets in Germany makes it the strongest major national market in Europe. Berlin retail as well as Frankfurt and Hamburg industrial markets are classified as HOT.

“Investors are able to purchase property at very attractive yields relative to recent experience in the tight German market, and while rental growth in Germany is generally expected to be subdued, these HOT markets are expected to out-perform and provide excellent returns for investors over the next five years.”

Majority of French markets are classified as WARM

In comparison with Germany, the French markets are generally less attractive, albeit most are classified as WARM. This is supported by the fact that there are no HOT French markets currently. However, all Paris sectors (office, retail and industrial) are rated WARM. The regional market of Lyon is over-priced in comparison, with a weaker rental growth outlook for both the office and retail sector set to weigh on future returns.

Nordics are most challenging sub-region in Europe after the UK

In comparison with German and French markets, the Nordic markets are generally less attractive. Stockholm retail is the only HOT market, while Stockholm offices are categorised as WARM. Most other Nordic office markets are rated as COLD, as highlighted earlier. Investor interest in these markets has returned strongly in recent quarters, driving yields downwards, and with limited prospects for rental growth investors are not expected to earn attractive returns.

Divergent pricing across Central and Eastern European markets

Apart from the UK and the Nordic region, Central and Eastern Europe has the largest number of COLD markets. However, this is offset by an equal number of HOT markets. Relatively high yields make Prague attractive, while buyers in the volatile Moscow market look set to see their returns boosted by strong rental growth in coming years. On the other hand, several countries continue to face severe economic difficulties, and pricing in markets such as Budapest will need to fall further to look attractive.

Other European countries have many HOT retail and industrial markets

In contrast to the European office markets, retail and industrial markets outside the countries and sub-regions already discussed offer many attractive opportunities. HOT markets include Belgian and Spanish industrial markets as well as Italian retail markets. Even the Dublin office market is rated HOT after the recent re-pricing.