DTZ: European commercial property hotting up, driven by office markets (EUR)
Thursday 25 November 2010
|European property markets now offer more attractive returns to investors, with the latest all-property DTZ Fair Value Index™ (FVI) Q3 2010 score for Europe standing at 55, an increase from 49 in Q2. Although Europe is still less attractive than other markets globally, as revealed by the global FVI Q3 score of 63, the European index is now above 50, meaning there are more HOT markets than COLD.|
|The DTZ Fair Value Index™ measures the attractiveness of commercial real estate markets around the world and was launched in Q2 2010.|
Across Europe the number of HOT markets has increased from 20 to 23 whilst the number of COLD markets has fallen from 21 to 14. Six markets have been upgraded from WARM to HOT: Warsaw retail, Manchester industrial, Warsaw offices, London West End offices, Madrid offices and Copenhagen industrial. Additionally, 10 markets have moved from COLD to WARM with the picture dominated by four regional UK office markets, as well as the Lyon, Oslo and Barcelona markets.
The FVI increase is most significant in the office sector, rising from 35 in Q2 to 46 in Q3. The Warsaw, London West End and Madrid office markets are all now classified as HOT primarily due to increased rental growth forecasts. The industrial sector is also increasing in attractiveness with the FVI score now standing at 63, reflecting pockets of recovery across Europe. Prospects for investment in the retail sector look broadly similar to the last quarter, with an index score of 62.
Magali Marton, DTZ Head of CEMEA Research, comments: “At current pricing levels, our latest Fair Value Index™ shows that there are, on balance, better investment prospects in Europe than in the second quarter of 2010. The increase in opportunities is evident in several countries including the UK, Germany, France and across the Nordic region. Several markets have moved to HOT in Q3 as a result of an improved rental outlook and yields moving outwards making pricing more attractive to investors. Additionally, several major European markets remain attractive, with London city offices, Milan retail and Antwerp industrial still classified as HOT.”
Improvements in office sector – rental growth outperformance in near term
Changes in FVI Q3 were most impacted by improvements in the office sector. The Warsaw and London West End office markets are now classified as HOT due to stronger rental growth forecasts. A shortage of supply as demand returns is fuelling a sharp rise in rents in the near term. The Spanish office markets have been upgraded as a result of stronger rental growth and expected yield compression over the next five years, whilst some markets in the UK have seen yields move out and are now WARM as income expectations rise.
Industrial sector offers least volatile growth prospects
A number of the core industrial markets continue to offer attractive investment opportunities. Yields in the industrial sector have remained high as demand in this sector has not matched the demand seen in the office and retail sectors. The Antwerp and Hamburg markets are classified as HOT and Rotterdam, Warsaw and London Heathrow markets remain WARM. The UK and in particular, Germany, have seen a recovery in industrial production.
Retail markets divided on basis of risk – highest returns forecast in central Europe
Despite subdued retail sales, retail rents have begun to recover, although the forecast is for limited growth of 2% per annum over the forecast period 2010 to 2014. There are some notable exceptions to the overall pattern, with core centres such as Paris and London continuing to perform well. The Milan retail market remains HOT having been resilient during the downturn, offering an attractive yield relative to other European retail locations. European retail markets are divided on the basis of risk with developing, mostly central European markets, currently offering higher current yields. As capitals values recover, several Eastern Europe locations are forecast to deliver strong annualised returns over the forecast period, including: Moscow (25.8%), Bucharest (19.1%), Warsaw (13.6%) and Istanbul (13.5%).
Tony McGough, Global Head of DTZ Forecasting & Strategy Research, said: “While the European FVI scores improved in Q3, they remain lower than in the US and Asia Pacific where investors are benefitting from higher growth prospects over a five-year holding period. Core European markets are generally well priced as investors are seeking high quality property assets in the current environment of low risk-free returns. This behaviour has driven down yields in several core European markets and as a result, investors will be more reliant on income returns than yield-driven capital growth recovery in the next couple of years.”
“There is still a gap between landlord expectations and the willingness of potential buyers to invest, which limits transactions. This gap has narrowed from more than 200bp in early 2009 to 50bp today. We believe that investment activity over the course of 2011 will be primary driven by the retail sector and by the office sector. Furthermore, identifying lower risk properties with long term lease agreements in prime locations will be a priority for investors.
In order to compensate for the perception that they represent a greater risk for investors, non-core markets like Romania, Russia, Ukraine and others are ready to offer higher returns for the equity invested. The retail sector and especially the “big box” segment of the market, which offers long income streams with strong covenants, has a particular appeal, offering the best of both worlds: secure long term income with an up-side derived from intensive asset management. This segment is well represented in Romania, which has an extensive portfolio of big box retail anchored by the major food and DIY operators. This is one of the unique portfolios in Europe directly controlled by individual investors.” commented Cristian Ustinescu, Investments Director, DTZ Echinox.
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