European prime property to lose investor appeal by 2015: DTZ

Rising bond yields and interest rates will make prime commercial property in Europe less attractive for investors over the next two years, according to DTZ.

As a result, multi-asset investors should buy property sooner rather than later as opportunities will start to recede, the adviser says in its latest European Fair Value Index report.

For the first time, the index looks ahead at the next five years to assess how investment opportunities will evolve.

Whereas in Q3 2013, the DTZ Fair Value Index score for Europe remained relatively stable, falling marginally from 75 to 74, this will change over the next few years.

The index results reveal that the European Fair Value Index is set to drop from Q3 2013 onwards, reaching 50 by the second half of 2015. At this point, DTZ anticipates an equal number of Hot (very attractive) and Cold (not attractive) markets in Europe.

Fergus Hicks, head of global forecasting at DTZ, said: ‘One year from now, in Q3 2014, we expect there will be 32 Hot markets, 56 Warm markets and 17 Cold markets and the European Fair Value Index score to be 57. This is a significant change in the current position and means that buying opportunities are set to recede over the coming year. Most of the downgrades in classification are expected to be from Hot to Warm, with 30 markets expected to experience this change.’

Magali Marton, head of CEMEA research, added: 'The drop in the Fair Value Index is expected to be driven by a rise in average required returns across Europe. As economic conditions improve, upward pressure on bond yields and a rise in interest rates are likely to feed through to our required return estimates. With expected returns remaining relatively stable going forward, the Fair Value Index is expected to fall. Multi-asset investors should buy property sooner rather than later as we expect opportunities will start to recede.'

In the third quarter, required returns edged up in core European economies such as Germany and the UK on the back of higher bond yields. These markets have become slightly less attractive in both countries, although this comes from a point of significant under-pricing.

Peripheral countries such as Spain and Italy, on the other hand, have seen bond yields fall, which has led to a corresponding fall in their required returns. Consequently, markets in Spain and Italy look more attractive compared to Q2 2013.

Ireland remains the most underpriced country in Europe having average expected returns of 14.1% per annum between Dublin office, retail and industrial, compared to required returns averaging 7.5% per annum.

By contrast, Switzerland is the most overpriced market in Europe with an average degree of over pricing of 26.2%.