DTZ expects commercial real estate to become less attractive for investors by 2015 due to rising bond yields.

DTZ expects commercial real estate to become less attractive for investors by 2015 due to rising bond yields.

The forecast is based on DTZ's recently published European all-property DTZ Fair Value Index TM results for Q4 2013. DTZ expects that European property will become less attractive over the next couple of years as rises in bond yields make property look less attractive in comparison.

The Index, which offers insight into the relative attractiveness of current pricing in European property markets, remained relatively stable in the fourth quarter of 2013 at 72, down slightly from 74 in Q3. European offices dropped from 60 to 55; retail rose from 79 to 84; while industrial dropped from 91 to 88. The Fair Value Index score for Europe is expected to fall to 50 by end-2015.

Over the past year the Fair Value indices for office, retail and industrial have diverged, suggesting that investors have needed to be more selective in their allocations to the different property types. Currently industrial is the most attractive sector.

There were only six European markets upgraded to Hot in Q4, and they were all located in either Spain or Italy. Falling bond yields have reduced required returns in these countries, while a slightly stronger economic outlook for both saw upgrades to expected returns on property. The favourable combination has made these markets look more attractive from an investment perspective. However, there are still risks that need to be considered in both countries, such as the 25% unemployment rate in Spain, and weak domestic demand in Italy.

Fergus Hicks, global head of forecasting at DTZ said: 'The Fair Value Index showed little change in Q4. Retail and industrial property are more attractively priced at the moment since they haven’t seen the same level of yield compression as core office markets. Overall though, with bond yields set to rise over the next couple of years as global monetary stimulus is withdrawn, we think European property will become less attractive from a multi-asset investment perspective.'

Magali Marton, head of EMEA research, added: 'One of the key findings of our latest Fair Value analysis is that the Spanish and Italian markets are now showing attractive investment opportunities. Although there are clear risks associated with these markets, intense competition for product in core markets means that some investors are beginning to broaden their horizons in their search for value.'

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