Feri rates most property markets in Europe as fairly valued

European commercial real estate markets present a stable picture to investors at the moment, according to European rating agency Feri. 'The rental yield and the fair value yields identified by us are relatively close together in most European prime office markets,' said Manfred Binsfeld, head of Real Estate Research at Feri.

Feri EuroRating Services investigated the potential for rents and rental yields in 25 European markets, and used the findings to compile its fair value ratings. In the process, a total of 17 markets were rated as 'C' (fairly valued). Dublin was the only location to get an AA rating ('strongly undervalued'). 'Germany in particular is still considered a safe haven by many investors. Berlin, for one, remains highly popular,' Binsfeld added. German markets such as Munich, Berlin and Frankfurt were rated D (slightly overvalued) in Q4 2011.

'Having soared in the wake of the financial crisis of 2008/2009, yield rates have levelled out since, especially in prime markets,' Binsfeld explained. 'Principally, we take an optimistic view of the rental growth during the next five years, even if the economic downturn expected for 2012 was to eventuate and the rental growth to slow down. We do neither anticipate a recession nor the deterioration of rents and prices this would trigger on the real estate markets.'

According to Feri, the present situation does not compare to the one prior to the financial crisis of 2007. The European markets are a far cry from the price bubble seen at the time, so that the impairment potential of real estate prices is considerably lower, too. The supply side exerts a particularly positive and stabilising effect. Even if vacancies are relatively high in many places, the markets are unlikely to experience price pressure in the coming years because the construction activity has been very moderate in recent years.

Feri is basing its determination of fair-value rental yields on the respective economic fundamentals. 'With real estate investments, it is always important to take the fundamentals into account. In the run-up to the financial crisis, for instance, risks were underestimated and the rental growth potential overestimated,' said Binsfeld. Feri bases its assessment of the current price level on the benchmark provided by the long-term trend. The same is true for the expected rental growth, the risk premium relevant for the real estate market, and for the riskfree interest.