European property markets now offer better value to investors than they did in the first quarter of 2011, according to the latest European all-property DTZ Fair Value Index.

European property markets now offer better value to investors than they did in the first quarter of 2011, according to the latest European all-property DTZ Fair Value Index.

The index, which measures the attractiveness of commercial real estate markets around the world, currently stands at 41 for Europe, which is an increase from 32 in Q1 2011. All sectors gained with offices increasing to 28 in Q2 2011 from 17 in Q1 2011, and retail and industrial both increasing to 52 from 40 and 48 in Q1 2011 respectively.

The index score increased despite the worsened economic outlook caused by the renewed uncertainty over the Eurozone debt crisis. The rise in the score follows two consecutive quarters of declining scores and largely reflects the fall in bond yields in core markets witnessed over recent months. With government bond yields compressing in many countries, significantly in Germany and France, prime property is now relatively more attractive. It offers higher income yields and a broadly stable capital value outlook going forward.

The number of Hot markets in Europe increased from 10 in Q1 to 11 in Q2 2011 and 18 markets were upgraded from Cold to Warm. The number of Cold markets decreased from 46 in Q1 to 28 in Q2 2011. The majority of Hot markets are Central and Eastern European office and retail markets, such as Moscow office and retail, and Bucharest and Prague retail. These markets are expected to enjoy strong capital value growth in the medium term, stemming from yield compression and strong rental growth, which more than compensates for their higher risk.

Most of the markets that were upgraded were in France, Germany and the UK. Several German markets, including Berlin and Frankfurt offices and Munich retail were upgraded from Cold to Warm, even though they became more expensive in Q2 as yields compressed. However, the shift was not sufficient to offset the positive impact from the inward German government bond yield movement.

In France, Paris CBD yields compressed further to 4.5%. This market remains Cold as it is considered over priced and an outward yield shift is expected. Paris La Defense provides higher yields but poor quality stock and high service charges are dampening rental growth as investors prefer other areas close to the CBD. On the upside, improved rental growth outlook led to the upgrade of Lyon retail and Marseille offices from Cold to Warm.

The Nordic markets have a relatively low ranking in the DTZ Fair Value IndexTM due to their aggressive pricing. For example, yields moved in from 5.5% in Q1 to 5% in Q2 2011 in Oslo and are at a low 4.85% in Stockholm.