Increased focus on core amid subdued capital growth: DTZ

Several core markets in Europe offer more attractive pricing relative to government bond yields, but capital growth expectations remain subdued, according to DTZ's latest Fair Value Index published on Monday.

The DTZ Fair Value Index score for Europe rose to 36 at end-2011 from 27 at end-September, reflecting an upward revision to a number of core markets even though the outlook for underlying market performance remains broadly unchanged.

Berlin and Copenhagen retail are among the 'safe haven' markets which were upgraded from 'warm' to 'hot'. On the other hand, Brussels and Budapest retail have been downgraded from 'warm' to 'cold'.

Dublin is seen as a market offering significant growth potential to investors willing to take economic risk. The city's retail, office and industrial markets were all upgraded from 'cold' to 'warm'. 'We expect improved sentiment following the decision not to allow tenants to remove upward-only rent review clauses retrospectively,' DTZ writes in its report.

Only nine markets are rated as hot in Q4, reflecting subdued capital growth expectations. 'However, with 61 of the 98 markets in the Index coverage rated 'hot' or 'warm', we consider that prime property is providing investors with a relatively attractive proposition in a troubled economic climate,' DTZ notes.

Investors fleeing to the safety of government paper in Germany and the UK would do well to consider selective investment in prime property, which offers a substantial yield premium, according to DTZ. 'With German office markets trading at a yield of around 5%, and most regional UK office markets at 6%+, investors can earn adequate returns even in the absence of future capital appreciation,' the broker says.