GLOBAL – A rise in bond yields within core European economies will make investments into real estate look less attractive, with above-market returns to diminish by 2015, DTZ says.

The manager’s European Fair Value Index, a forward-looking prediction on market returns, will drop to a neutral point of 50 by 2015.

The index provides scores between 1 and 100, with scores above 50 signalling market returns will exceed expectations, with property undervalued.

It said by the end of 2015 there would be an equal amount of hot markets, with scores above 50, and cold markets, with scores below 50.

It said bond investors would realise that safe returns could be achieved outside of core bond markets, as economic recoveries elsewhere continued.

“This will push bond yields higher and the required returns in our Fair Value Index upwards, diminishing the attractiveness of European property markets,” DTZ said.

The slide marginally began in the last quarter of 2013, the manager said, as its overall European index fell to 72, slightly down from its 74 score in Q3.

However, there is a growing divergence between the different market segments across Europe.

While retail saw its score jump to 84, from a Q3 score of 79, office closed in on balanced returns, falling to 55 from 60.

Retail also saw its index fall by 2 points, although it remained strong with a score of 88.

“This is the third quarter in a row the European Index has fallen and signifies the growing confidence surrounding prospects for the euro-zone going forward,” DTZ said.

Within the market, the manager said there were 58 hot markets compared with 35 warm and 12 cold.

DTZ said the resurgence of peripheral markets continued, with Spain and Italy both posting scores of 92.

At this point in 2013, the counties had a collective score of only 33.

This mirrored research conducted by accountants PwC and the Urban Land Institute.

It said markets in Spain, Italy and Ireland were expanding due to competition reducing returns in core markets.

Magali Marton, head of EMEA research at DTZ, said: “Although there are clear risks associated with these markets, intense competition for product in core markets means some investors are beginning to broaden their horizons in their search for value.”

The Fair Value Index for UK property also took a hit over the last quarter of 2013, falling to 73 from 85.

DTZ said the UK market was expected to see “significant deterioration” in 2014, with a score below 50 expected by the end of Q2 this year.

Its score for the Asia Pacific has also moved close to level returns, falling to 60 from 65 over Q4.

DTZ said the market experienced a steeper drop than Europe and the UK due to the slowdown in emerging markets.