The DTZ Fair Value IndexTM score for Europe increased to 62 at the end of Q3, up from 53 at the end of last quarter (Figure 1). The improved market outlook is being driven by falling government bond yields which have lowered the return required to make property look more attractive.
The upgrade is evident across all sectors. The retail sector achieved the highest score of 71 (up from 62 in Q2), closely followed by the industrial sector, whose score increased from 59 in Q2 to 69 in Q3, while the office sector increased from 44 in Q2 to 51 in Q3.
The recent announcement by the ECB that it will support the bond markets of countries under a formal EU bailout programme, had a positive impact on both bond and stock markets across Europe. Lower government bond yields and a tighter corporate bond yield spread has put considerable downward pressure on the required returns for property across Europe compared to last quarter. With expected returns on property remaining relatively static, the attractiveness of European property has increased significantly.
The reduction in required returns has resulted in a significant number of upgrades from WARM to HOT in Europe this quarter, mostly in the UK. The UK now has 15 HOT markets compared to 11 last quarter. In total, 17 European markets were upgraded from WARM to HOT across Europe, including 3 markets in Germany, 2 in France, and 2 in the Netherlands.
Despite these positive movements, the economic outlook for Europe remains bleak. Eurozone GDP is forecast to decline in 2012 and 2013, by -0.6% and -0.1% respectively, followed by modest growth until 2017.
Source : DTZ (Groupe UGL)