DTZ Foresight

Europe Fair Value : Property still attractive despite rising bond yields - Q2 2013

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The European Fair Value IndexTM (FVI) score edged downwards slightly this quarter from 77 to 75. However, European property is still attractively priced despite rises in bond yields across Europe over the last couple of months.

There are currently 62 Hot, 33 Warm and 10 Cold property markets in Europe. Italy and Spain both saw rises in their index scores this quarter, from 50 to 58 in Italy, and 42 to 50 in Spain. The Asia Pacific index score fell from 81 to 76, bringing its pricing more in line with Europe.

Industrial is the most attractive sector, with a FVI score of 88, followed by retail at 77, and offices at 66. A key factor making industrial property look attractively priced at the moment is its relatively high income yield.

Rising bond yields across Europe have increased required returns on property, which explains the slight reduction in the Fair Value Index this quarter. However the impact of higher government bond yields on required returns has been mitigated by a drop in the property risk premium. Corporate bonds yields have also risen, but by less than German government bonds, causing our property risk premium to fall.

Expected returns have remained relatively stable as we have made no major changes to our property forecasts this quarter.

Overall European property has become marginally less attractive, with the average degree of undervaluation at -5.6% in Q2, compared to -6.5% in Q1.

Source : DTZ (Groupe UGL)

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