The DTZ Fair Value Index TM score has remained relatively stable this quarter, falling marginally from 75 to 74. European offices dropped from 66 to 60, while the retail and industrial scores both increased from 77 to79 and 88 to 91 respectively. There are only two Cold retail markets and no Cold industrial markets in Europe, while there are ten Cold office markets.
Required returns have edged up in core European economies such as Germany and the UK on the back of higher bond yields, making markets slightly less attractive in both countries. However, this comes from a point of significant underpricing. Peripheral countries such as Spain and Italy have seen bond yields fall, which has led to corresponding fall in their required returns. Consequently, markets in Spain and Italy look more attractive compared to last quarter.
Ireland remains the most underpriced country in Europe, having average expected returns of 14,1 %p.a. compared to required returns of averaging only 7,5 %p.a. over the next five years. In saying this, the size of the Irish property market may deter investors looking for liquidity, with opportunities becoming more in larger markets such as Spain and Italy.
As economic conditions are expected to improve, upward pressure on bond yields and expected rises in interest rates will feed through to our required returns in the future. With expected returns remaining relatively stable going forward, the Fair Value Index is expected to fall.
This suggests that opportunities to achieve returns beyond those required by investors are expected to decrease in the near future. Multi-asset investors should buy property sooner rather than later as we expect opportunities will start to recede.
Source : DTZ (Groupe UGL)