The all-sector C&W Fair Value Index score for Europe was 42 in Q1 2018, the same as the figure published last quarter, and approximately the same level recorded in Q1 2006, reflecting the advanced stage of the current property cycle and fewer attractive prime opportunities.
As such, seven markets have been downgraded from ‘fairly priced’ to ‘fully priced’ with a further five markets downgraded from ‘underpriced’ to ‘fairly priced’. On the other hand, 12 markets were upgraded, resulting in just 19% of the index being classified as ‘underpriced’.
CEE and Semi-Core regions continue to show a good balance of ‘fairly’ and ‘underpriced’ markets, while in contrast Germany, Benelux and the Nordics have only a few ‘underpriced’ markets.
Logistics remains the most attractive sector, with 46% of the markets classified as ‘underpriced’, and only one market as ‘fully priced’.
Overall, our fair total return ended lower for most of the markets, as our illiquidity and risk premium component decreased. This premium in part resulted from the spread between corporate and 5-year bond yields, used as a proxy for tenant risk, which narrowed during the last three months.
On the other hand, the forecast total return increased, as our rental growth forecast has been revised upwards this quarter. Reasonable growth in most European economies is forecast to filter through to modest rent increases. For all the European markets covered in our Fair Value analysis, we expect rents to rise by 1.3% p.a. over the next five years. The best rental growth performers continue to be Semi-Core economies of Ireland, Spain and Portugal, still benefitting from a cyclical upswing after being impacted the most during the GFC and Eurozone crisis.
Source: Cushman & Wakefield