Report Finds Increasing Yields For Europe Commercial Real Estate

With the retail sector holding steady, and marked improvements in office and industrial property, a recent report puts Europe’s commercial market in hot territory. Rents are rising as …

With the retail sector holding steady, and marked improvements in office and industrial property, a recent report puts Europe’s commercial market in hot territory. Rents are rising as demand exceeds supply and the expectation gap is closing, but the period ahead will see investment based on income rather than capital yields. See the following article from Property Wire for more on this.

European commercial property markets now offer more attractive returns to investors with the number of hot markets increasing from 20 to 23, according to a new report.

In the latest all property DTZ Fair Value Index™ for the third quarter of 2010, the score for Europe is 55, an increase from 49 in the second quarter. Although Europe is still less attractive than other markets globally, with a score of 63, the European index is now above 50, meaning there are more hot markets than cold.

The index shows that across Europe the number of hot markets has increased from 20 to 23 whilst the number of cold markets has fallen from 21 to 14. Six markets have been upgraded from warm to hot: Warsaw retail, Manchester industrial, Warsaw offices, London West End offices, Madrid offices and Copenhagen industrial.

Also 10 markets have moved from cold to warm with the picture dominated by four regional UK office markets, as well as the Lyon, Oslo and Barcelona markets.

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The FVI increase is most significant in the office sector, rising from 35 in the second quarter to 46 in quarter three. The Warsaw, London West End and Madrid office markets are all now classified as hot primarily due to increased rental growth forecasts. The industrial sector is also increasing in attractiveness with the FVI score now standing at 63, reflecting pockets of recovery across Europe. Prospects for investment in the retail sector look broadly similar to the last quarter, with an index score of 62.

‘At current pricing levels, our latest FVI shows that there are, on balance, better investment prospects in Europe than in the second quarter of 2010. The increase in opportunities is evident in several countries including the UK, Germany, France and across the Nordic region,’ said Magali Marton, DTZ Head of CEMEA Research.

‘Several markets have moved to hot as a result of an improved rental outlook and yields moving outwards making pricing more attractive to investors. Additionally, several major European markets remain attractive, with London city offices, Milan retail and Antwerp industrial still classified as hot,’ she added.

A shortage of supply as demand returns is fueling a sharp rise in rents in the near term. The Spanish office markets have been upgraded as a result of stronger rental growth and expected yield compression over the next five years, whilst some markets in the UK have seen yields move out and are now warm as income expectations rise, the report also shows.

It also says that a number of the core industrial markets continue to offer attractive investment opportunities. ‘Yields in the industrial sector have remained high as demand in this sector has not matched the demand seen in the office and retail sectors. The Antwerp and Hamburg markets are classified as hot and Rotterdam, Warsaw and London Heathrow markets remain warm. The UK and in particular, Germany, have seen a recovery in industrial production,’ the report says.

But the European FVI scores remain lower than in the US and Asia Pacific where investors are benefiting from higher growth prospects over a five year holding period. ‘Core European markets are generally well priced as investors are seeking high quality property assets in the current environment of low risk free returns. This behavior has driven down yields in several core European markets and as a result, investors will be more reliant on income returns than yield-driven capital growth recovery in the next couple of years,’ said Tony McGough, Global Head of DTZ Forecasting & Strategy Research.

‘There is still a gap between landlord expectations and the willingness of potential buyers to invest, which limits transactions. This gap has narrowed from more than 200bp in early 2009 to 50bp today. We believe that investment activity over the course of 2011 will be primary driven by the retail sector and by the office sector. Furthermore, identifying lower risk properties with long term lease agreements in prime locations will be a priority for investors,’ he added.

This article has been republished from Property Wire. You can also view this article at
Property Wire, an international real estate news site.


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