Cushman & Wakefield’s quarterly Fair Value Index™ – which analyses 122 European office, retail and logistics markets – is at ‘Fairly Priced’ for the first time since 2009 when the region’s property markets were starting their recovery from the Global Financial Crisis.
Using a proprietary metric, each market is benchmarked against ‘fair value’ – an adequate compensation over a five-year hold period for the investor’s risk in purchasing prime assets.
The total number of underpriced markets fell between Q1 and Q2 as the spread between fair and forecast returns narrowed as property yield compression lowered the latter.
The Fair Value Index™ rates 30 markets as underpriced, 65 fairly priced and 27 as fully priced. Logistics markets offer investors the greatest scope to find underpriced assets, accounting for 17 of the 30 underpriced markets.
Moscow sits top of the underpriced European markets table in Q2, ranked first and second for its retail and office sectors respectively. Sofia (office), Dublin (logistics), and Barcelona (logistics) complete the top five. The UK, with one from 28 locations (Bristol offices), and France, with two from 10 (Paris and Marseilles logistics), have the fewest underpriced markets.
The five most fully-priced markets in Europe are Istanbul (office), Geneva (office), Vienna (office), Milan (retail) and Rome (retail). High bond yields in Turkey pushed the fair return for property to almost double the forecast return. Rome and Milan’s retail markets have a very low prime property yield, both at 2.75%, making them look less attractive on a relative pricing basis.
Across the 122 markets, Cushman & Wakefield ranked 53% of logistics sector markets as underpriced compared to 14% of office and 14% of retail markets. Conversely, 3% of the logistics market is fully priced, compared with 37.5% and 16.5% of office and retail markets respectively. Overall, the report shows a real spread across Europe with 15 different cities in 11 different countries featured in the top 20 undervalued locations.
Looking at the European market regionally, Central and Eastern Europe (CEE) has the highest number of underpriced markets with more than half given that rating. Germany, Benelux and the Eurozone periphery all have a good balance of fairly priced and underpriced.
Mark Unsworth, Head of EMEA Forecasting at Cushman & Wakefield, said: “This latest research shows that as property yields continue to fall, property valuations at the prime end of the market are becoming stretched, which is consistent with the advanced stage of the property cycle.
“Despite this, there are still opportunities across Europe, particularly in the logistics sector which continues to be supported by the positive structural growth story surrounding ecommerce.
“From a geographical perspective, markets in Central & Eastern Europe, Spain and Germany offer the most attractive investment opportunities driven by a combination of healthy economic prospects and continued investor demand.”