FORESIGHT
Property yields keep falling – where
are the opportunities in Europe?
European Fair Value Index™ Q1 2016
10/5/2016
Contents

Cushman & Wakefield's European Fair Value Index™ was 56 in Q1, up from the
Q4 published figure of 55 (Figure 1).

Just 37 of the 117 markets included in our index were classified as underpriced
for Q1, with industrial continuing to be the most attractive sector.
Overview
2
Drivers of Fair Value Index
3

Market in Focus: Brussels
Office
Baltics and CEE regions have the highest share of underpriced markets and
attractive opportunities for investors.
3
Cushman & Wakefield Fair
Value™ Methodology

4
Of the larger markets, Paris industrial, Milan industrial and Dublin retail show as
underpriced. On the basis of pricing alone, the five most attractive markets are all
industrial: Brussels, Antwerp, Madrid, Riga and Barcelona.

Although bond yields fell across Europe this quarter, in several markets the
impact on fair/required returns was more than offset by an increased illiquidity and
property risk premium.

We believe the expansion of the Eurozone QE programme announced in March
would be supportive of real estate investment and we expect yields to gradually
move out only from 2018-19, dependent on the market.

On the occupier side, we expect moderate rental growth in the majority of markets
supported by economic growth.

We expect the index to decrease in the short term as investor demand continues
to push property yields lower and attractive investment opportunities diminish.
The index should level off at around 45 by end 2017 and then recover.

The risks to the outlook include China hard landing, geopolitical tensions and
potential for policy errors.
Author
Matteo Vaglio Gralin
Associate Director, Research
+44 (0) 20 3296 2308
[email protected]
Figure 1
Cushman & Wakefield European Fair Value Index™, Q1 2016
100
Contacts
Mark Unsworth
Global Head of Forecasting
+44 (0) 20 3296 4221
[email protected]
Magali Marton
Head of EMEA Research
+33 (0) 1 4964 4954
[email protected]
Joanna Tano
Head of Operations EMEA Research
+44(0) 20 7152 5944
[email protected]
More underpriced
75
50
25
0
2000
Q4 2017
More fully priced
markets
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Source: Cushman & Wakefield Research
cushmanwakefield.com
FORESIGHT
1
European Fair Value Index™ Q1 2016
Overview
The all-property European Fair Value Index™ score for Europe
was 56 in Q1, up from Q4's published figure of 55. The index
measures the attractiveness of European property markets on
a relative pricing basis compared to government bonds. It
assumes a five-year hold period (a score of 100 indicates that
all markets are underpriced for investors and zero that all
markets are fully priced, Table 1).
Industrial remained the most attractive sector in Q1, with an
index score of 79 and 60% of markets classified as
underpriced (Figure 2). Retail was the second most attractive
sector, with a score of 51, and 26% of markets classified as
underpriced. The office index score was 43, well below the 50
mark, and with only 15% of markets classified as underpriced.
Table 1
Fair Value IndexTM scores
GEOGRAPHY/SECTOR
Q4 2015
Q1 2016
Europe all-property
55
56
Europe offices
40
43
Europe retail
55
51
Europe industrial
77
79
Source: Cushman & Wakefield Research
Note: Q4 scores refer to those published in the Q4 2015 report; charts show
revised index scores, which may differ due to changes in property forecasts.
Figure 2
Cushman & Wakefield European Fair Value Index™
We expect the European Fair Value Index™ to decrease in the
short term as investor demand continues to push property
yields lower and attractive investment opportunities diminish.
The office and retail indices are both expected to bottom out
next year, while industrial should reach its low slightly later, in
2018. In several European markets we expect yields to start to
move out from 2018/19.
Of the 117 markets included in our European Fair Value
Index™, 37 were classified as underpriced for Q1, 57 as fairly
priced and 23 as fully priced. Compared to Q4, 14 markets
have been downgraded, 15 markets upgraded, while the
majority of markets (88) saw no change in their Fair Value
categories.
Baltics and CEE regions have the highest share of underpriced
markets (Figure 3). Germany and Nordics have the majority of
their markets classified as fairly priced, while the UK still has
20 fairly priced markets, and is further ahead in the cycle.
In the ‘other’ category Moscow retail is classified as
underpriced; the office markets of Kyiv and Zurich are
classified as fairly priced, while the remaining markets are all
fully priced. Ukraine, Turkey and Russia have double-digit fair
total returns because bond yield in these countries are above
9% due to high uncertainty and risk. In Switzerland bond yields
were negative at the end of Q1 and rental growth prospects are
weak (rents should slightly decline in Geneva).
Of the larger markets, Paris industrial, Milan industrial and
Dublin retail show as underpriced. In terms of pricing alone, the
top seven most attractive markets for Q1 are all industrial:
Brussels, Antwerp, Madrid, Riga, Barcelona, Copenhagen and
Vilnius. According to our fair value analysis these markets are
underpriced by 19% and more, with Brussels the most
attractive, being almost 24% below fair value. However, the
size of these markets would limit the deployment of large
amounts of capital to them.
cushmanwakefield.com
Office
100
Retail
Industrial
More underpriced
markets
75
50
25
More fully priced
markets
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: Cushman & Wakefield Research
Figure 3
Number of markets in each category by region/country
1
1
2
4
3
1
4
5
20
10
4
4
9
6
5
8
Fully priced
1
Fairly priced
37
6
5
10
6
2
57
23
Underpriced
Source: Cushman & Wakefield Research
*Other includes seven markets from Turkey, Ukraine, Russia and Switzerland.
Moscow retail has been added to the index this quarter, while London (Midtown)
has been removed.
FORESIGHT
2
European Fair Value Index™ Q1 2016
Figure 4
Drivers of Fair Value Index
5-year government bond yield cycle
Fair total returns
25%
Fair/required total returns rose for some European markets this
quarter, driven by a higher illiquidity and risk premium
component that offset the fall in bond yields. The illiquidity and
risk premium in part depends on the spread between corporate
and 5-year bond yields, and is a proxy for tenant risk.
20%
min
The other two components of the fair total return in the model
(transaction and depreciation costs) are stable throughout time.
2016 Q1
15%
10%
5%
0%
Min-Max refers to Q1 2000 - Q4 2015 period
Figure 5
Despite European commercial real estate activity slowing
down, yields keep falling in many markets. Yields fell in Q1 in
32 of the 117 markets covered in our European Fair Value
Index™. For those markets in which yields fell, the average
decline over the quarter was 17 bps.
Prime rental growth (five years from Q1 2016, p.a.)
In the majority of markets rental growth is moderate, supported
by economic growth. For all the European markets we cover in
our Fair Value analysis, we expect rents to rise by 1.5% p.a.
over the next five years. Retail has the best prospects with
1.8% p.a., while both office and industrial are at 1.3% p.a..
Turkey
Source: Bloomberg
Forecast returns
We expect prime property yields to fall further this year in
several European markets, still driven by investor demand, lack
of product and the low interest rate environment. Only from
2018-19, dependent on market, do we expect yields to move
out gradually, due to less favourable investment conditions.
Russia
Poland
Romania
UK
Hungary
Norway
Italy
Spain
Ireland
CZ Rep
Sweden
Denmark
France
Finland
Belgium
Germany
Swiss
-5%
Netherl
European 5-year bond yields remain at very low levels,
supported by solid demand, boosted in the Eurozone by the
ECB’s QE programme (Figure 4). The programme was
expanded in March as inflation remains way below target.
Bond yields dropped in Q1 in several markets, with Turkey,
Russia, Hungary and the UK seeing the biggest falls. Now
there is the risk that monetary policy is reaching its limit.
max
Simple Average
Min-Max
8%
London (WE)
Dublin
Bristol
4%
0%
Lyon
Kyiv
Amsterdam
-4%
Office
Retail
Industrial
Source: Cushman & Wakefield Research
Figure 6
Market in Focus: Brussels Office
Brussels Office: fair and forecast returns

12%



15th
IndexTM
Ranked
overall in our Fair Value
for Q1,
Brussels office shows as underpriced by 13%.
The Belgian economy expanded 1.4% in 2015 and is
expected to grow by 1.6% p.a. over the next five years.
8%
Fair returns remained around 3.8% in Q1, almost in line
with previous quarter. A fall in the 5-year bond yield into
negative territory was almost offset by a higher illiquidity &
risk premium component.
4%
Expectations for further yield falls this year and moderate
rental growth lead us to forecast prime total returns of
around 7.4% p.a. over the next five years, which well
outpaces fair returns (Figure 6).
cushmanwakefield.com
Forecast
return
10%
Fair return
6%
2%
0%
-2%
Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1
2011
5Y bond yield
2012
2013
Depreciation cost
2014
Transaction costs
2015
2016
Illiquidity & risk
Source: Cushman & Wakefield Research
FORESIGHT
3
Figure 7
European office market Fair Value™ classifications, Q1 2016
Source: Cushman & Wakefield Research
Cushman & Wakefield Fair Value™ Methodology
The Cushman & Wakefield Fair Value Index™ was launched in August 2010.
Fair value is the value at which an investor is indifferent between a risk free return and the forecast return from holding property,
taking into account the extra risk of investing in the property asset class.
When a property price is at fair value, an investor is being adequately compensated for the risk taken in choosing to purchase real
estate; similarly, when the property price is below the fair value price, an investor is being more than compensated for the risk taken
in choosing to purchase real estate.
When buying at or below fair value, an investor does not necessarily buy at the bottom of the market.
Our Fair Value analysis focuses on prime assets and a five-year investment horizon, and hold for the market overall; individual
transactions may provide opportunities and risks beyond the average market view.
In the report we compare results for the current quarter with those published in the previous quarter’s report, though the history of
the Fair Value Index does change as our forecasts change.
For more information please contact Matteo Vaglio Gralin: [email protected]
cushmanwakefield.com
FORESIGHT
4
EMEA
John Forrester
Chief Executive
+44 (0)20 3296 2002
[email protected]
Disclaimer
This report has been produced by Cushman & Wakefield for use by those with an interest in commercial property
solely for information purposes. It is not intended to be a complete description of the markets or developments to
which it refers. The report uses information obtained from public sources which Cushman & Wakefield believe to be
reliable, but we have not verified such information and cannot guarantee that it is accurate and complete. No
warranty or representation, express or implied, is made as to the accuracy or completeness of any of the information
contained herein and Cushman & Wakefield shall not be liable to any reader of this report or any third party in any
way whatsoever. All expressions of opinion are subject to change. The data contained in this report is based upon
that collected by DTZ. Our prior written consent is required before this report can be reproduced in whole or in part.
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