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Real estate to enjoy longer low interest rate regime

Central and Eastern Europe, the Eurozone Periphery and the Baltic regions boast the most attractive opportunities for investors.

The number of attractive investment opportunities in European commercial property has receded as yields have fallen and more markets have become fully priced, according to research today from Cushman & Wakefield.

Cushman & Wakefield's European Fair Value Index™, published today, identifies Europe’s most attractive office, retail and industrial markets for prime commercial property investment on a five-year hold period. The report shows that with Eurozone interest rates unlikely to rise until 2018, prime property yields in core Eurozone markets look likely to stay stagnant until 2017/18.

Central and Eastern Europe, the Eurozone Periphery and the Baltic regions have the highest share of underpriced markets and boast the most attractive opportunities for investors. Germany has the majority of its markets classified as fairly priced, while the UK still has 19 fairly priced markets, and is further ahead in the cycle. In contrast, Swiss markets continue to look unattractive due to their very low prime property yields, between 3.0-3.5%, and weak rental growth prospects.

The overall Fair Value Index™ for Europe was 55, down from 62 in Q3 2015, meaning that opportunities for investors have further diminished.

Fergus Hicks, Global Head of Forecasting at Cushman & Wakefield, said: “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. Moreover, with further policy easing likely in the Eurozone, we do not expect any rises in European property yields until 2017/18 at the earliest. The office and retail indices are both expected to bottom out this year, while we expect industrial to reach its low only at the end of the forecasting period.”

Matteo Vaglio Gralin, Associate Director at Cushman & Wakefield, added: “The fair value index is predicted to level off around 50 and is unlikely to show the precipitous decline that it did during the financial crisis. This is because we expect reasonable growth in most economies to filter through to rent rises, rather than the falls in rents brought about by the recession in the financial crisis.”