The European Fair Value Index score continued its downward trend from 46 in Q3 2017 to 42 in Q4 2017, approximately the same level recorded in Q1 2006, reflecting the advanced stage of the property cycle and fewer attractive prime opportunities.
The main reason for the fall in the index over recent quarters has been the combination of property yield compression coupled with rising government bond yields which has narrowed the spread between the fair and forecast return.
In addition, this quarter our forecast total returns have been marginally lowered due to modest rental growth expectations combined with softening yields in the later part of the forecast period.
The most opportunities can still be found in the logistics sector rather than retail and offices which have more fully priced markets than under-priced.
Geographically, the CEE and Eurozone Periphery have the most under-priced markets while the UK and France have more fully priced markets.
What is the Fair Value Index?
The Cushman & Wakefield Fair Value Index was launched in August 2010 and covers 123 markets across Europe.
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 the previous quarter, which may differ from those published in the previous quarter’s report; this is due to the forward-looking methodology. As such, when our forecasts change so too does the Fair Value Index.
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