London a hotspot for Europe's office and retail markets, says DTZ

KUALA LUMPUR: London city office and retail properties present the most attractive investment opportunities in the European real estate market, according to a report released by international real estate consultancy DTZ.

According to DTZ's European Fair Value 2Q2010 reports, released on Aug 18, London city and London West end were rated as "hot" markets in the office and retail segments with a 12% and 9% undervaluation in prices.

"London City offices remain one of the most attractively priced markets when size and liquidity are considered. Strong rental growth over the medium term driven by a rapid recovery from the crisis combined with short supply will provide solid capital value growth and consequently attract solid return for investors," it said.

Other attractive office markets, in descending order, include Paris central business districts (CBD) (undervalued by 3%); Frankfurt and Milan (both undervalued by 1%); and Madrid (overvalued by 3%).

DTZ noted that Paris CBDs had lost some heat, turning "warm" as rental growth during 1H2010 had reduced the level of future growth which in turn limited future growth potential, lowering its underpricing level, despite the area's strong comeback in rental growth.

In the retail markets, the other top areas are Milan (undervalued by 6%); Paris (undervalued by 4%); Munich (undervalued by 3%); and Barcelona (undervalued by 1%). "In the retail sector, investors are currently able to purchase strong future rental growth in both London West End and Milan. London West End has held up well during the downturn and is dorecast to deliver stronger growth while Milan is set to deliver a solid rebound after falling significantly," it said.

Meanwhile, in the industrial market, Antwerp emerged tops with an 8% undervaluation, followed by Hamburg (undervalued by 7%), Rotterdam (undervalued by 3%), Warsaw (undervalued by 2%) and London Heathrow (overvalued by 2%).

The real estate consultancy said the industrial market was less volatile during the downturn.

Despite dampened prospects for rental growth, Antwerp saw high yields while Hamburg offered high returns, it added.

According to DTZ's methodology, markets rated as "hot" are estimated to be underpriced by over 5%, while "cold" markets are estimated to be overpriced by more than 5%. "Warm" markets are valued in between these two extremes.

The consultancy's report also pointed out Germany's real estate market was another attractive proposition given its relatively high yields and lack of "cold" markets.

Meanwhile, Europe's office market is poised for strong returns underpinned by rental growth and yield compression, the latter which is expected to stabilise on following an over-correction earlier this year.

"Rental growth also has a significant influence in 2010, but continues to display subdued growth over the forecast period. The austerity measures have had a negative impact on rental growth as many markets expect reduced demand over the next five years," it said.

Its retail sector is expected to deliver the lowest average return over the forecast period from 2010 to 2014 on low rental growth affected by sovereign finances and compressed yields.

Industrial properties, on the other hand, are expected to deliver stable returns over the period after recovering from anticipated negative rental impact in 2010.

"High yields boost relative performance in the later years of the forecast as rental growth and yield compression level out. The result is forecast to be relatively high, stable returns over the next five years," it said.