The all-sector European Fair Value Index score dropped to 16 in Q4 down from our Q3 score of 28, and approximately the same level recorded in Q2 2007, reflecting the advanced stage of the property cycle and fewer attractive prime opportunities.
The combination of property yield compression coupled a higher illiquidity and risk premium has narrowed the spread between the fair and forecast return further, deteriorating property attractiveness and causing the index to fall further.
Logistics remains the sector with the highest number of underpriced markets, however opportunities have reduced dramatically as investors seeking higher returns are driving strong demand in the sector, where yields continue to fall.
Geographically, the CEE and Semi-Core have the most underpriced markets while Core markets such as 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.