MARCH 2018 European Relative Value Index

Is there still good value in European real estate? 

Is there still good value in European real estate?

In absolute terms, property appears expensive, as indicated by record low property yields (now just above 4%). However, to most investors values are relative. Therefore, we implement the ‘Special theory of relativity’ introduced by our U.S. colleagues for the main European markets.

COMPOSITE RELATIVE VALUE INDEX

Sources: CBRE, Oxford Economics, EPRA, Natixis & AEW Research 2018

EXECUTIVE SUMMARY: FAIR RELATIVE VALUE REMAINS IN PRIME


  • As yields on European commercial real estate have tightened to record lows over the last two years, investors are fully justified to question whether direct real estate offers sufficiently attractive returns.
  • Our newly launched European Relative Value Index (RVI) answers this question for the European market as a whole as well as for key individual markets such as the French, German and UK market.
  • The RVI analyses show that fair relative value remains on offer in the prime European commercial real estate markets, with even better value available in secondary markets.
  • Similar to our U.S. RVI, we compare direct real estate to three other assets, including stocks, bonds and REITs. But, data limitations force us to stick with prime (i.e., not average) property yields and government instead of corporate bonds.
  • In our four step RVI approach we compare and calculate:
  • Property Net Operating Income (NOI) multiples to overall stock market earnings multiples (P/E ratio);
  • Prime property yields to 10-year government bond yields;
  • Premium or discount of REIT stock prices to their underlying Net Asset Values (NAVs);
  • Each comparison is normalised over its history using the Z-score and equal weighted in the RVI calculation.
  • Our RVI methodology assumes current pricing across assets and a reversion to the historical mean of the ratio between the different asset pricings, similar to our U.S. RVI approach.
  • Based on these RVI comparisons taking into account year-end 2017 pricing, prime UK property is slightly more attractive than other core European markets, such as France and Germany. As bond yields further normalise and other asset pricing changes this is likely to change in the next few years.
  • However, non-core property remains even more attractive than core – offering investors a 150 bps yield pick-up across the main European markets.

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The information and opinions presented in this research piece have been prepared internally and/or obtained from sources which AEW believes to be reliable; however, AEW does not guarantee the accuracy, adequacy, or completeness of such information.

Photo of Hans Vrensen

Hans Vrensen
Head of Research, Europe

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