The UK Fair Value Index identifies the most attractive office, retail and industrial markets for prime commercial property investment now on a five year hold period. The list pinpoints those cities with the most attractive pricing for investors looking to enter the market now. The report shows that the most underpriced markets continue to be found in regions outside of London, with many investors targeting the North West.
Of the most underpriced markets in the UK currently, three out of five are in the industrial sector with Manchester Retail now ranked 2nd overall of all UK markets.
Bruce Poizer, Senior Investment Director, DTZ Manchester comments: “Economic recovery and robust retailer and consumer demand mean that Manchester has the strongest rental growth expectations from all our UK market segments for the next five years, averaging 4.2% p.a.
“Manchester retail is currently under-priced by 13.1% according to our Fair Value analysis. Further price improvements and increased rental growth expectations over the next five years lead us to forecast prime total returns of around 7.8% p.a.
“Investor sentiment remained strong with prime yields holding at 4.75% in Q1 2015. These are expected to fall to 4.5% by the end of 2015, which will boost capital growth to 3.1% p.a.”
Bruce confirmed that: “Going forward, relatively strong rental growth and modest yield compression lead us to believe that it will continue to offer good value to investors over the next few years.
DTZ UK Fair Value Index™, Q1 2015: Number of markets in each category by region Source: DTZ ResearchTop five markets in UK ranked by attractiveness to investors Source: DTZ Research“There was also good news for the Manchester office market which was upgraded from ‘overpriced’ to ‘fairly priced’. This movement bucked the trend as many other UK office markets were downgraded this quarter. This is in part due to the attractiveness of Manchester to many overseas investors and we are experiencing unprecedented levels of competition for any investment opportunities within the city centre.“
Overall DTZ’s Fair Value Index™ for the UK fell to 58 in Q1 2015 from the previous quarter’s figure of 72, meaning that UK property has become less attractive to investors. According to DTZ’s research, keener pricing of property markets this quarter as a result of significant yield compression has reduced the UK Fair Value Index™ score. Since gilt yields are at very low levels, UK property still looks attractive on a relative basis due to favourable yield spreads. However the strong weight of capital targeting property means the market is now becoming more fully priced.
Fergus Hicks, DTZ’s Global Head of Forecasting, said: “Our latest UK Fair Value Index™ shows that UK property’s attractiveness to investors is starting to diminish as many of the major markets have now become fairly priced due to significant yield compression, particularly in the office sector. We believe that, going forward, UK property’s attractiveness will continue to diminish throughout the rest of this year so investors need to be much more selective about targeting better value opportunities.”
The industrial sector is currently the most attractively priced sector in the UK, with three of the top five most underpriced markets in DTZ’s UK Fair Value Index™ all in this sector. Higher income yields than the office and retail sectors make it particularly attractive to investors, given the wider spread over government bond yields.
Over the next five years regional markets are expected to offer the most favourable risk-adjusted returns, while the majority of London markets are now fairly priced after seeing significant yield compression over the last few years.
Ben Clarke, DTZ’s Head of UK Research, says: “Greater confidence on the part of developers means we have seen the return of speculative development in the office and industrial markets in the UK regions. Nevertheless, many of these markets remain supply constrained at the prime end of the market. This is supporting rental growth in these markets where yields remain well above what can be found in central London.”
With prime yields now at cyclical lows, a few office markets are now looking more fully priced, such as London’s West End and some regional markets such as Bristol and Leeds, where yields have fallen by 50 and 80 bps respectively over the last year. Nevertheless, most office markets still remain fairly priced, while regional industrial and retail markets offer the best value and are all under- or fairly priced.
The findings are based on the DTZ UK Fair Value Index™, which provides a quarterly insight into the comparative attractiveness of current property pricing across 32 UK markets. The classification for each market, based on a five year hold period, is determined by comparing the forecast return and the risk-adjusted fair/required return. A score of 100 indicates that all markets are underpriced and zero that all markets are overpriced. A score of 50 indicates a balanced number of over-and underpriced markets. In Q1 16 markets were rated as underpriced, 14 fairly priced and only two as overpriced.
