Strong investor demand continued to push yields down in quarter two, in 12 out of 32 markets covered, according to DTZ’s UK Fair Value Index™. This is reflected in the UK all property index, which fell nine basis points, from 58 in quarter one, to 47 in quarter two.
Whilst there is a tight supply of prime commercial investment properties throughout the UK, prime regional industrial and retail property markets are still attractive, with Leeds retail joining the top three best value markets within the index. According to the report, Manchester retail, which tops the index, is boosted by good rental growth prospects, which will help push capital values higher by 3 per cent per annum over the next five years. Leeds retail offers investors a similar opportunity.
Industrial markets from Newcastle, and Glasgow and retail in Bristol also feature in the top five rankings.
Fergus Hicks, DTZ’s Global Head of Forecasting, said: “Strong investor demand is continuing to fuel investment activity in UK commercial property and yields are falling as a result. While the most attractive opportunities for investors at the moment are in regional retail and industrial markets, we do expect more markets to look fully priced going forward and investors should move now to secure the best opportunities.”
Greg Davison, Director for DTZ in Leeds said: “Leeds remains one of the UK’s most attractive markets across all sectors, offering good opportunities for investors, and whilst we have seen strong yield compression, particularly for prime assets, this is a trend reflected across UK Regional markets, and one that we anticipate will stabilize in the short term. This yield compression has resulted in prime city centre offices in Leeds being classified as “fully priced” and is reflective of investor demand for such assets significantly outstripping available supply. With many institutional funds being behind their spending plans for 2015 allocations to prime regional offices, we expect this pressure to remain for the rest of 2015 and into 2016.
The index reflects what is happening at the prime end of the market and only tells part of the story. Inevitably, there is an extremely attractive underlying secondary market offering strong opportunities to create and add value, particularly within the office and industrial sectors, both of which benefit from strong tenant demand and upwards pressure on rents.”
Interest rates are expected to rise around the turn of the year and will push gilt yields higher, causing the relative attractiveness of property to deteriorate. As such, DTZ expects the number of attractive investment opportunities to diminish, and the Fair Value Index score to fall as a result.
Ben Clarke, DTZ’s Head of UK Research, said: “At the moment the market is still offering good opportunities for investors, particularly in the regions. However, as interest rates start to rise, which we expect to be around the turn of the year, commercial property pricing will begin to look less attractive and investors will need to look harder to seek out attractive opportunities.”
The Index identifies the most attractive office, retail and industrial markets for prime commercial property investment today on a five year hold period and covers 32 markets. The investment prospects for each market are assessed by comparing the forecast return and risk-adjusted fair/required return. A score of 100 indicates that all markets in the index are underpriced and zero that all markets are fully priced. A score of 50 indicates a balanced number of fully priced and underpriced markets. In Q2, 5 markets were rated as ‘underpriced’, 20 ‘fairly priced’ and 7 as ‘fully priced’.
