DTZ, a UGL company, has released its latest UK all-property DTZ Fair Value Index TM results for Q3 2012. The Index, which offers insight into the relative attractiveness of current pricing in the UK property markets, increased to 88 in the third quarter of 2012 from 78 in Q2. The elevated score indicates that prime property pricing has become even more attractive this quarter.
The increase in the index score has come about as a result of further yield uplift in regional markets, which is improving income returns for prospective buyers and pricing these markets at a discount relative to historic norms.
Ben Burston, Head of UK Research at DTZ and author of the report, said: “For the past year, we have witnessed rising UK regional prime office yields. The uplift is due to weak investor sentiment and reluctance to invest in property without the security of a 20+ year income stream. In Q3 we witnessed further outward movement with Glasgow and Edinburgh office yields both rising by 25 bps to 6.5%. We could see further uplift in selected markets in coming quarters, but consider that the majority of the correction in pricing has now taken place.”
The Q3 score is the highest since mid-2009, and we see some similarities between conditions then and now, with weak sentiment impacting on the investment market and prompting yields to rise in recent quarters. Investors buying in mid 2009 saw a rapid return on their investment, as the market rebounded during H2 2009 and through 2010.
James Lawlor, Associate Director at DTZ in Leeds commented: “The upgrading of the Leeds office market from Warm to Hot evidences the value which many see in the market at the moment. The fact that investors are reluctant to invest in anything other than ‘super prime’ assets has softened yields on ‘traditional prime’, improving its anticipated total return going forward. On the ground, landlords within the Leeds office market have reason to be optimistic as well as take-up improves, prime grade A stock dwindles and incentives shorten. Coupled with an upward yield shift, the city is looking like a legitimate place to invest.”
While prime yields are not as high as they were in mid-2009, they represent very strong income returns in a low interest rate environment and DTZ consider conditions attractive for buyers. As such, all 20 markets in the Fair Value Index coverage continue to be rated either HOT or WARM, with 15 classified as HOT. Pricing reflects weak sentiment and restrictive credit conditions at present, but investors taking a medium term view can position themselves now to benefit from the future recovery.
Ben Burston continues: “Investors in the UK market are understandably cautious, as the headwinds of the eurozone crisis, tight credit conditions and subdued occupier demand are taking a toll. However, for buyers taking a five year view, we maintain the view that the prime market is attractively priced, and this is reflected in our Fair Value Index score for Q3. Periods of weak sentiment resulting in elevated yields have historically represented a buying opportunity, and we see signs of this in the UK market at present.”
