Research published by DTZ has identified the UK’s top three most attractive cities for prime commercial property investment.
Based on comparative property prices for each city in the office, industrial and retail markets, the list pinpoints those cities most likely to provide the best returns for investors looking to enter the market now, and shows the UK regions moving strongly ahead of London as property prices in the capital continue to increase.
Regional markets top the list and in the retail sector Manchester and Leeds offer the biggest opportunities, driven by capital growth as rents rise over the next four years for these two cities. As a result Manchester and Leeds are expected to offer very attractive total returns for the 2014 – 18 period.
James Bladon, Associate Director, Investment agency comments: “Over the past 6-9 months, demand for commercial property investments has shifted from London and the South East to the regions, with a wide range of investors, both domestic and overseas, seeking to buy and take advantage of attractive pricing against a backdrop of the economic recovery.
“DTZ’s latest forward-looking Fair Value Index report, which looks at the attractiveness of commercial property investments, rates Nottingham offices as “HOT” and Nottingham’s retail and industrial sectors as “WARM”; “HOT” indicates that an investor purchasing an investment now can expect to achieve higher than anticipated returns and “WARM” indicates that they should achieve returns in line with what are required. Behind the “HOT” rating, the office sector is assessed to be under-priced currently and is expected to see good capital and rental growth over the next five years. In comparison, the retail and industrial sectors are assessed to be fairly priced in the main, although retail may experience some capital depreciation.
“Looking forward, a combination of strong investor demand but limited opportunities will push up prices just as required returns increase, making it more difficult to find good value.”
Philip Glenn, Valuation Advisory Director at DTZ in Nottingham also notes that with more transactional activity in the market there are inevitably going to be more opportunities for lenders in the sphere of new lending or loan review.
“We are seeing an increase in demand for better quality investment properties particularly in the industrial and logistics sector where there is a weight of money chasing a limited supply of opportunities. Investors are increasingly looking outside the South East and there is an increased willingness to move up the risk curve and consider shorter term income.
“Lack of supply in the sector particularly for new builds will also encourage development although speculative development is not yet a feature in the regional market. Yields are being driven down by these factors which will inevitably impact on investor returns. There are also signs of increased interest in prime retail although lack of stock is also a feature in this sector.
He added: “There are some concerns over occupational markets which are not recovering or growing as fast as the investment market particularly for secondary property.”
Looking at the UK as a whole, Fergus Hicks, DTZ’s Global Head of Forecasting, said: “While yields have continued to fall during 2014 and property prices have moved from being undervalued to more fairly valued, there are still many regional markets in the UK which provide good returns for investors. In fact, apart from Cardiff retail, we think all of the markets outside London are still around or below fair value, making them attractive to investors.
“In London the picture is more mixed. Ultra low yields make London prime retail look overvalued, while we think industrial property is around fair value. However, there are still opportunities in the City, West End and Midtown office markets, which we think are around fair value.”
The findings are based on the DTZ UK Fair Value IndexTM, which provides a quarterly insight into the comparative attractiveness of current property pricing in the UK. A score of 100 indicates that all markets are underpriced and zero that all markets are overpriced. A score of 50 indicates fair value.
In the first quarter of 2014 the UK Fair Value Index™ fell to 60 from 73 in Q4 2013 as UK regional property market yields declined, following strong investor interest for prime commercial property outside the capital. Over the past six months the UK Fair Value IndexTM has shown its largest fall since the first quarter of 2010 as a result of the recovery in the UK economy and the rise in bond yields. By the end of the year DTZ researchers predict that the UK Fair Value Index will fall below 50.