Research published today by DTZ identifies the UK’s current top three most attractive markets for prime commercial property investment.
Based on comparative property prices for each city in the office, industrial and retail markets, the list pinpoints those markets across the UK most likely to provide the best returns for investors looking to enter the market now. At present, UK regions are more attractive than London, although the flow of investor cash beyond the capital is already impacting the returns available to investors and resulting in changes since Q1.
Manchester retail tops the list of individual markets, with property underpriced by 13.6%, deposing Leeds industrial which was number one in Q1. However, Leeds retains two of the top three markets with its industrial and retail property underpriced by 11.8% and 11.1% respectively. Nottingham is the most underpriced UK office market at 9%, which makes it the fourth most attractive individual market.
Since Q1, DTZ has downgraded three markets – Leeds offices, Manchester offices and Newcastle retail – to reflect that these are no longer underpriced by at least 5% below fair market value. On the flip side, three markets look more attractive to investors now than in Q1 and DTZ has reclassified London City offices, Cardiff industrial and Glasgow industrial as underpriced.
Andrew Gibson, Associate Director, Investment & Development at DTZ in Cardiff comments: “Investment activity in UK commercial property was broadly the same in the first and second quarters of 2014, but the total for H1 2014 of £20.6 billion was 35% higher than the corresponding period. Notably, there has been a shift in activity to the regions, which accounted for 67% of transactions by value, due to a combination of keen prices in London – prime central London retail yields stand at just 3% – and investor confidence as the economic recovery gains ground. Domestic investors have increased their market share, being particularly active in the regions, supported by the significant net inflows to retail funds (£1.4 billion in three months). Notable deals in Q2 2014 in South Wales include the £15.3 million (4.72%) sale of the Waitrose Supermarket in Pentwyn and the sale of Trostre South Retail Park, Llanelli for £12.8m (6.74%).
“Against this backdrop, DTZ’s latest Fair Value Index categorises the industrial and office sectors in Cardiff as ‘Hot’, indicating that these sectors present an attractive investment opportunity on a risk-adjusted basis. Prices are increasing in the office and industrial sectors, and it is predicted that prime office rents will grow to £24.00 per sq ft by 2018. Over the period 2014-18 industrial rents are set to grow on average at 1.4% per annum. In addition, a reduction in the property risk premium, to the lowest level since before the financial crises, has reduced investors’ required returns.
“Looking forward, investment activity over the whole of 2014 is expected to equal 2013’s total of £48 billion, before falling back in 2015. This will correspond with a diminishing number of attractive investment opportunities, with future expected returns suppressed by higher prices and higher required returns as a result of the increasing likelihood of rising interest rates.”
Fergus Hicks, DTZ’s Global Head of Forecasting, said: “Regional cities are forecast to deliver the highest returns across all sectors, with Manchester topping the retail sector, Leeds for industrial and Nottingham for offices. These regional cities benefit from higher income yields which boost total expected returns. Industrial is the standout sector, benefitting from a higher income yield compared to retail and offices. All 10 of the UK’s industrial markets are currently rated around or below fair value.”
Richard Yorke, Head of UK Research, said: “All eyes are on the Bank of England to see when the first interest rate rise will come, with movement before the year-end looking more likely. We therefore expect the UK property market to present fewer attractive opportunities over the next 18 months. This reflects regional markets becoming fully priced as property yields reach their low points in the cycle, while interest rates rising will push bond yields higher. This will result in property being less attractive on a relative pricing basis compared to other investment options.”
The findings are based on the DTZ UK Fair Value Index, 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. Of the 32 markets covered in Q2 2014, 11 were rated Hot, 19 Warm and 2 Cold.
In the second quarter of 2014 the UK Fair Value Index stayed unchanged at 64, showing the UK continues to offer attractive investment opportunities. DTZ researchers predict that the UK Fair Value Index will fall below 50 by the end of the year.