Research published by DTZ has identified the UK’s 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 with the most attractive pricing for investors looking to enter the market now. The report shows that the most underpriced markets are to be found in regions outside of London, while London office and industrial markets look to be around fair value.
DTZ’s Fair Value Index™ for the UK rose to 72 in Q4 2014 from the Q3 figure of 64, meaning that UK property has become more attractive to investors. According to DTZ’s research the plunge in oil prices since last summer has led to UK inflation falling recently to only 0.3%, which has caused the BoE to delay raising interest rates. This has pushed down government bond yields to historically low levels close to 1%, with five-year forward rates also falling to new lows. Current favourable spreads of property yields over bond yields make UK property look attractive on a relative basis as investors search for higher yields in a low inflation environment.
Fergus Hicks, DTZ’s Global Head of Forecasting, says: “Our latest UK Fair Value Index™ shows that UK property has become more attractive for investors. The fall in bond yields and forward rates triggered by lower inflation and oil prices lead us to expect that the property market will continue to look good value in the first half of this year due to attractive spreads over bond yields.”
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.
Bristol’s retail and industrial market has been classified as ‘underpriced’, offering attractive opportunities to investors.
Nick Allan, Senior Investment Director at DTZ in Bristol, comments: “The pricing of investment property increased sharply over 2014 and has continued to do so into 2015 driven by the weight of available equity, improving occupation market and economy and the scarcity of quality opportunities to invest. The recent fall in the inflation rate has pushed back the long-expected increase in interest rates which, coupled with anticipated rental growth on the back of improved occupier activity, has made property look more attractive, with projected returns expected to exceed the returns that investors require. In general, the UK regions offer better value than London and, in the South West, Bristol retail and industrial is particularly attractive, with industrial having been re-rated to “underpriced” on the basis of DTZ’s latest forecasts. Bristol offices are rated “fairly priced” largely due to the significant yield compression over the last year.”
Over the next five years regional markets are expected to offer the most favourable risk-adjusted returns, while the majority of London markets are fairly priced, with the exception of London West End retail, which is the most overpriced UK market, according to DTZ’s UK Fair Value Index™.
Ben Clarke, DTZ’s Head of UK Research, says: “While there are still plenty of buying opportunities in London due to its status as one of the largest and most sought-after global investment markets, opportunities outside of London are looking attractive to investors given the higher yields available with broadly similar covenants, and occupier markets underpinned by increasing demand and still relatively limited supply.“
Although at the lower end of the rankings, the London office markets are around fair value, with only West End retail looking overpriced . This is due to very sharp declines in yields over the past 18 months and strong investor demand. Manchester office is also ranked in the bottom five due to previous strong yield compression with prime office yields having fallen by 75 bps over the course of last year to reach levels last seen in 2006. However this could arguably be another indicator that Manchester has made a structural shift away from most of the other UK regional office markets, with commensurate lower long term yields.
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. 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 Q4 16 markets were rated as underpriced, 14 fairly priced and only two as overpriced.
