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.
While the number of UK commercial property investment opportunities is falling, regional industrial and retail property markets are still attractive, with Manchester retail topping the index. According to the report, Manchester retail 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. Industrial markets from Newcastle, and Glasgow and retail markets from Leeds and 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.”
Phil Glenn, Director at DTZ in Nottingham comments: “The findings of our research team are perhaps not surprising as strong demand has continued to put downward pressure on yields. However our research suggests that, despite the prospect of interest rate rises and less scope for further yield compression at the level we have seen recently, better rental growth prospects and limited supply of product still offer the prospect of capital growth in regional retail and industrial markets particularly. The imbalance between high demand and limited supply of investment product continues to be a feature of the market.”
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’.
