The UK all-property DTZ Fair Value IndexTM (FVI), which offers insight into the relative attractiveness of current pricing in the UK property markets, increased to 53 at the end 2011 from 33 in Q3 2011. Several regional markets were revised upwards in response to their more attractive pricing relative to government bond yields, which continued to fall sharply during Q4. This quarter, Manchester industrial has returned to the HOT category, joining Manchester retail. Whilst Birmingham retail, Edinburgh office, Bristol office and Cardiff office have all been upgraded to WARM.
In Q4 2011, 19 of the 20 UK markets covered were HOT or WARM, showing that prime property can provide investors with a relatively attractive proposition in a difficult economic environment. The UK is also out-performing the broader European index score of 36. Yields in UK markets are generally slightly higher, and the UK economy is seen as less vulnerable than markets directly exposed to the sovereign debt crisis.
Ben Burston, Associate Director, Forecasting & Strategy Research at DTZ and author of the report, said: “Investors seeking the safety of government paper in the UK would do well to consider selective investment in prime property, which offers a substantial yield premium over low bond yields. With most prime regional UK office markets trading at yields of 6% and above, investors can earn adequate returns even in the absence of future capital appreciation and this is reflected in the current Fair Value Index ratings.”
In Q4 2011 the combination of higher bond yields and rising property yields caused several markets to be upgraded. The Edinburgh office and Birmingham retail markets both moved from COLD in Q3 2011 to WARM this quarter.
Last quarter’s report revealed that Bristol and Cardiff office markets had become COLD owing to a 25 base point fall in yields. This quarter they are among the markets with rising yields, upgrading them to WARM.
Manchester industrial has returned to HOT. It is forecast to benefit from above average rental growth in 2013 and 2014, driving capital growth and, combined with an attractive yield, this leads to strong forecast returns.
James Bladon, Associate Director at DTZ Birmingham commented: “Property offers a safe haven in troubled times with DTZ upgrading a number of locations/sectors across the UK in the Q4 2011 Fair Value Index. Birmingham mirrors the national trend with Retail upgraded to ‘WARM’, while the Office and Industrial sectors have maintained their previous ‘WARM’ status. ‘WARM’ means that the sector is fairly priced with investors expected to achieve solid total returns over the next five years broadly in line with required rates of return. in order to achieve total returns in line with the long-term average. For all three sectors, it is expected that performance over the period 2012-2016 will be driven by income return, with some rental growth off current market rents. Stock selection remains key but this report demonstrates that conditions are favourable for investors with an appetite for acquisitions.”