DTZ, part of UGL Services, a division of UGL Limited (ASX: UGL), has published the latest UK all-property DTZ Fair Value Index TM results for Q1 2012. The Index, which offers insight into the relative attractiveness of current pricing in the UK property markets, increased to 65 in the first quarter of 2012 from 53 in Q4 2011. The increased score indicates that the market has continued to become better value.
With all 20 markets in the Index coverage rated either HOT or WARM, prime property in the UK is providing investors with an attractive proposition in the current economic climate, and pricing is the most attractive it has been for investors since mid-2009. The UK is also out-performing the broader European index score of 46.
Ben Burston, Associate Director, Forecasting & Strategy Research at DTZ and author of the report, said: “Our results for this quarter reflect the much wider yield premium offered to property investors in the UK relative to recent experience. This confirms our analysis of the market during much of 2011: that yields in regional markets were a little too low to make them attractive to investors. Now, however, most prime regional UK office markets are trading at yields of 6% and above, ensuring that investors can earn attractive returns relative to other assets.”
There are two drivers behind the upgrading of UK Fair Value estimates over the past two quarters. Firstly, required returns have been impacted by the persistent reduction in bond yields; the UK five year gilt yield has more than halved since mid 2011. The second driver has been an increase in yields in several UK markets. This has led to further upgrades this quarter, including to Birmingham industrial and Glasgow retail which are both now classed as ‘HOT’.
Ned Jones, Associate Director in DTZ’s Birmingham Investment team, comments: “DTZ’s Fair Value report suggests Birmingham Industrial investments are now underpriced and the diminishing supply of grade A distribution buildings in the region is a major factor. A large number of the available grade A buildings have now been occupied over the last 24 months and this, combined with the lack of speculative build schemes, should result in an upward movement in rental levels in this sector. Prime property is providing investors with an attractive proposition in a difficult economic climate, and we consider that pricing is the most attractive it has been for investors since mid-2009.”
Ben Burston added: “Of the major UK markets included in the Index, many are around Fair Value, meaning their expected returns over the next five years are broadly in line with modest required returns. With the rental growth outlook subdued, capital growth will be limited and income-driven returns of 6 to 7 percent per annum will increasingly be the norm, until a broader economic recovery bolsters occupier demand and provides a driver for rental growth.”