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 trend was identified last quarter, and has continued in Q1 2012 with yields in several markets shifting out, including Manchester retail out 50bps to 5.5% and Edinburgh office out 25bps to 6.25%.
Philip Glenn, Head of DTZ’s Nottingham office comments: “The latest DTZ Fair Value Index gives some encouraging news for investors in the regions. Prime property continues to provide investors with an attractive investment class in difficult market conditions. The forecast for total returns in the Nottingham offices market going forward is that these will compare well with other regional markets and potentially out perform some major regional centres. The one note of caution is that there is a lack of prime stock in the market and secondary properties are unlikely to perform as well.”
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.”
