The UK prime property markets now offer better value for investors than in Q1 2011, according to DTZ’s latest Fair Value IndexTM report. The index, which offers insight into the relative attractiveness of current pricing in the UK property markets, has improved significantly, with the score for Q2 2011 rising to 50 from 28 in Q1 2011.
The rise in the score follows two consecutive quarters of declining scores and reflects the fall in bond yields in the UK witnessed in recent months. Yields had risen over the six months to the end of Q1 2011, but weakening confidence in the economic outlook has resulted in lower yields, with the UK five-year bond yield currently standing at 1.4%.
The resultant marked shift downwards in required returns is likely to underscore the appeal of the solid income returns offered by prime property amidst a clouded economic outlook. While capital growth is expected to be subdued in coming years, and there are downside risks, most retail and office markets are trading at yields of around 5-6%. This offers a substantial premium over bond yields, which sat at just over 2% at end Q2, and have since fallen significantly further.
In Q2, the Manchester retail and industrial markets have been upgraded from WARM to HOT. The Newcastle, Manchester, Leeds, Birmingham and Bristol office markets were upgraded from COLD to WARM. Glasgow’s retail and industrial markets went from COLD to WARM while the Heathrow industrial market was also upgraded from COLD to WARM.
Tony McGough, Global Head of Forecasting & Strategy Research at DTZ said: “With bond yields compressing, and increasing stock market volatility, prime property in the UK is now relatively more attractive. It offers higher income yields and a broadly stable capital value outlook going forward.”
Nick Allan, Senior Director in DTZ’s Birmingham investment team, commented: “The change in the classification of the Birmingham office investment market from COLD to WARM is clearly positive news for investor confidence in the city. On the ground, we continue to see strong demand for both prime and good secondary assets as investors seek levels of return which are commonly unachievable in the markets of London and the south east, where both yield compression and rental growth has been significant during the past 18 months or so.
“The change in classification is, of course, dependent on fluctuations in the UK’s bond market but with the continuing take-up in Birmingham’s Grade A office supply and limited development pipeline, the medium-term dynamics of the Birmingham market look positive. This has been demonstrated by a number of recent acquisitions in the city by Hinds, Salmon Harvester, Brockton Capital and a number of overseas investors.”
In Q2 2011, the global Fair Value IndexTM score rose to 55 from 50 in Q1, which indicates that the global investment environment has retained its appeal to investors in spite of an uncertain global economic outlook. The European index score rose from 32 to 41 and the Asia Pacific score from 65 to 70, while the US score remained broadly unchanged at 73
