Research published today by DTZ has identified the UK’s top three most attractive cities for prime commercial property investment.
Based on comparative property prices for each city in the office, industrial and retail markets, the list pinpoints those cities most likely to provide the best returns for investors looking to enter the market now, and shows the UK regions moving strongly ahead of London as property prices in the capital continue to increase.
Regional markets top the list and in the retail sector Manchester and Leeds offer the biggest opportunities, driven by capital growth as rents rise over the next four years for these two cities. As a result Manchester and Leeds are expected to offer very attractive total returns for the 2014 – 18 period.
Peter Atkinson, Associate Director, Investment at DTZ in Newcastle comments: “With the weight of oversees money pouring into London and the stiff competition resulting, the appeal of robust regional cities has rarely been so strong.
“Balanced occupational supply and demand dynamics across all three key property sectors means Newcastle is well placed to deliver strong performance, both in terms of rental growth and yield compression.
“DTZ has acquired three significant office holdings in Newcastle, totalling in excess of £50m in value over the last six months alone for institutional clients including Standard Life, Orchard Street IM and M&G Real Estate. Whilst this demonstrates the weight of demand for Newcastle and the wider north east region from institutional investors, the supply of investment opportunities remains highly restricted.”
Looking at the UK as a whole, Fergus Hicks, DTZ’s Global Head of Forecasting, said: “While yields have continued to fall during 2014 and property prices have moved from being undervalued to more fairly valued, there are still many regional markets in the UK which provide good returns for investors. In fact, apart from Cardiff retail, we think all of the markets outside London are still around or below fair value, making them attractive to investors.
“In London the picture is more mixed. Ultra low yields make London prime retail look overvalued, while we think industrial property is around fair value. However, there are still opportunities in the City, West End and Midtown office markets, which we think are around fair value.”
Richard Yorke, Head of UK Research, said: “A strengthening recovery in the UK economy provides the backdrop for rental uplift and we expect investor demand to remain buoyant in the near term, with buyers continuing to look for opportunities outside London.
“However with interest rates likely to rise in 2015, pushing bond yields higher, prime property will look less attractive in comparison. As the year progresses we expect investment opportunities to have diminished. Investors will increasingly look beyond prime in the UK and towards other European markets.”
The findings are based on the DTZ UK Fair Value IndexTM, which provides a quarterly insight into the comparative attractiveness of current property pricing in the UK. A score of 100 indicates that all markets are underpriced and zero that all markets are overpriced. A score of 50 indicates fair value.
In the first quarter of 2014 the UK Fair Value Index™ fell to 60 from 73 in Q4 2013 as UK regional property market yields declined, following strong investor interest for prime commercial property outside the capital. Over the past six months the UK Fair Value IndexTM has shown its largest fall since the first quarter of 2010 as a result of the recovery in the UK economy and the rise in bond yields. By the end of the year DTZ researchers predict that the UK Fair Value Index will fall below 50.