Research published 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.
This is echoed by the industrial market in Leeds which is forecast to see the highest rental growth over the forecast period, together with the highest average capital growth.
Jonathan Brown, Surveyor, Investment agency at DTZ in Manchester comments: “DTZ’s latest forward-looking Fair Value Index report, which looks at the attractiveness of commercial property investments, rates the retail and office sectors in Manchester as hot indicating that Manchester is currently an attractive place to invest with returns expected to be above what investors require. Manchester has long been considered a key centre for office investment, and has gained a significant amount of interest, with DTZ’s most recent disposal of Direct Line House in Manchester for Aviva Investors at £24.28m, equating to a circa 5.6% yield and providing evidence of the strength of the market.
“We are seeing an increase in demand for better quality investment properties, particularly in the office and logistics sector where there is a weight of money chasing a limited supply of opportunities. Investors are increasingly looking outside the South East and there is an increased willingness to move up the risk curve and consider shorter term income.”
“Looking forward, now is the time to act as a combination of strong investor demand but limited opportunities will push up prices just as required returns increase, making it more difficult to find good value.”
Russell Hefferan, Associate Director in DTZ’s Valuation team adds: “Retail yields are trending inwards to around 4.75% for the very best properties, and with rental growth forecast over the medium term, demand from investors is likely to increase. Occupier demand in Q1 of this year has improved on last year. The outlook is positive, with inflation falling and positive wage growth, retail sales should continue to see growth.”
“The industrial / logistics prime market continues to perform well as supply remains thin and demand for well located sites remains strong. This is evidenced by the progress made at Omega, Warrington and Logistics North, Bolton.”
“Over the last nine months we have seen strong investor interest for Grade A and B office investments as confidence in the occupational market for Manchester improves. Prime rental growth is forecast over the next three years. We have seen the yield gap narrow between Grade A and B investments as investors are now identifying opportunities to drive rental levels in Grade B buildings. This has resulted in competitive bidding for well located Grade B office buildings in or around the traditional office core surrounding King Street and the more modern office core of Spinningfields.”
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.”
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.