The UK all-property DTZ Fair Value IndexTM (FVI), which offers insight into the relative attractiveness of current pricing in the UK property markets, increased to 53 at the end 2011 from 33 in Q3 2011. Several regional markets were revised upwards in response to their more attractive pricing relative to government bond yields, which continued to fall sharply during Q4. This quarter, Manchester industrial has returned to the HOT category, joining Manchester retail. Whilst Birmingham retail, Edinburgh office, Bristol office and Cardiff office have all been upgraded to WARM.
In Q4 2011, 19 of the 20 UK markets covered were HOT or WARM, showing that prime property can provide investors with a relatively attractive proposition in a difficult economic environment. The UK is also out-performing the broader European index score of 36. Yields in UK markets are generally slightly higher, and the UK economy is seen as less vulnerable than markets directly exposed to the sovereign debt crisis.
Ben Burston, Associate Director, Forecasting & Strategy Research at DTZ and author of the report, said: “Investors seeking the safety of government paper in the UK would do well to consider selective investment in prime property, which offers a substantial yield premium over low bond yields. With most prime regional UK office markets trading at yields of 6% and above, investors can earn adequate returns even in the absence of future capital appreciation and this is reflected in the current Fair Value Index ratings.”
In Q4 2011 the combination of higher bond yields and rising property yields caused several markets to be upgraded. The Edinburgh office and Birmingham retail markets both moved from COLD in Q3 2011 to WARM this quarter.
Last quarter’s report revealed that Bristol and Cardiff office markets had become COLD owing to a 25 base point fall in yields. This quarter they are among the markets with rising yields, upgrading them to WARM.
Manchester industrial has returned to HOT. It is forecast to benefit from above average rental growth in 2013 and 2014, driving capital growth and, combined with an attractive yield, this leads to strong forecast returns.
Richard Turner, Investment Director, DTZ in Newcastle comments: “The Eurozone crisis has created significant opportunities for property investors. The outward yield shift experienced in Q4 together with the fall in government bond yields to historic lows has seen the yield premium for property rise to unprecedented levels. This gap is reflected in the Fair Value Index which has seen a number of key markets upgraded to either ‘Warm’ or ‘Hot’.
“Newcastle Offices has maintained its Warm status with total returns over the next five years forecast to outperform most other regional markets. Elsewhere in our region, the high initial yield available from North east industrials together with emerging rental growth potential will drive above average returns going forward. Stock selection remains the key, but this report demonstrates that current conditions are favourable for investors with an appetite for acquisitions.”