Investors should act now before regional markets become more expensive

DTZ has published the latest UK all-property DTZ Fair Value Index TM results for Q3 2013. The Index, which offers insight into the relative attractiveness of current pricing in the UK property markets, declined slightly in the third quarter of 2013 to 85, from 90 the previous quarter. Nevertheless, the UK remains more attractive than Europe as a whole with 15 of the 20 markets covered being rated as Hot.

In this latest report, DTZ has for the first time produced a five year forecast of the UK FVI. This forecast identifies a significant decline in the relative attractiveness of UK markets. Looking forward to the year ahead, DTZ expects most UK markets covered by the FVI to become more expensive.

The UK FVI is forecast to fall rapidly to 43 by Q3 2014. This will be the lowest score for six years. Moreover, DTZ expect the UK index to continue falling and plateau to just 18 in the third quarter of 2015.

Richard Yorke, Head of UK Research, comments: “The rapid fall in the UK Fair Value Index will be due to a combination of yield compression, lower expected returns as regional markets become less under-valued, and higher required returns caused by rising bond yields.”

Consequently, DTZ expect a significant change in the relative attractiveness of UK markets. The number of Hot markets is expected to fall from 15, as of Q3 2013, to just one – Manchester retail – by Q3 2014. Conversely, the number of Cold markets is set to rise from one to four – London West End retail, London Mid Town and City offices, and Heathrow industrial – over the same period.

Nick Allan, Senior Investment Director at DTZ comments: “The increasing investor appetite for commercial property in Cardiff is positive news generally and for vendors in particular. DTZ’s latest Fair View Index classifies offices in the city as ‘Hot’, indicating that they are currently undervalued and so purchasers can expect to make a good return on their investment. However, as a note of caution, demand is currently driving prices upwards as investors are forced out of the highly competitive London and South East markets. Moreover, as bond yields push up ‘required returns’, we could see property become ‘fair value’ relatively soon.”

Richard Yorke added: “Given our expectation of the Fair Value Index falling sharply from next year, investors should consider acting now in order to maximise potential returns.”