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.rds being fairly priced but still offers opportunities to investors.
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.
Commenting on opportunities in Leeds, DTZ Investment Director for the region, Greg Davison said: “The opportunity to generate above average returns from commercial property within Leeds is largely unique within the UK insofar as it occurs across all of the key market sectors. Backed up by the strong local economic growth outlook and market restrictions, due to a limited development pipeline, Leeds offers investors a compelling story.
“We have started to see yield compression take hold for prime assets through pricing readjustment and in anticipation of rental growth for which there is now real evidence, born out of a lack of supply and stronger economic outlook. Gaining exposure to the best in class remains difficult but as rental growth gains momentum we expect the performance window to increase beyond just prime property; as ever, it is a question of knowing where the best opportunities lie.”
Chris Murfitt, Valuation and Bank Advisory Director at DTZ in Leeds also notes that with more transactional activity in the market there are inevitably more opportunities coming through for banks to act whether this be in the sphere of new lending or loan review.
“The opportunity for banks to re-balance their loan portfolios should not be missed but is still being influenced by the property fundamentals of the relevant sector and location. What remains of some concern is the strength of occupier demand for certain sectors (for example out of town offices) set against existing supply and differential yields between favoured towns and estates continues. What is encouraging is a return to some development activity, although again this is seen as very sector and location specific, often underwritten with a pre-let or sale.”
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.